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Research: financial stresses remain despite stabilisation of reserves

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Financial resilience is the hottest of hot topics in local government, and for good reason. The sector has weathered funding cuts for the best part of a decade and, combined with year-on-year increases in many demand-led services, the strain is showing in many local authorities. A section 114 notice at  Northamptonshire CC is only the most visible sign of that financial strain.

adrian jenkins

adrian jenkins

Adrian Jenkins

Understanding the financial position of local authorities – individually and collectively – is not an easy task.

To get a better understanding requires going through every council’s annual statement of accounts.

Our analysis looks at usable revenue reserves which includes the general fund balance and earmarked reserves. We have excluded housing revenue account reserves and schools’ balances.

The real surprise for us in the 2018-19 accounts is that overall usable revenue reserves for top-tier authorities increased in aggregate by 4.53%, reversing the decline in reserves seen over the past two years. In contrast, usable revenue reserves fell by 2.88% in 2015-16 and by 8.22% in 2016-17. We had fully expected this trend to continue as financial pressures on local authorities intensified.

 

One interpretation of this net increase in usable reserves is that the sector’s financial health is starting to stabilise. However, a more nuanced definition of financial health ought to be that every authority has sufficient funding to set a balanced budget and to deliver its statutory duties. And on that measure, there are still some very serious concerns.

More than a third of top-tier councils (54 out of 149 we had data for) experienced a fall in their usable revenue reserves. Some of these reductions were significant: at least three authorities had falls of more than 10% compared to the previous year. The four authorities with the lowest usable reserves (relative to net revenue expenditure) had reductions in reserves, as did 20 authorities in the bottom quartile. Some of these councils will be struggling to manage or contain their financial pressures, and this is where there is still a very high risk of financial failure.

As we found in our previous research, there continues to be a significant disparity in the level of reserves at the extremes: whilst two authorities have more than a year’s net revenue expenditure in their reserves, 14 authorities have less than two months’ worth of net revenue expenditure.

At the class level, the pattern is little changed from last year: of top-tier councils, shire counties have the lowest level of reserves relative to net revenue expenditure (30%), and inner London boroughs the highest (58%). The lower level of reserves in counties possibly reflects the greater financial pressure that they are under from social care, both in terms of the growth in demand and the share of counties’ budgets. Nevertheless, with the exception of inner London, usable reserves have grown over the last year in each class of top-tier authority.

 

Inner London is an interesting case. Its levels of usable reserves are very high relative to net revenue expenditure compared other top-tier councils. While some councils have very high reserve levels there have been some very large reductions in some individual boroughs in 2017-18, and overall inner London is the only class to report aggregate reductions in reserves. It is not known if this was planned use of earmarked reserves, or balances to support the budget. The largest reduction was at Kensington & Chelsea RBC, due to its response to the Grenfell Tower tragedy. Whilst Kensington & Chelsea’s level of reserves has enabled the council to absorb the additional costs, it does show authorities with lower levels of reserves may struggle if they are ever faced with an unanticipated event resulting in a significant financial shock.

Given the overall scale of reserves in inner London boroughs, there is no immediate financial threat to any of these authorities.

The story for districts is quite different. As a class, they have much higher levels of reserves, they had the largest aggregate increase in reserves, and most districts are increasing their reserves.

Despite having the highest decreases in core spending power, the returns from retained business rates have been significant for many districts as have returns from the new homes bonus. We know that many district councils are very worried about potential changes in funding in 2020-21, including a baseline reset and changes to the new homes bonus, and might be hoarding resources in anticipation of a reduction in their share of funding.

One worrying aspect of our analysis, though, is that those districts with low levels of reserves are more likely to have reported reductions in 2017-18. This is a different picture from the top-tier, where reductions were more evenly distributed. It suggests districts receiving little from business rates and new homes bonus are struggling. These are typically areas with higher levels of deprivation, lower taxbases and less growth. This is a real risk area for the future.

While there has been a stabilisation in the level of usable reserves, both nationally and in each class of authority, there continue to be serious concerns at the extremes where some authorities have very low – and reducing – levels of usable reserves on which to fall back on.

The government might dismiss one section 114 notice as an outlier. However, this data shows that the financial stresses are more widespread.

By Adrian Jenkins, Pixel Financial Management

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