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Cash constraints at met councils revealed

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Forty-two per cent of metropolitan councils have higher levels of current liabilities than current assets, compared with just 16% of all councils. 

The figures emerged from the latest and final release of the Audit Commission’s financial ratios tool. The figures relate to the financial year 2012-13.

The commission warned councils with low ratios of current assets to current liabilities to take steps to ensure they could meet short-term liabilities. 

It added that it could be expensive for councils to take on short-term borrowing to pay debts. 

“The ratio of current assets to current liabilities is an indicator of how a council manages its short-term finances,” it said.

The report also recommended that councils ensured they had sufficient reserves for planned future needs and contingencies without impinging on current expenditure.

Geoff Winterbottom, principal research officer at the Special Interest Group of Municipal Authorities (Sigoma), said it was no surprise that metropolitan councils’ holding of cash had declined in recent years. 

“This is because it has become significantly cheaper to borrow [in the] short term or [to] self-invest [using cash investments to finance funding needs] than to undertake long-term borrowing,” he said.

“This, coupled with the risk attached to safely placing surplus funds and the minimal returns on investment, means that many authorities I know have pursued a treasury policy of increased short-term borrowing while reducing cash investments. 

“This will also yield immediate benefits in terms of the net cost of borrowing to authorities facing budget cuts.”

But he added: “We have consistently maintained that municipal authorities are the most resource constrained of local authorities and face the greatest cuts compared to their service demands, so it can hardly be a surprise that this translates into the most cash constrained.

“If you equate short-term liabilities and assets with operational income and expenditure, then mets are the ones working to the tightest margins between cost of service and funding.”

Gillian Fawcett, head of public sector at ACCA, the Association of Chartered Certified Accountants, described the ratio analysis as “a useful tool for identifying the financial stresses faced by councils”.

She said: “In the case of metropolitan councils where they have a lower level of assets compared to liabilities, the ratio provides an indication that further probing is required to find out where the stresses and strains are in managing their short-term finances.

“A potential risk for these councils is that they could fail to meet their liabilities.

“The report does not make it clear why metropolitan councils are worse than other local authorities at managing their short-term finances.

“It could be for a number of reasons, such as delaying paying creditors, less cash in the bank, less money available to place in short-term investments or growing PFI lease commitments.

“But what is clear is that those councils affected should be scrutinising why they have a lower level of assets to liabilities.”

Bradford, Coventry, Leeds, Liverpool and Rochdale councils all responded to enquiries by saying their current assets exceed their current liabilities.

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Readers' comments (1)

  • This analysis is of 2012/2013 accounts. It is difficult to imagine the position has not got worse for 2013/2014 and the current financial year!

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