The Chartered Institute of Public Finance & Accountancy’s local authority financial resilience index, which was put out to consultation earlier this month, has - according to the body’s chief executive Rob Whiteman - received a “mixed response”.
However, the scale of the criticism, with representative organisations voicing serious concerns, suggests this claim was a significant understatement. Opponents have warned that Cipfa’s approach would create a false, damaging, and over-simplified hierarchy of performance.
The consultation document says the index is part of a package of measures developed in the wake of the National Audit Office report which in March warned of a “heightened risk” that more councils could follow Northamptonshire CC in issuing a section 114 notice.
While Cipfa’s “early warning” package includes the development of a new financial management code to promote good practice, a review of continuing professional development requirements, and a new range of accredited training for leadership teams, managers and councillors, it is the centrepiece resilience index that is proving most controversial.
The proposed index methodology will see Cipfa devise on an annual basis, or when significant data becomes available, a score for every council based on six “composite” indicators. These are:
- Level of total reserves as a proportion of net revenue expenditure
- Percentage change in reserves over the past three years
- Ratio of government grants to net revenue expenditure
- Proportion of net revenue expenditure accounted for by children’s social care, adult social care and debt interest payments
- Ofsted rating for children’s social care
- Auditor’s value for money judgement
Cipfa will then calculate a relative score on each indicator for councils of the same type. To arrive at the final index scores, these individual scores will be combined to create an average, calculated by weighting the scores on the indicators Cipfa regards as the most important when assessing financial health: level of reserves and change in reserves.
The scores will be presented as a table, including councils’ individual overall scores and performance against each indicator, which will be colour coded using a traffic-light system. Cipfa will also produce an Excel tool enabling councils to explore the data further, as well as analysis of different tiers and geographies.
The consultation document insists the index “is not a performance table of service outcomes or quality and is not a comment on the quality of leadership in councils”. Instead it is “intended to provide an early warning system… so that action can be taken in a timely manner”.
“Cipfa believes that good governance best occurs when it is supported by well-founded evidence which is discussed objectively, and we believe it is in all councils’ and taxpayers’ interests that a comparative resilience index is produced from which local government and its external auditors can draw,” the document adds.
There is no doubt in the sector that Cipfa’s approach is well-intentioned, with many saying comparative performance evidence to support policy and practice is vital as councils face increasing hardship as we approach the end of a crippling, austerity-dominated decade.
The Local Government Association acknowledged this but said “ranking councils would be extremely unhelpful as it requires choices about relative weightings and could too easily lead to inappropriate judgements.”
Specific criticism from county councils followed. In a joint statement the Association of County Chief Executives (ACCE) and the County Councils Network said Cipfa’s approach would be “a blunt instrument” which over-simplifies complex issues and offers “no genuine solutions to councils who could be deemed failing by the index’s standards”.
ACCE questioned whether the proposed indicators would create an accurate picture of councils’ performance as they do not include factors such as organisation culture, local democratic accountability, and work with partners.
Writing for LGC, North Yorkshire CC chief executive Richard Flinton says the index could also lull some councils deemed to be performing well into a “false sense of security”.
Duncan Whitfield, Southwark LBC’s strategic director of finance and governance, welcomed the concept of identifying key indicators to reflect councils’ financial health but told LGC he would be “very concerned” by an approach that would create a “league table” as this would not recognise the complexities of how the individual indicators work together.
“It is also the difficulty of measuring local governance arrangements and external influences such as external audit findings and inspection regimes,” he said. “It is, after all, governance that seems to have been highly instrumental in the breakdown in Northamptonshire’s financial management arrangements.”
Mr Whitfield said such governance problems were only likely to be identified though a targeted external audit or through a new inspection regime.
There are also concerns about the impact of the index on behaviour within councils.
One potential consequence put to LGC is that finance directors at councils deemed to be performing well, who have advocated prudence, may face awkward questions from councillors over savings and could be accused of “crying wolf” or exaggerating the scale of financial challenges. On the other hand, there are concerns that “fingers could be pointed” at chief executives or finance directors as “unfair victims” if a council is low in the rankings.
Responding to the criticism, Mr Whiteman insisted Cipfa was not aiming to name and shame councils but insisted “the status quo is not an option given that the trajectory of tax, spend, savings and reserves may not be sustainable for local authorities.”
He found an ally in Leicestershire CC chief executive John Sinnott who expressed his disappointment at the “predictable” reaction to the index proposals. Writing for LGC he said local government should work with Cipfa on the indicators and methodology otherwise the sector could be seen as “complacent” if it “tries to ward off Cipfa’s good intentions”.