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Report reveals most urgent cost pressures

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The scale of the structural budget deficit, the increasing burden of care costs and loss of revenue from property sales will provide the greatest cost pressures for local government during the recession, experts have warned.

Research by consultants PricewaterhouseCoopers (PwC) shows councils will be operating on cost bases between 25% and 30% of their current levels by 2012-13.

The exploding burden of care costs and the looming issue of next year’s valuation of council pension funds have the potential to lead to a 20% rise in costs on their own.

The Local Government Pension Scheme had an average fund deficit of 16.5% or £302m, according to a Chartered Institute of Public Finance & Accountancy analysis of the last valuation. But that is expected to soar as a result of the collapse of stock markets last year.

Showing strong leadership

PWC’s local government leader Steve Beet, said chief executives would need to show strong leadership in dealing with the coming crisis.

He warned that councils would have to act immediately to prepare themselves for a “perfect storm” of cost pressures, suggesting a 10-day agenda rather than a 100-day plan because in 100 days “the ship will have sailed”.

Actions include appointing a corporate director to lead a transformation programme; deferring all non-essential programmes; and clamping down on expenditure.

Over the past 4 months, analysts at PWC conducted interviews with chief executives and leaders from 17 authorities as well as officials from government departments including HM Treasury.

While care costs and pension fund contributions were found to be the biggest cost pressures, the loss of income from investments due to low interest rates was the issue that brought the most immediate cost pressure.

Moving from private to public

Meanwhile the issue that councils felt least prepared to deal with was the move from the private sector to the public for services such as education, care and transport.

Councils also reported an issue in meeting the necessary short-term costs of implementing transformation programmes such as redundancy, of implementing transformation programmes.

In recent years, the government has allowed councils to ‘capitalise’ the cost of statutory redundancy payments by borrowing against or selling assets. Last year saw a significant rise in the amount that councils were allowed to borrow in order to meet those costs.

In 2008-09, 30 authorities were given permission to capitalise a total of more than £36.1m to meet statutory redundancy costs – a 6% increase on the £22.2m, 20 authorities were granted the year before.

The amount councils were allowed to capitalise to pay for pension fund contributions also rose last year. Twenty four authorities were permitted to capitalise £38.6m to pay for pension fund contributions in 2008-09, up from £27.2m for 19 authorities the year before.

However, Mark Luntley, programme director for finance at the Local Government Association, said a large increase in applications could place question marks over councils’ ability to set balanced budgets next year.

“The deadline for requests is mid December and councils don’t find out if they’ve been successful until February,” he said. “That’s obviously pretty late in the budget-setting process and finance directors will have to make a judgment on whether the budget is deliverable with that level of uncertainty hanging over it.”

Top 5 issues with the greatest financial impact

  1. Scale of the structural budget deficit and the flow through into local authority settlements
  2. Exploding burden of care costs
  3. Loss of revenue from property sales as prices continue to be depressed
  4. Pressure for cost reductions and efficiency gains, but less cash to use in ‘spend to save’
  5. A need to top up final salary pension scheme deficits due to higher actuarial forecasts

Top 5 issues whose timing has the greatest impact

  1. Loss in income from investments and deposits, with the collapse in interest rates
  2. Less revenue and income from charges and discretionary items as the public curbs spending
  3. Loss of revenue from property sales as prices continue to be depressed
  4. Short-terms costs, such as redundancy and transition, as transformation projects highlight long-term efficiency opportunities but have shortterm costs
  5. Loss of commercial rates as businesses fail and the high street empties

Top 5 issues councils are least prepared to deal with

  1. The move from private to public sector in education, care and transport, as people increasingly tighten their belts
  2. Grant-awarding bodies scrutinising their funding to local authorities closely as they come under pressure themselves
  3. Unemployment placing greater demand on support and community services as people seek to fill their days
  4. Failure in the supplier/supply chain, or suppliers not being able to accept enhanced procurement arrangements
  5. Scale of the structural budget deficit and the flow through into local authority settlements

 

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