ICAEW chart of the week: Local government in England

9 October 2020: The complex structure of regional and local authorities in England is just begging for reform, but will the rumoured plan to abolish county and district councils fix it for good?

Chart with three rings: regional tier, county or unitary tier and then district council tier, showing lots and lots of councils in England.

Local government in England, as illustrated by the #icaewchartoftheweek, is pretty complex with eight different types of regional or principal authority and a patchwork quilt of different tiers of government across the country.

This complex system comprises areas without a regional tier of government involving unitary authorities or county & district councils, and those with combined authorities atop unitary authorities or metropolitan boroughs (and one county and its districts) and the Greater London Authority atop 32 London boroughs and the City of London. (This excludes the 9,000 or so town, village and other forms of parish councils in England, mostly outside the major urban areas).

This complexity makes it very difficult for the Government to interact with local authorities in the absence of a consistent model of local government or a country-wide regional tier of government to act as intermediary. This contrasts (for example) with the federal system in Germany, where Chancellor Angela Merkel regularly speaks to the leaders of the 16 German states, who in turn deal with the local authorities in their areas. Similarly (although not formally federal), France has 13 mainland and 5 overseas regional administrations that President Emmanuel Macron and Prime Minister Jean Castex can talk to and who will deal with their constituent provinces.

The UK Government can and does communicate with London Mayor Sadiq Khan, Greater Manchester Mayor Andy Burnham, West Midlands Mayor Andy Street, West Yorkshire Chair Susan Hinchcliffe, Liverpool City Region Mayor Steve Rotherham, Sheffield City Region Mayor Dan Jarvis, North East Chair Iain Malcolm, West of England Mayor Tim Bowles, Cambridgeshire & Peterborough Mayor James Palmer, North of Tyne Mayor Jamie Driscoll and Tees Valley Mayor Ben Houchen, each of whom can represent their constituent local authorities. But, they only represent 44% of the English population, with a further 24 county council leaders and 46 unitary authority leaders to speak to cover the remaining 56%. That is a pretty big Zoom call, assuming borough and unitary leaders within the regional authority areas don’t also insist on joining in.

The delayed announcement of a plan to abolish the 25 county and 188 district councils and replace them with between 25 and 40 new unitary authorities (perhaps with some mergers with existing unitary authorities) will go some way to rationalising the existing system by going to a single tier of principal local authorities. This would bring local public services together under one roof and save money, albeit there are some concerns about whether some of the new authorities would be too remote from the local citizenry.

However, this is still likely to leave English local government reform unfinished with over half the country without a regional tier of government. Will the Government want to continue with its existing organic approach of combined authority formation or go for a more comprehensive programme to establish regional authorities across the whole country, similar to the French reforms of the 1980s?

This chart was originally published by ICAEW.

PAC slams Ministry for local commercial investment failures

13 July 2020: The Public Accounts Committee has severely criticised central government for complacency as local authorities put £7.6bn into risky commercial property investments.

In a hard-hitting report, the Public Accounts Committee (PAC) has severely criticised the Ministry of Housing, Communities and Local Government (MHCLG) for failing to properly oversee the local government prudential framework in England.

The National Audit Office (NAO) reported earlier this year on the huge rise in local authority investment going into commercial property, with £1.8bn invested in 2016-17, £2.6bn in 2017-18, £2.2bn in 2018-19 and £1bn in the first half of 2019-20. This compares with the £200m spent on commercial properties in 2015-16.

ICAEW submitted evidence to the inquiry.

Key findings and recommendations from the PAC report include:

  • More active oversight of the prudential framework is needed, including publicly challenging local authorities where there are concerns.
  • MHCLG’s failure to ensure local authorities adhere to the spirit of the framework has led to some local authorities taking on extreme levels of debt.
  • Requirements to set aside money each year to service debt (the Minimum Revenue Provision) should be strengthened.
  • Actions taken to address risky and non-compliant behaviour have been too little and too late.
  • A ‘soft’ approach of guidance changes has not worked, and ‘hard’ more timely and effective interventions are needed, with rigorous post-implementation reviews.
  • The local government prudential framework has been impaired and now requires a fundamental review.
  • MHCLG does not have access to the data it needs to carry out its oversight responsibilities.
  • External audit has a role to play, but more important is real-time scrutiny of commercial investment strategies and investment decisions.
  • Local governance arrangements are not robust enough, with investments not being properly transparent or subject to adequate scrutiny and challenge.

The PAC is particularly critical of the Ministry for taking four years between identifying that local authorities were starting to ‘borrow for yield’ to making more substantive changes to Public Loan Work Board lending rules. This was despite NAO and PAC reports highlighting the issue in 2016.

The PAC also highlights significant shortcomings in data, with MHCLG ‘flying blind’ as local authorities borrowed billions of pounds. It also doesn’t feel that lessons have been learned about capturing data on emerging and future commercial investment activities and not just about investments that have already been made.

Commenting on the report Alison Ring, Director for Public Sector at ICAEW, said: “This is a hard-hitting report from the Public Accounts Committee that severely criticises the Ministry for Housing, Communities and Local Government for complacency about the huge expansion in debt-financed commercial property investment by English local authorities over the last four years.

The PAC rightly focuses on the importance of data in carrying out central government’s oversight role, enabling better understanding and analysis of risks in local authority balance sheets. Stronger governance at a local level is also needed, with improved transparency and scrutiny needed both before, and after, investments are made.

However, it is important that any changes to the prudential framework do not prevent local authorities in making essential investments in local infrastructure and in encouraging local economic activity as the country emerges from lockdown.

Supporting the economic recovery may involve councils taking on more – rather than less – balance sheet risk, making the PAC’s recommendations about strengthening both local governance and central oversight even more critical.”

This article was originally published by ICAEW.

New funding package for English local authorities

2 July 2020: Secretary of State Robert Jenrick has announced a new £2bn package for English councils to replace lost income and cover spending pressures.

The government has announced additional funding for local authorities in England to help alleviate the financial pressures they are under. This follows on from our previous article on council funding pressures, which reported that total lost income and additional expenditure could amount to £9.4bn by next March.

The funding package announced today comprises £500m to cover incremental expenditures being incurred by councils – adding to the £3.2bn already provided – together with a reimbursement scheme covering up to 71% of lost income from sales, fees and charges.

The reimbursement scheme kicks in where losses are more than 5% of a council’s planned income from sales, fees and charges. The government will cover 75% of the lost income above 5%, meaning that councils will need to cover around 29% of the shortfall from their own resources. Depending on the final details, councils could receive somewhere in the order of £1.5bn and £2bn to replace lost income.

The Ministry of Housing, Communities & Local Government (MHCLG) also announced that councils would be able to phase repayments of council tax and business rates deficits over three years rather than one, reducing cashflow pressures on councils. However, the apportionment of irrecoverable council taxes and business rates will not be decided until the Spending Review in the autumn.

This announcement should significantly reduce the risk of councils needing to issue s114 ‘bankruptcy’ notices – for the next few months at least.

Commenting on the announcement Alison Ring, ICAEW Public Sector Director, said: “Although the new funding won’t cover all the expenditure and lost income councils have suffered due to coronavirus, it should be enough to help most get through the rest of the summer, and the prospects of some having to declare themselves bankrupt with s114 notices should recede for now. 

However, we’re concerned that councils will still have to cut back spending to cover the lost income from areas such as car parking, leisure centres, planning fees and other charges that are not being covered by central government. This has the potential to damage local economies just as they are trying to recover.”

This article was originally published by ICAEW.

Local authorities running out of money as COVID costs mount

2 July 2020: English councils have warned that £6bn more funding may be needed to keep operating through the rest of the financial year.

Data collected by the Ministry for Housing, Communities & Local Government (MHCLG) from 339 local authorities in England indicates that councils expect lost income and additional expenditure as a consequence of the coronavirus pandemic to amount to a total of £9.4bn.

Many councils are warning that they may not be able to continue operating without further infusions of cash from central government. Although £3.2bn has been provided by central government to date, this has only covered lost income and additional expenditure incurred up to the end of May 2020, with councils forecasting a further impact of £6.2bn over the remainder of the financial year.

Table 1 – English local authorities: financial impact of the coronavirus pandemic

 March
2020
£bn
April & May
2020
£bn
Forecast to
March 2023
£bn

Total
£bn
Lost income  0.17 1.82 3.70 5.69
Additional expenditure 0.08 1.17 2.46 3.71
Total covid-19 impact 0.25 2.99 6.16 9.40

Source: Ministry of Housing, Communities & Local Government, ‘Local authority COVID-19 financial impact monitoring information’.

Lost income is expected to reach in order of £5.7bn overall, while additional expenses are forecast to reach around £3.7bn. Further detail is provided in Table 2 and Table 3 below. 

With no additional funding as yet forthcoming, councils have been using their reserves to cover shortfalls during June. A number of local authorities are now discussing the possibility that that they may have to issue s114 ‘bankruptcy’ notices, which would require them to freeze all non-statutory expenditures, severely affecting local services.

The Chancellor is expected to announce further financial measures when he updates the nation next week and councils are hoping this will include more funding from central government in line with the encouragement they received at the outset of the lockdown to “do whatever it takes”.

Alison Ring, director for public sector at ICAEW, commented: “These numbers from English local authorities highlight just how severe the financial impact of the coronavirus pandemic has been. The £3.2bn in additional funding from central government announced so far is only a third of the estimated total of £9.4bn in lost income and additional expenditure expected to be incurred.

There is a risk that without clarity on further funding that some councils will start issuing s114 ‘bankruptcy’ notices. This would significantly reduce spending by local authorities at the same time that local economies need every bit of help they can get if they are to fully recover.”

Table 2 – English local authorities: lost income

 March 2020
£bn
April & May 2020
£bn
Forecast to
March 2021
£bn

Total
£bn
Business rates  0.03 0.44 0.72 1.19
Council tax 0.02 0.48 1.21 1.71
Sales fees and charges 0.08 0.65 1.15 1.88
Commercial income 0.03 0.17 0.45 0.65
Other 0.01 0.08 0.17 0.26
Lost income 0.17 1.82 3.70 5.69

Source: Ministry of Housing, Communities & Local Government, ‘Local authority COVID-19 financial impact monitoring information’.

Table 3 – English local authorities: additional expenditure

 March
2020
£bn
April & May 2020
£bn
Forecast to
March 2021
£bn

Total
£bn
Adult social care  0.03 0.50 0.97 0.50
Children’s social care 0.00 0.08 0.22 0.30
Housing (excluding HRA) 0.01 0.06 0.12 0.19
Environment and regulatory services 0.01 0.09 0.11 0.21
Finance & corporate services 0.01 0.08 0.11 0.20
Other service areas 0.02 0.36 0.93 1.31
Additional expenditure 0.08 1.17 2.46 3.71

Source: Ministry of Housing, Communities & Local Government, ‘Local authority COVID-19 financial impact monitoring information’.

This article was originally published by ICAEW.

PAC launches local authority property investments inquiry

27 April 2020: the Public Accounts Committee has launched a formal inquiry into the risks from English local authority investments in commercial property, and how these are monitored by the Ministry for Housing, Communities and Local Government.

The inquiry will investigate concerns about gaps in commercial skills and whether risks are being properly monitored, as well as the potential for big losses following the coronavirus.

The National Audit Office (NAO) reported in February that English local authorities had invested £6.6bn in commercial property over the three years to 31 March 2019, an increase of 1,340% compared with the previous three years.

With many of these investments funded by borrowing, the PAC is concerned about what the coronavirus pandemic might be doing to local authority finances, especially on the £2.5bn invested by councils outside of their local areas.

The Public Accounts Committee (PAC) plans to question officials from the Ministry for Housing, Communities and Local Government (MHCLG) on gaps in commercial skills in local government, and the extent to which MHCLG formally monitors commercial activity and long-term exposure to risk. The PAC will also ask officials about the Ministry’s response to COVID-19, and what impact the pandemic has had on local government finances.

Commenting on the launch of the investigation Alison Ring, Director, Public Sector at ICAEW, said: “The Public Accounts Committee is right to ask questions about the significant increase in balance sheet risk being taken on by a small but growing number of local authorities and how those risks are being managed both locally and by central government. The coronavirus pandemic will have resulted in significant losses in many local authority commercial property portfolios, adding to the pressure on their finances at a difficult time.

“The PAC also needs to consider the structural issues that have driven local authorities to establish debt-financed ‘mini sovereign wealth funds’ that predominantly invest in one particular asset class, rather than spreading risk across multiple types of investment. 

“Central government also needs to consider how local authorities can be encouraged to invest in infrastructure and other productive assets that will support economic growth and benefit local taxpayers in the long-term, in addition to managing financial investment risks effectively. This will be particularly important if the economy is to recover fully after the end of the pandemic.”

The PAC has put out a call for evidence asking for submissions by Wednesday 6 May 2020.

For further insights during the coronavirus pandemic, please see the ICAEW designated COVID-19 hub.

This article was originally published by ICAEW.