English councils are set to face six tests under a proposed new “traffic light” scheme rating their financial resilience, including changes in reserve levels and the ratio of government grants to net revenue expenditure.
The Chartered Institute of Public Finance and Accountancy (CIPFA) launched a consultation on its proposed new resilience index this week.
The institute proposed that other criteria used to compile the index would relate to expenditure, Ofsted ratings for social care, and an auditor’s value for money judgement.
Rob Whiteman, chief executive of CIPFA, said: “CIPFA believes there is a need for appropriate and robust independent challenge and support of some councils on financial strategy and trajectories through this new resilience index, which is intended to provide challenge where needed so that appropriate action can be taken at a local level.”
The institute is proposing to rank councils within all six of the criteria, before combining the scores to give an overall rank.
The six criteria, and their level of weighting in calculating the overall rank, are proposed as follows:
- The level of total reserves, excluding schools and public health, as a proportion of net revenue expenditure. (0.25)
- The percentage change in reserves, excluding schools and public health, over the past three years. (0.25)
- The ratio of government grants to net revenue expenditure. (0.1)
- Proportion of net revenue expenditure accounted for by children’s social care, adult social care and debt interest payments. (0.15)
- Ofsted’s overall rating for children’s social care. (0.15)
- Auditor’s VFM judgement. (0.1)
CIPFA emphasised that the resilience index is not proposed as “a performance table of service outcomes, or quality, and is not a comment on the quality of leadership in councils”.
However, the institute said the aim was to create “an authoritative measure” of financial resilience, using publicly available information, intended to provide an early warning system.
CIPFA believes local government and external auditors could use the information to assist their work.
David Green, strategic director at treasury adviser Arlingclose, said it was unlikely the new index could radically change the cost of borrowing for local authorities.
“CIPFA’s focus appears to be on setting a balanced budget, rather than the ability to repay loans, which should be the main concern for lenders, although the two are of course related,” he said.
“We don’t expect many authorities to set different interest rates for lending to their peers, but some may decide not to lend to the least resilient.
“Private sector lenders will probably take note of the index too.
“But we shouldn’t get too carried away. Even the weaker local authorities are much more creditworthy than the vast majority of banks and companies.”
Dan Bates, consultant at Pixel Financial Management, welcomed the consultation, saying the index could give authorities assistance with financial planning.
“It will be important to use up-to-date and reliable measures,” he said. “Many of the proposed indicators will use revenue outturn data, and it will be essential that this information is validated as it has been subject to collection inconsistencies between authorities in the past.”
He added the index could benefit from additional criteria, such as capital financing requirements, long-term borrowing and the size of pension deficits.
The proposed index forms part of CIPFA’s broader strategy aimed at ensuring council finance leaders have the support needed to achieve a balanced budget.
The institute has also begun development of a new financial management code to accompany the existing prudential and treasury management codes.
The consultation on the financial resilience index is open until 24 August. CIPFA said it expects the first edition to be published in the early autumn.
