Christian Wall gives his take on CIPFA’s new tool to compare councils’ financial performance
Just before Christmas CIPFA summarised the initial findings of its Financial Resilience Index. The index as it stands is flawed, although some problems merely reflect the “nature of the beast” and are common to all quantitative credit and financial resilience models. However, there are a number of issues that should be addressed and as yet there is no clear explanation regarding the real purpose of the index and who is supposed to benefit from its publication.
Local authorities are complex democratically accountable organisations whose long-term financial performance depends on the Government, statutory requirements and a complex interlocking web of financial and non-financial decisions over a prolonged period of time. Other than short-term financial viability, they simply cannot be understood using a number of somewhat arbitrary indicators.
Identifying the methodological and systemic problems of the index is easier than addressing the existential questions. As it stands and with the caveat that some points are inextricably interlinked:
- Manyof the indicators are auto-correlated and / or measure the same things indifferent ways. For example, there are seven indicators dealing with reserves, many of which require interpretation to understand properly.
- The index is essentially retrospective. All quantitative assessment frameworks are “point in time” assessments that are largely backward looking. The value and great skill has always been and will always remain the judgement that extends that assessment reliably into the future.
- Data without context is meaningless. Effective interpretation and correct responses to the findings of the index require context and other data.
- The index is tautological. As the service focus is on social care, by definition districts will be more resilient than counties and unitaries. The only remedy is to selectively apply indicators thereby losing sector-wide comparability.
- There is a short-term, selective focus. Until recently, many assumed districts were at the greatest risk of financial failure. That counties and unitiaries are now deemed so, is no excuse to ignore lower tier service pressures altogether. If the index is to be used over time, it cannot be subject to frequent alteration to reflect the issues of the day.
Local authorities routinely publish a wealth of financial information, well beyond that of any other sector in the UK. Coupled with the voluminous returns to Government, at first glance it appears odd that the index is even needed and it is difficult to see how the index can address sector funding issues in the near future.
Key partsof the Government believe that local authorities can make further “efficiencies” and those currently in difficulty are in that position due to idiosyncratic failings. Anyone believing the index will change that immediately is naïve. Aside from policy, causality and moral hazard will always be considerations; government cannot “reward” the reckless or incompetent. Furthermore, it will be difficult for councils and the Government to resist using the index for their own ends, particularly “fair” funding.
The most likely outcome is many councillors and officers will raise real and spurious objections to the results, or misuse them, thus defeating its purpose. Anyone who thinks some councils will not use a “good” result to support unsustainable decisions about budgets and council tax is probably deluded. Anyone who thinks many in opposition to a council will use “poor” scores to do anything other than score cheap points is probably “somewhat misguided”. Most commentators lack the time, expertise and resources to do in-depth analyses, so the risk of superficial and headline-grabbing pronouncements is great. Local government is not the NHS: financial failure in the NHS usually results in some public sympathy and additional funding; in local government, opprobrium and commissioners.
Ultimately,if the financial resilience index is required, it is due to a collective failure on the part of councils, the Government and CIPFA to deliver a system of financial reporting and accountability that is transparent, easily understood and relevant. If the energy being expended on the index had instead been spent on simplifying the accounts and financial reporting, while vastly improving the communication of financial issues inside and outside councils, there would be no real need for an index. Reading local authority accounts and budgets is currently a masochistic exercise.
Even themost jaundiced observer is almost certainly incorrect if they believe that CIPFA’s motives are anything other than laudable. However, it should have been obvious that the proposals would be met with a degree of hostility and incredulity. It should have been even more obvious that the interests of various stakeholders are not aligned and that it was, and is, highly likely that even the most objective of indices will be used to buttress already entrenched views and tangentially related politics, largely to the detriment of S151 Officers whom the index is probably designed to help.
Christian Wall is a director at financial adviser PFM.
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