Balance sheet monitoring is vital to assessing financial resilience, argues LG Improve’s Dan Bates, as he picks out key results from the consultancy’s analysis of 2022/23 accounts.
We can now see 122 published accounts (almost an equal number of districts and upper tier authorities) and some key trends are emerging. These are:
- significant reductions in usable revenue reserves at single tier authorities (London boroughs, mets and unitaries);
- reserve levels much more stable in district and county authorities; and,
- indications that the delay in the fair funding review is starting to explain the widening gap in financial health that we can see from the 22/23 accounts.
Usable revenue reserves tend to be the headline measure when considering local government financial health. Whilst I wouldn’t dispute this, reserves are a ‘lagging’ measure – levels are determined by a combination of factors, decisions and actions. By the time reserves are depleted, it’s too late to act, at least in any proactive manner. We therefore really need to understand what leads to this position. This is where balance sheets become critical.
Put simply, reserves will deplete when our spending is higher than our income. Room151 has recently published a number of stories covering authorities’ revenue outturns which show that overspends are resulting in reserves depletion. Overspends arise for a variety of reasons, such as increasing needs and reduced funding alongside local spending decisions and economic factors (like inflation and interest rates).
Our council tax, business rate growth and settlement analysis models all show significant redistribution of funding since 2012/13. Whilst all authorities have suffered from the austerity cuts, those with higher council taxbases and business rate gains have tended to suffer lower reductions in reserves. With no plans for a fair funding review or a business rates reset, I anticipate that funding disparities will widen and those on the wrong end of the redistribution will continue to see pressure on their financial health.
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Turning to the balance sheet, alongside reserves, we can pick out the implications of our capital decisions as well as the flow and use of working balances to deliver returns from investment or reduction in costs of capital via internal borrowing.
Our 22/23 accounts review shows that:
- The need to borrow is slowing down, but is high and increasing at some authorities.
- Successive interest rate increases are not yet feeding through to higher financing costs as lots of debt is fixed – this will no doubt change as new debt is taken out at higher rates.
- Interest receivable has more than trebled as authorities which tend to have lots of cash are able to get significantly higher returns from increased interest rates.
- The squeeze on reserves is not limited to the general fund; housing revenue and schools balances are also reducing and dedicated schools grants deficits are increasing significantly.
- Dwindling resources means less to invest or put towards internal borrowing which will ultimately lead to pressures from reduced treasury income and/or increased financing costs.
Increased need to borrow and reduction in working balances are measures that can only be taken from the balance sheet to give an indication that an authority’s capital position remains prudent, affordable and sustainable. We look at a number of measures to assess each council’s position including debt gearing over time and debt to NRE ratio.
I am not, for a minute, advocating that authorities shouldn’t incur debt; far from it. Some of the brilliant things delivered by councils are done by taking out borrowing. I’m simply saying that really good governance, alongside due diligence and effective business cases, needs to include a really good understanding of our balance sheets.
Balance sheet monitoring is now part of the CIPFA FM Code and rightly so, but whilst I’ve seen lots of emphasis on reserves and external borrowing, I think as a sector there is still work to be done to use balance sheet monitoring as part of our financial resilience assessment.
Dan Bates is the financial resilience director at consultancy LG Improve.
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