Financial management in a glacial age

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Entering the glacial ageof finance

3

Public services have improved, but financial pressure pre-dates the crunch

Quantity & scope

Quality

Management

Pre-school educationPower of well being

Positive activities for teensSupporting people

Choice based lettingsDecent homes

Capital expenditure & PFIe-enabled services

Local political leadershipGershon efficiencyCorporate assessment

Use of resourcesFOI, data protection

• £3 billion efficiency savings 2004-2007• Additional £5.5 billion target 2008-2011

4

Council funding is unlikely to escape spending cuts, adding to the pressure

0

100

200

300

400

500

600

700

800

2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14

£ b

illio

n

Current Departmental Expenditure Limits

Current Annually Managed Expenditure(including benefits and debt servicing)

Cyclically-adjusted Budget Deficit

Source: HM Treasury – Budget 2009 Full Report

5

A 20 per cent cut would turn the clock back a few years, but expectations are now higher

2010/11 DEL 20 per cent lessEquivalent

to (real)

NHS £102 billion £80 billion 2004/05

Children, Schools and Families

£51 billion £40 billion 2005/06

CLG £31 billion £24 billion 2002/03

Innovation, Universities and Skills

£18 billion £14 billion 2005/06

Source: HM Treasury, Audit Commission calculations

6

Financial management has improved in recent years

Source: Audit Commission, Summing Up

0

20

40

60

80

100

2005 2006 2007 2008

Per

cen

t

Level 1 Level 2 Level 3 Level 4

UoR KLOE scores for financial planning

7

The global financial crisis raised questions about basic financial management

• The collapse of Icelandic banks caught many by surprise

• Risk and return showed that basic treasury management was of variable quality:

– The best councils explicitly balanced risk and reward, regularly scrutinised policies and procedures, had well trained staff and engaged members.

– Poorer councils had weak governance, depended exclusively on credit ratings, and had inadequately trained staff

Source: Audit Commission, Risk and Return

8

0

20

40

60

80

100

District Unitary Londonborough

Metropolitanborough

Countycouncil

Per

cen

t

Substantial negative impact Negative impactNeutral impact Don't know

The economic downturn is hitting local finances, especially in district councils

Impact of the recession on council finances

Source: Audit Commission, When it comes to the crunch

9

Demand for services is increasing, with more expected

0

20

40

60

80

100

Welfare ordebt

advice

Housingbenefits

Businesssupport or

advice

Servicesfor

homelesspeople

Freeschoolmeals

Schoolplaces

Children'sservices

Mentalhealth

services

Servicesfor olderpeople

Per

cen

t

Already experienced Anticipated

Changes in demand for council services

Source: Audit Commission, When it comes to the crunch

10

The impact of the recession will be felt for many years – we are early in Wave 2

Wave 1Economic

impact

Wave 2Social impact

Wave 3Unequal recovery

Business closures Job

losses

IMPACT OF RECESSION

PRIORITIESAcross all tiers of

government

Long term problems in some

areas

Big increases in unemployment

Rising social costs

Wave 1Protect

Wave 2Support

Wave 3Recover

Save businesses

and jobs

Deal with social issues Employment

and training programmes

Attract growth and investment

Address long term

social issues

Recession

Inequalities develop

Some areas recover quickly

Target worst affected areas

Fallinghouse prices

Morereposessions

Efficiency savings

Large efficiency savings – service cuts

Source: Audit Commission, When it comes to the crunch

11

The underlying financial pressures won’t go away

Source: PSSRU projections

0

10

20

30

40

50

60

2000 2010 2020 2030 2040

£ b

illi

on

Total Public Private

Expenditure on long-term care

12

Short term fixes may not solve long term pressures such as pension revaluations

• The recession has hit local authority pension funds:– Average funding level in 2007: 85 per cent– Expected funding level in 2010: 70 per cent– Rough rule of thumb: 3 per cent decrease in funding level

translates into a 1 per cent increase in payroll costs

• CLG is proposing a temporary fix, but councils need to ensure this doesn’t exacerbate their long term financial health

• CLG will consult on more radical options

Responding to the colder climate

14

Reserves are in good shape, but may not help much

0

2

4

6

8

10

1995-96 1998-99 2001-02 2004-05 2007-08

£ b

illi

on

Schools reserves Other reserves

Local authorities’ reserves (1995/96)

Source: CLG

15

Most local authorities can improve efficiency: few have transformed back offices

Source: Audit Commission, Back to front

16

The need for efficiency drives innovation - “Don’t let a good crisis go to waste”

• Staff are often the best source of creativity; partners also contribute new ideas

• Few authorities create opportunities for staff to think creatively away from day-to-day pressures

• Innovation thrives with cross-cutting structures and customer facing staff with devolved responsibility

• Dedicated money is not key: good ideas usually secure funding

• Authorities can struggle to deploy adequate managerial capability to implement well

Source: Audit Commission, Seeing the light

17

Partnerships may need to be reshaped to meet the efficiency agenda

• There is a temptation to treat partnerships as an ‘optional extra’ in tight financial times

• Few LSPs or partners have assessed costs and benefits of joint working

• But savings can be found in partnerships:– A review of services for excluded groups in a city resulted

in 16 services being decommissioned, saving nearly £1 million per year

– A police force achieved a 40 per cent reduction in utility costs by working with regional colleagues

• Total Place may identify scope to save

Sources include: Audit Commission, Working better together? and CAA

18

Strategic financial planning is essential, but could be better

• Few medium-term financial plans include scenario planning

• The financial impact of demographic change is missing from more than half the plans

• Few plans are regularly reviewed and there is little emphasis on outcomes

• Some councils are using the current situation as an opportunity to restructure services

• Some are planning to ‘weather the storm’ – using reserves rather than driving efficiency

Source: Audit Commission, emerging findings from Strategic financial management – due Q1/2 2010

Avoiding failure andimproving financial literacy

More details in the handout for today’s session

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There are common themes which may indicate an organisation is facing financial difficulties

• Absence of financial leadership• Problems seen as external, not internal• Finance director taking sole responsibility for recovery

• Members lacking skills or knowledge to challenge the chief executive or finance director

• Short-term fixes (e.g. asset sales) to divert non-recurrent resources for temporary cover

• Reluctance to commit key financial decisions

21

There are short-term steps that will address immediate problems

• Understand the costs of what you do• Clear framework on what to do and who does it• Members accept that financial management is their responsibility

• Service managers own their budgets• Effective basic budgetary controls are in place:

– Prompt reporting to budget holders of current position– Budget holders required to implement corrective action if

variances arise (rather than just give an explanation)

22

Organisations with good financial health also display similar characteristics

• Service managers are held to account for their service budgets

• KPIs are monitored on a monthly basis• Financial performance is evaluated against a range of financial ratios

• Budget monitoring includes information on outputs and outcomes

• Zero based budgeting exercises are undertaken• Cost drivers of high-spend areas are examined to seek cost reductions

23

Better financial literacy will improve financial management throughout an organisation

Free tool at www.audit-commission.gov.uk/fmskills

Twoquestions for discussion

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Questions for discussion

• How is your approach to financial management changing, given the climate we are now facing?

• What is the next unknown financial risk (‘Iceland’) on the horizon?

26

There is a range of Audit Commission national reports in production that should help you

National reportExpected

publication

Financial implications of an ageing population Q1 2010

Managing costs Q1 2010

Crunch time III Q1 2010

IFRS implementation Q1/2 2010

Strategic financial management Q1/2 2010

Value for money in policing Q3 2010

Please take the handout from today’s session