The financially distressed position of Croydon Council has been the subject of much attention is recent weeks (see panel below). So what are the implications for public sector organisations and their finance directors?
One key aspect of the financing of local government is that each local authority is in an individual and unique place financially. Some are relatively financially sustainable, due to historically favourable balances between needs and resources, leading to the ability to build and maintain a strong financial position. Others are in a financially challenged situation, due to needs outstripping resources, leaving little opportunity for the building up of financial resilience.
There is a basket of particularly financially challenged local authorities in the UK, often due to high demand for social care. The added pressures associated with the pandemic have exacerbated financial distress. Croydon is clearly one of these authorities.
Taking responsibility
Governments have repeatedly attempted to balance needs and resources across local authorities through the allocation of central government grant. More recently, though, the move to a system based on business rates has changed the distribution in favour of those authorities that are able to generate business rate growth.
Balancing the council’s needs can be difficult if other members of the leadership team abdicate their responsibility for the effective conduct of financial affairs
Nevertheless, while central government plays a key role, local authorities are independent statutory bodies, with their political leaders bearing responsibility for services and financial outcomes. It is important that they take this responsibility and accountability seriously if local government is to continue and not be replaced with local administration.
Enter, the FD
Within this world of conflicting demands sits the local authority finance director. Within local government, this is a statutory role defined initially by the Local Government Act 1972, which makes the post holder responsible for financial affairs and, in particular, for the certification that the annual revenue budget is balanced and, within their professional opinion, deliverable.
In a period of austerity this can be a particularly onerous role. Essentially, the FD has to work with the service providers to achieve a balanced position, often when there is a wide range of conflicting demands. A UK unitary authority provides more than 1,000 diverse services, many of which are underpinned by statute and have a compelling call on taxpayer resources.
Herculean task
For the FD, working with a leadership team, balancing all these needs against finite resources can be a Herculean task. It can be particularly difficult if other members of the leadership team abdicate their responsibility for the effective conduct of financial affairs.
A key principle is that the organisation’s leadership teams take a shared responsibility for the effective delivery of services within the financial envelope provided by the taxpayer. The FD should provide leadership, strategy and technical support, but it is not for them alone to ensure the financial sustainability of the organisation.
In addition, the statutory finance officer must be a full member and integral part of the leadership team, reporting directly to the CEO. The role is so much greater than that of the traditional numbers person, and must be an integral part of the top-tier decision-making process.
Similarly the post holder needs to have the financial qualification directed by the statute. This means at the least a professional accountancy qualification, preferably supported by senior-level career development.
Timeline
The London Borough of Croydon has been allocated over £23.5m in de-ringfenced funding since the start of the pandemic. The council’s core spending power also increased by £20.8m this financial year even before the announcement of additional emergency funding.
The council is currently forecasting a shortfall of more than £50m for the current financial year (2020/21). The medium-term forecast financial planning also points to significant recurring shortfalls in future years, and there have been persistent criticisms of the council’s approach to commercial investment.
23 October 2020
Grant Thornton, Croydon Council’s external auditor, publishes a report sharing serious concerns about the council’s finances and governance.
29 October 2020
The government launches a rapid review of the council’s governance and finances, which the secretary of state for local government describes as ‘dysfunctional’. The Ministry of Housing, Communities and Local Government says the announcement of the review does not rule out a more formal, statutory intervention in the future.
30 October 2020
In its annual inspection of local audit quality, the FRC accuses Grant Thornton (and other audit firms) of poor public sector auditing. In response, Grant Thornton UK says it remains ‘committed to the quality and integrity of our work’.
19 November 2020
Extraordinary council meeting is held to discuss the Grant Thornton report.
23 November 2020
Council outlines ‘renewal’ plan of redundancies and service reductions, along with a request for a £134m government loan while it develops the programme to ‘live within its means’ and achieve financial stability by 2024.
Hard choices
In the current political and business environment it is important that organisations have the best quality of decision-making. Inevitably this means hard choices. There can be a temptation to seek out easy options to avoid service reductions necessitated by scarcity of resources. While creative finance and commercial activity can help on occasions, they are additions to, and not replacements for, sound financial management and decision-making. Often there can be no alternative but to critically review the service offerings to fit with the revenue resources available to fund them.
In the case of Croydon, clearly a great deal of internal and external resource was applied to move the position of the council forward in a positive fashion. While there may be a long journey to financial sustainability, clearly efforts are being made to progress in the right direction.
This is important not just for the community of Croydon but also for wider local government. If local government is to fulfil its role as democratic local leadership, it must demonstrate its ability to continue to address the financial challenges despite the difficult environment within which it operates.
Ultimately, this will help in making the case for local government to be allocated a greater share of the public sector pot. That, after all, is what will be needed to build an effective local government for the 21st century that is both financially sustainable and delivers an excellent service offering to local communities.
