Financial management in a glacial age

1. Financial management in a glacial age Your name Your title

2. Entering the glacial ageof finance

3. Pre-school education Power of well being Positive activities for teens Supporting people Quantity & scope Choice based lettings Decent homes Capital expenditure & PFI e-enabled services Quality Local political leadership Gershon efficiency Corporate assessment Use of resources FOI, data protection Management Public services have improved, but financial pressure pre-dates the crunch • £3 billion efficiency savings 2004-2007 • Additional £5.5 billion target 2008-2011

4. 800 700 Cyclically-adjusted Budget Deficit 600 500 £ billion Current Departmental Expenditure Limits 400 300 200 Current Annually Managed Expenditure (including benefits and debt servicing) 100 0 2013/14 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 Council funding is unlikely to escape spending cuts, adding to the pressure 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 Source: HM Treasury, Audit Commission calculations

6. Financial management has improved in recent years UoR KLOE scores for financial planning Source: Audit Commission, Summing Up

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. 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 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 Source: Audit Commission, When it comes to the crunch

11. The underlying financial pressures won’t go away Expenditure on long-term care Source: PSSRU projections

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

13. Responding to the colder climate

14. Reserves are in good shape, but may not help much 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

19. Avoiding failure andimproving financial literacy More details in the handout for today’s session

20. 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

24. Twoquestions for discussion

25. 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 Please take the handout from today’s session