Local Government Finance Explained

Objectives Questions Jargon Don’t panic! Welcome! Objectives Questions Jargon Don’t panic!

Our Agenda The legal framework Revenue funding Capital funding The budget setting process The budget monitoring process

What the law says The Council must have: A Medium Term Financial Strategy A balanced budget with adequate reserves Financial Regulations, usually as part of the Council’s Constitution A “Section 151” Officer

The “Section 151” officer Section 151 of the Local Government Act 1972 Ensures effective financial management Provides financial advice, procedures and systems

The Auditors Internal Audit Tests internal control at the council Detailed reports provided to management Work evaluated and considered by the Audit Committee (or equivalent)

The Auditors External Audit Currently provided via the Audit Commission Provides audit and value for money opinions The future of local government external audit?

The Housing Revenue Account The “landlord” function of providing council housing Only required if your authority owns housing stock “Ringfenced” and cannot be subsidised by the General Fund

The General Fund All services apart from council housing Beware, non “landlord” housing duties will be part of the General Fund e.g. Housing Benefits, Support to Housing Associations etc

Revenue v Capital Revenue The running costs of the council Generally under one year life e.g. Employee costs, transport & premises running costs, supplies and services

Revenue v Capital Capital Creating and improving assets Over a one year life e.g. Buildings, infrastructure, vehicles, large items of equipment

Revenue v Capital The council receives separate funding for revenue and capital Revenue funding may be used for capital purposes Capital funding cannot be used for revenue purposes

The current system Housing Rents Service charges Housing Subsidy Grant HRA Funding The current system Housing Rents Service charges Housing Subsidy Grant

HRA Funding The new system (subject to the Localism Bill) Fully local funding of the HRA No Housing Subsidy Grant A one-off redistribution of debt between councils

Revenue funding - sources Council Tax Formula Grant Specific grants Fees and charges Investment interest Use of reserves and balances

Council Tax A tax on domestic properties The level of tax depends on the property value on 1 April 1991 The level of Council Tax must be formally approved by full Council prior to the start of the financial year

Controlling Council Tax Levels Council Tax “Capping” In 2011/12, a one-off grant equivalent of a 2.5% increase in Council Tax From 2012/13 - local referendum on “excessive” increases

The New Homes Bonus New for 2011/12 “Match funding” the increase in Council Tax base as a result of new homes Funding remains (and builds) for 6 financial years

Formula Grant Government Spending Review 2010 determines overall amount The Local Authority “Settlement” informs each council of their individual grant allocation

National Non Domestic Rates Nationally determined since 1990 Billing authorities send out bills and collect the tax Proceeds are “pooled” nationally Redistributed back to councils via the Formula Grant

Specific Grants Money to reimburse all, or a proportion of, spending on defined services Can be subject to individual audit certification Many have been “rolled into” Formula Grant from 2011/12

Fees and Charges Many individual services have specific legislation concerning charging The Local Government Act 2003 provides a power to charge for all discretionary services Income cannot exceed the cost under the LGA 2003

Investment Interest Councils invest surplus funds to earn interest The Treasury Management Policy determines where the money is invested The balance between “risk” and “return” is key

Use of Reserves and Balances Minimum level of reserves agreed by the council The Section 151 Officer reports on the adequacy of reserves Using reserves is fine, but once used, they are gone forever

Capital funding Capital receipts Borrowing Capital grants Contributions from private developers Revenue contributions

Capital Receipts The proceeds of sales of assets 100% usable for general fund assets “Right to Buy” receipts currently “pooled” – 75% are returned to central government

Borrowing The Prudential Code for Capital Finance (CIPFA) Councils can borrow if considered affordable and prudent Councils can borrow from the banking sector, but usually use the “Public Works Loans Board”

Contributions from Developers Town and Country Planning Act Section 106 The Community Infrastructure Levy

The Financial Management Process Medium Term Financial Strategy Capital Programme Annual Budget Revenue Capital Spending

Roles and Responsibilities - Members Full Council debates and agrees the annual budget and the MTFS The Executive proposes the budget to full Council

Roles and Responsibilities - Members Scrutiny reviews, influences and makes recommendations to improve service delivery and the budget etc. The Audit Committee monitors internal control and audit issues

The Budget Timetable April February September December Update MTFS Full Council Update MTFS February CONSULT? September Finalise Budget December Detailed Budgeting

Budgeting for Front Line Services Service expenditure + Central recharges = Total expenditure - Income Net Expenditure

Budgeting for Central Services Service Expenditure + Central recharges = Total expenditure - Recharges Net Expenditure (0)

The Capital Programme Project based “Prudential Indicators” Has the MTFS picked up the revenue implications?

The Budget Monitoring Process Approved Budget Compare with actual spending Impact on future years? Service Performance Take action on “variances”

Roles and Responsibilities Delegated authority Detailed monitoring and control by “Budget Holders” The finance department provides budget monitoring information and support

Roles and Responsibilities Executive members provide political overview of the budget monitoring process Scrutiny ensure budgets are being monitored thoroughly and review “problem areas”

Linking Finance and Service Performance Information Over spend? - Unforeseen demand for a service? Under spend? - not achieving a service plan target Always consider both sides of the coin!

Key Messages Local government finance is complex! Elected members approve the budget and ensure that spending and income are monitored effectively Always consider financial information alongside service performance information

Ian Fifield, Head of Training LG Futures Ltd. ian. fifield@lgfutures Ian Fifield, Head of Training LG Futures Ltd. ian.fifield@lgfutures.co.uk Tel: 07710 955276 www.lgfutures.co.uk

These training materials provide LG Futures view of current practice and contain general advice and comments only. You should seek further advice from your organisation’s finance professionals before acting upon any of the specific issues covered within the materials or placing reliance upon them in any particular circumstances. © 2011 LG Futures Ltd. All rights reserved