VFM conclusion guidance for auditors 2012/13 v3 issued 13 May 2013
This section covers:
outcomes and impact of the 2010 Spending Review, and the local government finance settlement;
the scale of the challenge for councils to maintain services and effectiveness with reduced funding;
changes to the arrangements for governance, scrutiny and standards arising from the Localism Act 2011;
the impact of the Welfare Reform Act 2012;
potential changes to local government finance from 2013/14, arising from the Local Government Finance Act 2012;
the impact of changes to public health arrangements;
the role of the LGA in promoting sector-led improvement; and
potential changes to the local government pension scheme.
On 20 October 2010 the government published the Spending Review 2010, which set out government department budgets and spending reductions for the period 2011/12 to 2014/15.
The impact of the reductions in central government funding on individual local authorities was finalised with the publication of the local government finance settlements for 2011/12 and 2012/13. The settlements confirmed the amount of formula grant (Revenue Support Grant, redistributed National Non-Domestic Rates and police grant) each local authority will receive.
These follow in-year funding reductions in 2010/11 of £1.166 billion (£805 million in cuts to revenue and £360.9 million to capital specific grants). In 2010/11 the government also removed the ring-fence on £1.1 billion of specific grants (£158.8 million of revenue and £948.1 million of capital).
The Chancellor of the Exchequer is expected to announce the results of the latest spending review, for 2015/16 and beyond, on 26 June 2013.
In summary, the settlement for 2012/13:
included total government revenue funding of £71.9 billion for local authorities in 2012/13, a decrease of 0.1 per cent from 2011/12. Excluding funding for schools, which has protection from the cuts, the decrease in total revenue funding is 3.2 per cent;
distributed £27.8 billion in formula grant, a decrease of 5.1 per cent. This figure includes the 2012/13 council tax freeze grant of £652.2 million which not all local authorities received;
provided transitional grant of £20 million to protect authorities that would otherwise see a reduction in their ‘revenue spending power’, as defined by central government, of more than 8.8 per cent; and
made £652.2 million available to fund a council tax freeze in 2012/13.
These reductions follow decreases in total revenue funding (excluding schools) of 9.5 per cent in 2011/12.
The details of the 2012/13 settlement are available on the DCLG website. Further information on changes in ‘revenue spending power’ for each local authority is available in the VFM profiles tool. Auditors should remember that authorities receive funding from a range of other sources in addition to that received from DCLG. They may therefore want to check the 2010/11 and 2011/12 specific and formula grant figures for individual authorities to understand the full decrease experienced by a specific local authority.
On 4 February 2013, the Secretary of State published the final local government settlement for 2013/14. The settlement increases the proportion of council income from local sources from 56 per cent to 70 per cent.
The settlement recognises the significant changes to local government finances for 2013/14 compared to 2012/13. Funding has been split into two main elements: start up funding assessment and other grants.
This replaces the formula grant and is limited to the local government control total set in the spending review and amended in subsequent autumn statements.
The assessment consists of two elements:
Central government will continue to provide local government with various specific and general grants at the local authority level, particularly schools funding.
The reduction has been calculated after allowing for a number of specific funding streams for 2013/14 include:
Including education grants, other grants have increased by 3.3 per cent from £41.2 billion to £42.6 billion. Excluding education grants, other grant funding has fallen by 11.9 per cent.
In total, spending power by English local authorities has reduced by 1.7 per cent in 2013/14 compared to 2012/13. This has not impacted all local authorities equally. Seven authorities have been awarded a total of £8.7 million of efficiency support grant to cap their spending power reductions at 8.8 per cent.
The provisional settlement for 2014/15 shows an overall reduction in spending power of 3.8 per cent for English local authorities, with seven district councils facing reductions in excess of 10 per cent.
In 2011/12, the government offered local authorities funding equivalent to a 2.5 per cent increase in council tax if they froze or lowered council tax. This offer excluded town and parish councils. The City of London, police and fire authorities and the GLA had different arrangements.
All local authorities set their council tax for 2011/12 at or below that of 2010/11 levels and therefore received the council tax freeze grant. The government also made funding available for the rest of the spending review period to reflect the income forgone in those years. There are no guarantees about income forgone in years beyond the 2010 Spending Review period for a freeze in council tax in 2011/12.
The government offered ‘one-off’ funding, equivalent to an increase of 2.5 per cent of council tax, to local government if they froze or reduced council tax in 2012/13. Over 300 local authorities froze or reduced their council tax in 2012/13 and so are eligible for the grant. No funding is available in future years for revenue forgone arising from a council tax freeze in 2012/13. As in 2011/12, some authorities were excluded or had different arrangements.
The Localism Act 2011 requires a local authority, from 2012/13, to hold a referendum if it proposes an increase in its ‘relevant basic amount of council tax’ that exceeds the level set each year by the Secretary of State and endorsed by the House of Commons. In 2012/13, increases above 3.5 per cent (or 3.75 per cent in the City of London) would trigger a referendum. No local authority exceeded this limit.
In October 2012 the government announced that a further council tax freeze grant would be payable to local authorities that freeze or reduce council in 2013/13. The grant is equivalent to a 1 per cent council tax increase payable in both 2013/14 and 2014/15. The trigger for a referendum in 2013/14 is a council tax increase of more than 2 per cent.
Capitalisation of £300 million was available to local government as a whole in 2011/12 to ‘support local authorities to deliver efficiency savings early through organisational restructuring’. This is a departure from IFRS, whereby the government exceptionally allows local authorities to treat revenue costs as capital costs. Decisions on capitalisation announced by the government in 2011 are on the archived DCLG website.
There has been no announcement on 2012/13 capitalisation.
The budget reductions over the Spending Review period, combined with additional pressures arising from demographic and other changes, will have a significant impact on councils. The Commission’s Tough Times reports, published in November 2011 and November 2012, highlighted that central government support and locally raised income are falling in many councils.
Against this background, balancing their budgets may present a challenge for councils. 'Tough Times' found that in 2011/12 spending on services was planned to fall in real terms by 6.5 per cent in single tier and county councils and 8.5 per cent in district councils. Spending on adult social care had some protection (with a 2.5 per cent cut), but for other services bigger reductions were planned – for example a fall of 28 per cent in planning spending.
While councils largely delivered their planned savings, a sizeable minority of councils had to make additional in-year cuts, seek additional funding, or restructure efficiency programmes in order to deliver their budgets. The report says that auditors are concerned that 12 per cent of councils are not well placed to deliver their 2012/13 budgets. They feel that a further 25 per cent will cope in 2012/13, but may struggle in the remaining years of the Spending Review period.
The Commission’s national report, Surviving the Crunch, published in 2010, found that achieving significant and sustainable savings while minimising the impact on services requires major transformational change. Such changes usually require a lead time. Less prepared councils, or those lacking sufficient capacity to respond to the scale of change needed, are more likely to resort to straightforward budget cuts and increasing fees and charges. The robustness of estimates used in council budgets for planned savings, and their delivery in the planned timescales without slippage, will be critical to prevent unexpected budgetary pressures or deficits from occurring. Councils that do not have a good track record of managing change will be more at risk. 'Tough Times' confirmed this. It found that councils with a combination of weak financial management, low reserves and high cuts (relative to spending) are of greatest concern for auditors.
The Localism Act 2011, which received Royal Assent in November 2011, contains a wide range of measures to devolve more powers to councils and neighbourhoods, and introduces changes to governance and scrutiny arrangements. Key provisions in the Localism Act 2011 include:
replacing the subsidy method of financing the HRA with a system of self-financing;
introducing a new general power of competence, enabling local authorities to do anything which an individual may do, unless other legislation specifically prevents it;
giving councils greater local control over business rates;
empowering communities to challenge increases in council tax and arrangements for service provision; and
abolition of the Standards Board regime and the introduction of requirements for authorities to promote and maintain high standards of conduct.
In April 2012, the Localism Act 2011 replaced the current subsidy method of financing the HRA with a system of self-financing. From 2012/13 local authorities no longer receive housing subsidy or major repairs allowance income. Instead they will fund all HRA revenue and capital expenditure from existing resources, principally rental income and debt finance.
On 1 February 2012, the government published self-financing valuations, based on assumptions about rental income and the expenditure required to maintain the housing stock over a 30-year period, and the payments required to implement the self-financing of council housing. The government also published limits on the housing debt that each local authority can hold. Payments between local authorities and central government were completed during 2011/12. Details of the payments to and from the Secretary of State can be found on the DCLG website.
To help secure financial resilience, local authorities will need to ensure business planning, medium-term financial planning, treasury management and budgeting adequately consider the risks and implications of self-financing the HRA. In particular, councils will want to ensure that budgets, business and financial plans:
properly include the maintenance costs needed to maintain the Decent Homes Standard set by the government;
keep the level of debt within the borrowing limit set for the council; and
articulate the strategy for the disposal or transfer of housing stock, where applicable.
Local authorities’ well-being powers (contained in section 2 of the Local Government Act 2000) have been repealed and in their place the Localism Act 2011 introduces a new ‘general power of competence’.
This power enables local authorities to do anything which an individual may do, unless other legislation specifically prevents it. Councils may use the power to do things for a commercial purpose, although they must do them through a company. The power cannot be used as a way round the other restrictions and limits in the Localism Act 2011 and other legislation.
The general powers are subject to restrictions, limitations and prohibitions in the Localism Act 2011, and the courts’ jurisdiction. Applying the new powers is therefore still subject to legal interpretation and advice. When exercising the power, councils must ensure that they act reasonably and responsibly. This includes ensuring that the exercise of this power supports the achievement of economy, efficiency and effectiveness in the delivery of services.
The Localism Act 2011 gives councils greater freedom to offer business rate discounts to help attract firms, investment and jobs. However, these discounts need to be funded from local resources. This change forms part of the wider reforms in the Local Government Finance Act 2012 to localise non-domestic (business) rates retention.
To help secure financial resilience, councils will need to ensure that financial plans include consideration of the cost of the discount against the possible benefit of attracting growth and jobs to their area.
The Localism Act 2011 introduces the right for communities to approve or veto council tax rises. The Secretary of State will determine a limit for council tax increases for approval by the House of Commons. If a council proposes to raise taxes above this limit, they must hold a referendum to get approval from local voters. This means that councils will need to convince local voters, rather than central government, of the case for rises in council taxes.
To justify the proposed increase to local voters, councils should be able to articulate which services or activities they are proposing to fund with the increase in council tax. They will also need to ensure that financial plans are properly and promptly revised if local voters veto the proposed increase.
The provisions of the Localism Act 2011 complement the government’s wider agenda to localise support for council tax. In the Local Government Finance Act 2012, the government requires councils to design their own schemes to replace council tax benefit.
The Localism Act 2011 also introduces a right for communities to express an interest in running a local authority service. The council must consider and respond to this expression of interest; and where it accepts it, run a procurement exercise for the service in which the challenging organisation can bid. Councils will need to ensure that all procurement exercises include proper consideration of the impact of expressions of interest and of a change in service provider, on service delivery and financial plans.
The Localism Act 2011 has introduced changes to council’s arrangements for governance, scrutiny and standards. Since January 2012 all councils have had the option of returning to the committee system of governance. Councils operating a committee system are not required to exercise scrutiny functions except where there is a specific legislative requirement to do so. At present, there are specific requirements for councils to scrutinise health services, the work of community safety partnerships and flood and erosion risk management.
A new standards framework for local government came into force on 1 July 2012. It abolishes the requirement for councils to adopt the national code of conduct and to have a standards committee to oversee the behaviour of their councillors and receive complaints. It also abolished, on 31 March 2012, the Standards Board for England, the central body set up to regulate standards committees.
All councils now have a duty to ‘promote and maintain high standards of conduct by members and co-opted members of the authority’. Each council must:
develop a local code of conduct dealing with the conduct of members and co-opted members of the authority;
maintain and publish a register of interests; and
appoint at least one independent person to act as an adviser to the council on any allegations it may be considering and to members who may be the subject of the allegation(s).
Members who fail to comply with the requirement to register pecuniary and non-pecuniary interests will now be committing a criminal offence. The council itself must decide what action to take if it finds that a member has failed to comply with the local code.
The LGA has published a template code of conduct which councils may wish to use. DCLG has published illustrative text for a local code of conduct.
A council will need to consider how any changes to governance structures would affect the arrangements for the scrutiny and challenge of financial plans and securing economy, efficiency and effectiveness.
The Welfare Reform Act 2012 introduces major changes to the benefits system. Universal Credit will replace the current system of means-tested and contributory benefits and tax credits for people who are out of work or whose earnings are low. The government aims to simplify the system and give people a greater financial incentive to work. Universal Credit will be piloted in the Greater Manchester and Cheshire region from April 2013 and then phased in for new claimants from October 2013 onwards. Existing claimants will start to transfer to Universal Credit from April 2014. The government aims to complete the migration process by 2017.
The government is also replacing Disability Living Allowance by phasing in the Personal Independence Payment from June 2013. The government aims to reduce expenditure by 20 per cent and to target help at the most disabled.
The welfare reforms will have significant implications for councils. As well as localising support for council tax, the government is also transferring DWP funding for discretionary Social Fund community care grants and crisis loans to councils from April 2013. The grant will not be ring-fenced and councils will have discretion to respond as they see fit to the needs of people the Social Fund was intended to help.
Councils and the DWP will be jointly responsible for administering a benefit cap. The cap will apply where household benefit payments exceed the cap limits, and any excess will be deducted from Housing Benefit payments from April 2013. The aim of the cap is to restrict the total amount of benefit a household can receive to the average net earnings of a working household. This is currently set at £500 a week for couples and £350 a week for a single person. The cap will not apply in circumstances where the household receives a benefit type that is exempt.
As Universal Credit is phased in, councils will stop administering Housing Benefit as DWP will pay this as part of Universal Credit.
The Local Government Finance Act 2012 includes provisions for the:
local retention of non-domestic (business) rates; and
localisation of council tax benefit.
Until 31 March 2013 district councils or single tier authorities collect business rates (non-domestic rates) and pass them to central government. Business rate income is returned to local government through formula grant. In this system of grant funding, there is no relationship between the amount of business rate income that authorities collect and the amount they receive.
In June 2012 the government issued a revised Business rates retention scheme: The central and local shares of business rates – A Statement of Intent. From 2013/14 the government intends that councils will keep 50 per cent of business rates (local share). The remaining 50 per cent (central share) will be paid into a central pool, to be redirected to the local government sector through other grants. By keeping a share of business rates, the government hopes that authorities will be incentivised to promote local growth.
The government will be able to alter the size of the local share in future years, but does not intend to do so until 2020.
From 1 April 2013, local authorities that collect business rates will retain a similar level of business rates to the amount they would have received under the previous system. Authorities expected to raise more than this will pay the difference to central government as a tariff, to top up those authorities that are not expected to raise enough business rates. These tariffs and top-ups will increase by inflation each year.
Authorities will be able to keep a proportion of any growth in business rates, although the government is planning to recoup a share of disproportionate growth through a levy. This will be redistributed to other authorities experiencing decreases in their business rate income below a certain level. County councils will receive a share of the business rates, and growth in business rates, from the districts in their area and will also be subject to tariffs, top-ups and the levy where appropriate. This means that a local authority’s income may change if the amount of business rates that they collect goes up or down. Half of the business rate will be paid to central government and used to fund local authority-specific grants. Local authorities will be able to voluntarily pool their business rates.
The government also confirmed that tax increment financing, whereby authorities will be able to borrow against future business rate income, will operate within the business rates retention system. Auditors should be aware that borrowing of this type may therefore appear in council’s medium term financial plans.
Business rates were included in the final local government settlement published on 4 February 2013.
The Local Government Finance Act 2012 imposes a duty on councils to design their own schemes to replace council tax benefit from April 2013, working with a framework set out in legislation. It also gives councils greater discretion over council tax discounts and exemptions, for example over second and empty homes.
The government has made it clear that pensioners’ entitlements will be protected. It also expects local schemes to support incentives for people to find and stay in work. Councils must agree a local scheme of council tax support by 31 January 2013 or a default scheme, which will be the same as the current Council Tax Benefit scheme, will apply instead.
Funding for council tax support in 2013/14 will be 90 per cent of forecast subsidised expenditure. Councils will therefore need to decide how to manage the impact of the reduction in funding. This may include:
reducing the financial support available to working age claimants;
making savings in other budgets;
using reserves; or
increasing council tax to meet the shortfall, subject to the requirements of the Localism Act 2011.
The government will provide £30 million of additional funding towards the transitional costs of developing and implementing local schemes. The government announced in October 2012 that additional transitional funding of £100 million will be available for councils to apply for in 2013/14 only if their local scheme of council tax support meets certain criteria.
From April 2013, single tier and county councils take on new responsibilities for public health in three areas: health improvement, health protection and healthcare. This will include commissioning specific public health services. Central government intends to fund local authorities’ responsibilities for public health through a ring-fenced grant.
On 7 February 2012 the DH published 2010/11 public health spend by SHAs and PCTs. This included a projection of this spend at the local authority level estimated to be £2.2 billion nationally. The government published the distribution of public health grant to local authorities for 2013/14 and 2014/15 on 10 January 2013, announcing that £2.66 billion would be allocated in 2013/14, and £2.79 billion in 2014/15.
The LGA is leading work to enable the local government sector to put in place arrangements for councils to work together to deal with the scale of the challenge following the Spending Review.
The LGA has developed an approach to sector-led improvement in the local government sector that is intended to help councils strengthen their accountability and help them evaluate and improve their services. The approach is set out in Sector-led improvement in local government published in June 2012. It includes the opportunity for all councils to request a corporate peer challenge by member and officer peers from other councils with support from LGA staff. The LGA website has a list of councils which have had or have requested a corporate peer challenge.
The LGA has also developed a new approach to sector-led improvement for:
children’s services, in partnership with the Association of Directors of Children’s Services, SOLACE and the Department for Education; and
adult social care, in partnership with the Association of Directors of Adult Social Services, SOLACE, the Social Care Institute for Excellence, the CQC and the DH.
The LGA and trade unions have agreed changes with employers and members on the LGPS proposals, to take effect from 1 April 2014.
There will be significant changes for employees and employers. The scheme proposals will not affect past service costs, as all pensions in payment or built up before April 2014 will be protected.
For councils the key impacts of the changes are:
A reduction in the employer Future Service Rate (the amount required to fund new benefits to accrue in the future); due largely to the link between Normal Pension Age and State Pension Age. The LGPS, in its LGPS 2014 – Employer Overview, estimates an average reduction of 2 per cent across the 89 pension funds in England and Wales.
A change in future scheme valuations due to the option for members to pay 50 per cent of the contributions for a 50 per cent pension, while retaining the full value of other benefits of the scheme. If a significant number of existing members take up this option, the employer rate at subsequent valuations will reduce. An increase in participation by non-members may result in an increase in cash costs in the short term, with a reduction in employer rates in the longer term.
The LGPS estimates that the shift to a career average for calculating benefits will be broadly cost equivalent to the current final salary basis of calculation. This is because the Consumer Price Index is proposed to be the revaluation rate used to increase each year’s pension for inflation.
Authorities should be aware of the proposed changes, and should consider how the changes, if enacted, will impact on their MTFP and risk management considerations.
The Commission’s local government VFM profiles tool and the financial ratios analysis tool provide a range of information which auditors may find useful as background. Further information on these tools is provided in section 5.5 of this guidance.