Introduction from the Committee
The Department for Communities and Local Government has responsibility in government for the local government finance system. Accountability for capital is more devolved than for revenue, but the Department still has responsibility for ensuring that local authorities are financially sustainable. The Department recognises that this includes both revenue and capital. The Department also maintains the accountability system for local government to enable assurance to Parliament about local authority use of resources.
In 2014–15, local authorities spent £38.1 billion on revenue to deliver services and £12.3 billion on capital (excluding education). Capital spending pays for local assets like leisure centres, libraries and roads.
Revenue spending on services has fallen since 2010–11, while capital spend has increased in real terms for local authorities as a whole. However this overall increase masks changes in the purpose of capital spending as authorities now focus increasingly on using their capital programmes to generate revenue returns rather than solely to provide services.
Background resources
• NAO report: Financial sustainability of local authorities - Session 2016-17 (HC 234)
• PAC report: Financial sustainability of local authorities - Session 2016-17 (HC 708)
• Treasury Minutes: March 2017 (Cm 9429) Updated Government response to the Committee
There were 7 recommendations in this report. As of the last Treasury Minute (Cm 9413), the Department disagreed with 1 recommendation. 6 recommendations remain work in progress, as set out below.
1: Committee of Public Accounts conclusion:
The Committee is concerned that the Department for Communities and Local Government appears complacent about the risks to local authority finances, council tax payers and local service users resulting from local authorities increasingly acting as property developers and commercial landlords with the primary aim of generating income
Recommendation 1a:
By summer 2017, the Department should send an update to the Committee setting out how it is strengthening its understanding of the scale and nature of authorities’ commercial activities, focussing in particular on the scale of risk across the sector and the types of authorities placing themselves at greatest risk.
1.1 The Government agreed with the Committee’s recommendation.
Target implementation date: Spring 2018.
1.2 The Department has engaged extensively with CIPFA, the LGA and a range of local authorities to enhance its understanding of the scale and nature of local authorities’ commercial activities. Together with the Treasury, the Department has also started to consider potential macro-economic impacts.
1.3 The Department has identified that commercial activities fall into three broad categories. These are ‘invest to save’ initiatives that have been expanded into commercial activities, activities that achieve regeneration or other policy outcomes that are delivered through commercial vehicles and activities designed to generate yield. Many commercial activities fall into more than one category. The vast majority of authorities’ commercial activities are small scale in the context of overall local authority expenditure and do not give rise to systemic risk. However, the Department has identified concentrations of commercial activity that is potentially more risky in a small number of authorities and the department will update the control framework to take account of this.
Twenty Sixth Report of Session 2016–17
Department for Communities and Local Government
Financial sustainability of local authorities
5: Committee of Public Accounts conclusion:
This contract collapse is yet another case of the NHS lacking the commercial skills to procure patient services effectively.
Recommendation 5:
By April 2017, NHS England should report back to the Committee on what specifically it has done to improve the quality of commercial skills available to local NHS bodies, as identified in its seven key lessons for the future.
5.1 The Government agreed with the Committee’s recommendation.
Recommendation implemented.
5.2 Clinical Commissioning Groups (CCGs) have been testing and strengthening the quality of their procurement and contracting support through NHS England’s Lead Provider Framework. This has driven up quality and value for money by providing expert procurement advice to all CCGs. 70 CCGs have already awarded contracts for support under the Framework and a further 27 are out to procurement now. Another 54 had launched procurements by April 2017.
5.3 The Strategic Projects Team, involved in advising on the UnitingCare Partnership procurement, was disbanded. Commissioning Support Units (CSUs) now offer CCGs access to teams that are capable of managing major procurements and can give CCGs and others expert advice. They routinely manage multiple procurements on behalf of CCGs and other organisations. All CSUs have been made aware of the outcomes of the UnitingCare Partnership procurement. A key objective of the Integrated Support and Assurance Process was to provide local NHS bodies not only with assurance, but also with access to support from central expertise across NHS England and NHS Improvement. This has helped supplement local knowledge and expertise with broader national and regional experience.
5.4 This response meets the requirement of reporting back to the Committee.
Introduction from the Committee
The Department for Communities and Local Government has responsibility in government for the local government finance system. Accountability for capital is more devolved than for revenue, but the Department still has responsibility for ensuring that local authorities are financially sustainable. The Department recognises that this includes both revenue and capital. The Department also maintains the accountability system for local government to enable assurance to Parliament about local authority use of resources.
In 2014–15, local authorities spent £38.1 billion on revenue to deliver services and £12.3 billion on capital (excluding education). Capital spending pays for local assets like leisure centres, libraries and roads.
Revenue spending on services has fallen since 2010–11, while capital spend has increased in real terms for local authorities as a whole. However this overall increase masks changes in the purpose of capital spending as authorities now focus increasingly on using their capital programmes to generate revenue returns rather than solely to provide services.
Background resources
• NAO report: Financial sustainability of local authorities - Session 2016-17 (HC 234)
• PAC report: Financial sustainability of local authorities - Session 2016-17 (HC 708)
• Treasury Minutes: March 2017 (Cm 9429) Updated Government response to the Committee
There were 7 recommendations in this report. As of the last Treasury Minute (Cm 9413), the Department disagreed with 1 recommendation. 6 recommendations remain work in progress, as set out below.
1: Committee of Public Accounts conclusion:
The Committee is concerned that the Department for Communities and Local Government appears complacent about the risks to local authority finances, council tax payers and local service users resulting from local authorities increasingly acting as property developers and commercial landlords with the primary aim of generating income
Recommendation 1a:
By summer 2017, the Department should send an update to the Committee setting out how it is strengthening its understanding of the scale and nature of authorities’ commercial activities, focussing in particular on the scale of risk across the sector and the types of authorities placing themselves at greatest risk.
1.1 The Government agreed with the Committee’s recommendation.
Target implementation date: Spring 2018.
1.2 The Department has engaged extensively with CIPFA, the LGA and a range of local authorities to enhance its understanding of the scale and nature of local authorities’ commercial activities. Together with the Treasury, the Department has also started to consider potential macro-economic impacts.
1.3 The Department has identified that commercial activities fall into three broad categories. These are ‘invest to save’ initiatives that have been expanded into commercial activities, activities that achieve regeneration or other policy outcomes that are delivered through commercial vehicles and activities designed to generate yield. Many commercial activities fall into more than one category. The vast majority of authorities’ commercial activities are small scale in the context of overall local authority expenditure and do not give rise to systemic risk. However, the Department has identified concentrations of commercial activity that is potentially more risky in a small number of authorities and the department will update the control framework to take account of this.
Twenty Sixth Report of Session 2016–17
Department for Communities and Local Government
Financial sustainability of local authorities
2: Committee of Public Accounts conclusion:
Neither the Department, nor the Treasury understand why local authority investments on deposit are now at record levels.
Recommendation:
In its update to the Committee in summer 2017, the Department and the Treasury should explain clearly the causes of, and risks associated with, the build-up of investment cash held on deposit by local authorities based on both analysis of data and direct engagement with local authorities.
2.1 The Government agreed with the Committee’s recommendation.
Target implementation date: Spring 2018.
2.2 The Department and the Treasury have a programme of analysis in place to develop an understanding of the causes of the build-up of investment cash held on deposit by local authorities, including interactions between the low interest rate environment, prudential borrowing framework and trends in investment activities including investment in non-financial assets such as commercial property.
The Department and the Treasury originally committed to providing an update to the Committee in Summer 2017, but given that the work programme has been expanded beyond the scope of the recommendation, the Department and Treasury will now provide an update in Spring 2018 once the revised programme of work has been completed.
2.3 Work so far has indicated that the build up of cash does not in itself give rise to additional risk.
However, the low interest rate environment means that many treasury investments do not generate any yield and there is a risk that local authorities will look at more risky investment classes. The Department and the Treasury will take account of this risk when updating the Statutory Guidance on Local Authority Investments. The Department is working on an accelerated timetable and aims to finalise the updated Guidance in sufficient time so that LAs would have regard to the updated codes for the 2018-19 financial year.
3: Committee of Public Accounts conclusion:
The Department does not have a good enough understanding of the extent to which revenue pressures are affecting local authorities’ capital spending and resourcing activities.
Recommendation:
The Department should ensure that the interactions between revenue spending, capital spending and borrowing and the resulting pressures on local authority capital programmes are considered fully in future spending reviews and in the design for the 100% business rates retention scheme. The Department needs to set out plans to do this in its summer 2017 update to the Committee.
3.1 The Government agreed with the Committee’s recommendation.
Target implementation date: Autumn 2017.
3.2 The Department is increasing its modelling capacity to continue to improve its understanding of underlying pressures that impact on the financial sustainability of the sector. The Department is working on how to better model the pressures on revenue budgets as a result of capital financing choices.
3.3 In addition, the Department is working with sector partners to develop a stress test that will enable individual authorities to assess the cumulative impact of their capital financing and investment decisions on their financial sustainability. The Department aims to ensure that the stress test is incorporated in the updates to the Codes that comprise the prudential framework. The different elements of the stress test will be contained in the Prudential Code and elements in the Guidance on Local Authority Investments.
3.4 Ensuring that the Codes refer to each other is a deliberate decision as the Department and CIPFA want to ensure that local authorities consider the procedures that they are required to have regard to when making borrowing and investment decisions in an integrated manner. CIPFA published their consultation on the update to the Prudential Code on 11 August and the Department will announce its plans for updating the Investments Guidance shortly. The updated Codes will come into force for the 2018-19 financial year.
4: Committee of Public Accounts conclusion:
The Department lacks a cumulative picture of capital risks and pressures across the sector.
Recommendation:
The Department’s update note should set out how it intends to strengthen its use of quantitative data and other information to ensure it has a clear understanding of trends and risks across the sector relating to capital spending and resourcing.
4.1 The Government agreed with the Committee’s recommendation.
Target implementation date: Spring 2018.
4.2 The Department is in the process of updating and improving its statutory data collections on capital expenditure and financing and reviewing additional cross government and other data sources on commercial activity. The proposals relating to statutory data collections will include more specific categories of commercial activity types which have been identified with modelling needs in mind. This will allow the Government to track emerging trends and support analysis on sector risk relating to capital spending.
4.3 The Department developed the changes through several rounds of consultation with local authorities. The changes have been approved through the normal process, by a paper to the Central and Local Government Information Partnership67, of which LGA is a key member. The changes are being prepared for implementation in the capital estimates (budget) return by the end of February 2018, and for the capital outturn returns by the end of March 2018.
5: Committee of Public Accounts conclusion:
Neither the Department, nor the Treasury understand why local authority investments on deposit are now at record levels.
Recommendation:
In the update note for summer 2017, the Department should set out what measures it has introduced to ensure that the purpose and geographical location of capital spending can be ascertained and what specific steps it has taken to remove double counting from its figures.
5.1 The Government agreed with the Committee’s recommendation.
Target implementation date: Spring 2018.
5.2 The Department has reviewed the capital spending and financing data provided by all local authorities. Proposals for improvements have been agreed with local authorities and these are due to be signed off by the Single Data List Gateway Group68 on 2 October 2017. The changes will include new categories for local authority commercial activity, and where capital grants or loans are made to other organisation, the type of organisation will be categorised too. The changes have been agreed with local authorities and will be signed off by the LGA in October. The changes will be included in the data collections that are sent to local authorities from Spring 2018 and which are scheduled for publication in June and September 2018.
5.3 In addition to the improvements, the Treasury has agreed to provide data it collects on local authority commercial investments to DCLG. This data, supported with case study analysis, should enable DCLG to analyse patterns in local authority investments which should help inform its understanding of the potential purpose of such investments.
5.4 The Department also reviewed how Local Enterprise (LEP) expenditure was being recorded in its statutory data collections. Some of the local authorities which act as accountable bodies for LEPs were reporting all LEP finance in the local authority data returns, whereas others were treating the LEP as a third party. The former treatment caused an observable uplift in the capital expenditure figures for 2015-16. The data collection guidance is now prescriptive on this issue, and requires authorities to use the third-party approach. The Department is improving its statutory data collections on capital expenditure and financing and reviewing additional cross government and other data sources on commercial activity.
67https://www.local.gov.uk/our-support/research/partner-organisations/central-local-information-partnership-clip 68https://www.gov.uk/government/publications/single-data-list
2: Committee of Public Accounts conclusion:
Neither the Department, nor the Treasury understand why local authority investments on deposit are now at record levels.
Recommendation:
In its update to the Committee in summer 2017, the Department and the Treasury should explain clearly the causes of, and risks associated with, the build-up of investment cash held on deposit by local authorities based on both analysis of data and direct engagement with local authorities.
2.1 The Government agreed with the Committee’s recommendation.
Target implementation date: Spring 2018.
2.2 The Department and the Treasury have a programme of analysis in place to develop an understanding of the causes of the build-up of investment cash held on deposit by local authorities, including interactions between the low interest rate environment, prudential borrowing framework and trends in investment activities including investment in non-financial assets such as commercial property.
The Department and the Treasury originally committed to providing an update to the Committee in Summer 2017, but given that the work programme has been expanded beyond the scope of the recommendation, the Department and Treasury will now provide an update in Spring 2018 once the revised programme of work has been completed.
2.3 Work so far has indicated that the build up of cash does not in itself give rise to additional risk.
However, the low interest rate environment means that many treasury investments do not generate any yield and there is a risk that local authorities will look at more risky investment classes. The Department and the Treasury will take account of this risk when updating the Statutory Guidance on Local Authority Investments. The Department is working on an accelerated timetable and aims to finalise the updated Guidance in sufficient time so that LAs would have regard to the updated codes for the 2018-19 financial year.
3: Committee of Public Accounts conclusion:
The Department does not have a good enough understanding of the extent to which revenue pressures are affecting local authorities’ capital spending and resourcing activities.
Recommendation:
The Department should ensure that the interactions between revenue spending, capital spending and borrowing and the resulting pressures on local authority capital programmes are considered fully in future spending reviews and in the design for the 100% business rates retention scheme. The Department needs to set out plans to do this in its summer 2017 update to the Committee.
3.1 The Government agreed with the Committee’s recommendation.
Target implementation date: Autumn 2017.
3.2 The Department is increasing its modelling capacity to continue to improve its understanding of underlying pressures that impact on the financial sustainability of the sector. The Department is working on how to better model the pressures on revenue budgets as a result of capital financing choices.
3.3 In addition, the Department is working with sector partners to develop a stress test that will enable individual authorities to assess the cumulative impact of their capital financing and investment decisions on their financial sustainability. The Department aims to ensure that the stress test is incorporated in the updates to the Codes that comprise the prudential framework. The different elements of the stress test will be contained in the Prudential Code and elements in the Guidance on Local Authority Investments.
3.4 Ensuring that the Codes refer to each other is a deliberate decision as the Department and CIPFA want to ensure that local authorities consider the procedures that they are required to have regard to when making borrowing and investment decisions in an integrated manner. CIPFA published their consultation on the update to the Prudential Code on 11 August and the Department will announce its plans for updating the Investments Guidance shortly. The updated Codes will come into force for the 2018-19 financial year.
4: Committee of Public Accounts conclusion:
The Department lacks a cumulative picture of capital risks and pressures across the sector.
Recommendation:
The Department’s update note should set out how it intends to strengthen its use of quantitative data and other information to ensure it has a clear understanding of trends and risks across the sector relating to capital spending and resourcing.
4.1 The Government agreed with the Committee’s recommendation.
Target implementation date: Spring 2018.
4.2 The Department is in the process of updating and improving its statutory data collections on
4.2 The Department is in the process of updating and improving its statutory data collections on