Written evidence submitted by David Lewis [SRF 012]

SUMMARY

The COVID-19 pandemic has highlighted an urgent need to look at the bigger picture and face the reality that current arrangements for governance and funding of local services rooted in the 19th century are failing and no longer sustainable. Radical rather than incremental change is needed involving greater devolvement and pooling of budgets on a place basis for the provision of local services including health and social care.

A decade of year on year cutbacks in funding, taken together with current pressures due to the pandemic, have left a significant number of local authorities at serious financial risk. It simply cannot be right that councils have had to resort to risky commercial activities, including commercial property investment, to fund the provision of local services. This submission makes several proposals to address the underlying issues which the Committee may wish to consider and recommend to Government

INTRODUCTION

Relevant to this submission is my experience working as a director and senior manager in 7 different local authorities over the last 25 years (county, district and unitary councils both in London and outside) managing the property function to optimise the use of  assets in supporting the delivery of public services. In 2009/10 I worked as the Interim Director of Property at Kent County Council contributing to the National Total Place pilot project the outcome of which was reported as part of Budget 2010.

CONTEXT

Whilst the Covid-19 pandemic has created significant short term pressures on local authorities in terms of additional costs and loss of income it has also highlighted a need to look at the bigger picture and face the reality that the current arrangements for the funding and governance of local service provision are no longer fit for purpose.

The current model for funding the delivery of local services in the UK is rooted in the 19th Century and is no longer a sustainable basis for the allocation of resources. It emphasises an outmoded vertical top down approach to resource allocation rather than a horizontal cross-cutting approach focused on the outputs needed to support service delivery in the third decade of the 21st Century. Amongst other matters the Total Pace Pilot Project, the outcome of which was reported as part of Budget 2010, advocated a joined-up cross-cutting locality-based approach to funding the provision of local services. The current governance and funding model for local services is in itself a major barrier to improving the efficiency and effectiveness of local service delivery.

A further critical issue is that the last decade has seen a significant reduction in the level of Government grant funding available to support the provision of local authority services. Whilst arguably a case could be made at the beginning of the decade for economies as part of the measures to reduce the overall deficit in more recent years annual reductions have created severe underfunding across the sector.

Several organisations, including CIPFA, have recently highlighted the fact that a significant number of local authorities are now running into serious financial problems made worse by the current emergency. Croydon has already had to issue a Section 114 notice and several other local authorities are not far behind with others seeking Government approval to raise and spend capital money on revenue service provision.

Whilst local authorities are very resourceful and innovative in dealing with financial challenges there are limits to what can be achieved. It simply cannot be right that the funding of local public services has to some extent become dependent on councils undertaking the provision of commercial services and investing in commercial property to offset the loss of Government Grant over the last decade. Involvement in commercial activity involves significant risks with local authorities that have invested in commercial property now facing major problems with a loss of income and a decline in the value of the assets held.

Whilst hopefully the current single year spending review will fix the short term funding problems faced by local authorities as a result of the Covid-19 Pandemic it will do nothing to resolve the underlying problems caused by a decade of funding cuts. Informed by reliable high-quality data realistic levels of funding for local services need to be made available preferably as part of a rolling 5-year settlement. This should be on the basis that services are fully funded so that councils are not dependant on income from commercial activity with the assets then transferred into Urban Wealth Fund vehicles.  A place-based approach should be adopted with local government, health service and emergency services budgets pooled to secure a joined-up approach to service provision.

PROPOSALS

The Committee will probably have received many detailed evidence-based submissions from organisations and individuals directly and indirectly concerned with the delivery of local public services. Based upon insights gained through 25 years of working in the sector this submission puts forward some proposals to address the challenges faced by local authorities in the medium and longer term:-

Greater devolvement of decisions and budgets on a place basis redrawing the boundaries between central and local government.

The UK is probably the most centralised country in Western Europe and this needs to change with greater devolvement of budgets and decision making to the local level. Experience during the current emergency has highlighted the fact that the boundary between Central and Local Government needs to be redrawn to secure improved outcomes with greater efficiency and effectiveness.

Accelerating a move to single tier local authorities with integration of social care funding and governance arrangements.

As mentioned above the underlying problem here in the UK is that we are trying to deliver public services in the second decade of the 21st Century based on organisational and funding structures that are a 19th Century legacy. Increasing service demand and financial pressures will only be met through radical rather than incremental change. Historic divisions between health, emergency services, central and local government (together with multiple tiers in local government) need to be redrawn with greater devolvement and an integrated cross sector locality-based approach to meeting need based on output rather than input.

A unitary authority with unified budgets for every locality across the country covering all current local government and health services would be a major step in securing a sustainable future platform for the delivery of local services. Such action would also reduce duplication and overlap between services ensuring a joined-up approach and greater efficiency in the provision of services

Ensuring objective and realistic budget provision for local services by either extending the remit of the Office for Budget Responsibility or setting up a parallel independent organisation with responsibility for collecting, verifying  and publishing data in respect of the demand and funding needs for locally delivered services.

A lack of transparency and reliable data is a big issue which will no doubt have been flagged up in many of the submissions received by the Committee. Fair and impartial resource allocation is dependent on the availability of high-quality financial data. Consideration should be given to either extending the remit of the Office for Budget Responsibility or setting up a parallel independent national organisation (along the lines of the Office for Budget Responsibility) that will have responsibility for collecting, verifying  and publishing data in respect of the demand and funding needs for locally delivered services. This can then be used by Government to inform objective funding decisions with greater equality between regions and areas.

Funding

Whilst there may be differing opinions on the extent to which individual local authorities have contributed to their own problems the Committee may well have received submissions highlighting the fact that funding cutbacks over the last decade have caused major problems for local government.

But this is nothing new an October 2018 report by the Association for Public Service Excellence (APSE) highlighted the shift between Local and Central Government funding since 2010/11.

https://www.apse.org.uk/apse/assets/File/Hollowed%20out%20-%20The%20impact%20of%20financial%20localisation%20on%20neighbourhood%20services.pdf

In 2010/11 local government in England received £12 billion more from Central Government than the total amount it collected through council tax and business rates. By 2015/16, core spending power had fallen to the point where it equalled the total amount raised locally thereby eliminating central government subsidy to local government. By 2019/20 the report projected that locally raised taxes would exceed Core Spending Power by £7bn meaning Local Government was effectively subsidising Central Government.

Recent reports by a number of organisations, including CIPFA, have highlighted the fact that a significant number of local authorities are running into serious financial problems made worse by the current emergency and an increasing dependency on commercial income to balance the books. Croydon has already had to issue a Section 114 notice and a number of other local authorities are not far behind with others seeking Government approval to raise and spend capital money on revenue service provision in order to balance the books.

It simply cannot be right that the funding of local public services has to some extent become dependent on local authorities undertaking the provision of commercial services and commercial property investment to offset the loss of Government Grant over the last decade.

Informed by reliable high-quality data (see above) realistic levels of funding need to be made available, preferably as part of a rolling 5-year settlement, for the provision of local resources without the need for income from commercial activity. A place-based approach should be adopted with local government, health service and emergency services budgets pooled to secure a joined-up approach to service provision. Whilst it might not be appropriate for every area the approach adopted at Greater Manchester would seem to be a good model to look at as a starting point.

Consistent introduction of accounting standards across the local government sector which fully meet the requirements of the Financial Reporting Council including accrual accounting as the basis for budgetary systems linking the balance sheet to the budget.

Councils need a better understanding of their financial situation given the high levels of borrowing supporting property investment acquisitions and the associated risks particularly given the market downturn due to the Covid-19. Following a review, the Financial Reporting Council, which is the regulatory body for the accounting industry, has said that 60% of local authorities audits did not meet the required standards.

Understanding the long-term impact of public investment requires greater transparency by accounting for assets correctly. Adopting an accrual-based accounting approach, recording revenues and expenses when as they are incurred provides a much better guide to the long-term costs and benefits of public ownership of assets, including equity holdings in commercial investment property. Such a step would ensure that assets are fully accounted for with decisions taken based on net worth rather than just debt.

Establishing Urban Wealth Fund vehicles to take over responsibility for the commercial investment property acquired by local authorities to offset a decade of cutbacks in funding for the provision of local services. 

The current emergency has highlighted the financial risks involved in local authority commercial property investment due to fluctuations in income and capital values. Even local authorities that have been prudent and operated within APSE/CIPFA best practice guidance are not immune. The recent National Audit Office report criticised the Government for failing to stop local authorities from taking on additional financial risks by building up  commercial property investment portfolios using PWLB funding.

As mentioned above it cannot be right that local authorities have had to resort to investment in commercial property to fund the provision of local services. The Government should accept responsibility for the problems that have been created by a decade of cutbacks to the funding of local services and pass legislation transferring  assets acquired by local authorities for income generation purposes into one or more Urban Wealth Funds to be established for the purpose. The income from the investment assets taken over from local authorities could then be available to offset the additional funding needed to fully fund local services.

The link below is to an important report just published by UCL that makes a strong case for setting up Urban Wealth Funds in the UK.

https://www.ucl.ac.uk/bartlett/public-purpose/wp2020-16

Amongst other matters the report advocates transferring commercial property investment assets acquired by local authorities into one or more Urban Wealth Funds (pages 48/9 of the report). Such a step would insulate councils from continued involvement in a volatile class of assets which would then be held and managed in an arms-length ringfenced corporate vehicle free from short term political influence.

In Conclusion I would be happy to elaborate on any of the points and proposals made in this submission.

November 2020