Financial management in a glacial age Your name Your title.
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Transcript of Financial management in a glacial age Your name Your title.
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Public services have improved, but financial pressure pre-dates the crunch
Quantity & scope
Quality
Management
Pre-school educationPower of well being
Positive activities for teensSupporting people
Choice based lettingsDecent homes
Capital expenditure & PFIe-enabled services
Local political leadershipGershon efficiencyCorporate assessment
Use of resourcesFOI, data protection
• £3 billion efficiency savings 2004-2007• Additional £5.5 billion target 2008-2011
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Council funding is unlikely to escape spending cuts, adding to the pressure
0
100
200
300
400
500
600
700
800
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 2013/14
£ b
illio
n
Current Departmental Expenditure Limits
Current Annually Managed Expenditure(including benefits and debt servicing)
Cyclically-adjusted Budget Deficit
Source: HM Treasury – Budget 2009 Full Report
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A 20 per cent cut would turn the clock back a few years, but expectations are now higher
2010/11 DEL 20 per cent lessEquivalent
to (real)
NHS £102 billion £80 billion 2004/05
Children, Schools and Families
£51 billion £40 billion 2005/06
CLG £31 billion £24 billion 2002/03
Innovation, Universities and Skills
£18 billion £14 billion 2005/06
Source: HM Treasury, Audit Commission calculations
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Financial management has improved in recent years
Source: Audit Commission, Summing Up
0
20
40
60
80
100
2005 2006 2007 2008
Per
cen
t
Level 1 Level 2 Level 3 Level 4
UoR KLOE scores for financial planning
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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
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0
20
40
60
80
100
District Unitary Londonborough
Metropolitanborough
Countycouncil
Per
cen
t
Substantial negative impact Negative impactNeutral impact Don't know
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
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Demand for services is increasing, with more expected
0
20
40
60
80
100
Welfare ordebt
advice
Housingbenefits
Businesssupport or
advice
Servicesfor
homelesspeople
Freeschoolmeals
Schoolplaces
Children'sservices
Mentalhealth
services
Servicesfor olderpeople
Per
cen
t
Already experienced Anticipated
Changes in demand for council services
Source: Audit Commission, When it comes to the crunch
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The impact of the recession will be felt for many years – we are early in Wave 2
Wave 1Economic
impact
Wave 2Social impact
Wave 3Unequal recovery
Business closures Job
losses
IMPACT OF RECESSION
PRIORITIESAcross all tiers of
government
Long term problems in some
areas
Big increases in unemployment
Rising social costs
Wave 1Protect
Wave 2Support
Wave 3Recover
Save businesses
and jobs
Deal with social issues Employment
and training programmes
Attract growth and investment
Address long term
social issues
Recession
Inequalities develop
Some areas recover quickly
Target worst affected areas
Fallinghouse prices
Morereposessions
Efficiency savings
Large efficiency savings – service cuts
Source: Audit Commission, When it comes to the crunch
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The underlying financial pressures won’t go away
Source: PSSRU projections
0
10
20
30
40
50
60
2000 2010 2020 2030 2040
£ b
illi
on
Total Public Private
Expenditure on long-term care
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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
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Reserves are in good shape, but may not help much
0
2
4
6
8
10
1995-96 1998-99 2001-02 2004-05 2007-08
£ b
illi
on
Schools reserves Other reserves
Local authorities’ reserves (1995/96)
Source: CLG
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Most local authorities can improve efficiency: few have transformed back offices
Source: Audit Commission, Back to front
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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
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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
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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
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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
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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)
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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
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Better financial literacy will improve financial management throughout an organisation
Free tool at www.audit-commission.gov.uk/fmskills
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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?
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There is a range of Audit Commission national reports in production that should help you
National reportExpected
publication
Financial implications of an ageing population Q1 2010
Managing costs Q1 2010
Crunch time III Q1 2010
IFRS implementation Q1/2 2010
Strategic financial management Q1/2 2010
Value for money in policing Q3 2010
Please take the handout from today’s session