Local Government Finance Explained
Apr 01, 2015
Local Government Finance Explained
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
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
Annual Budget
Revenue Capital
Capital Programme
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
September
December
February CONSULT?
Budgeting for Front Line ServicesService expenditure
+Central recharges
=Total expenditure
-Income
=Net Expenditure
Budgeting for Central ServicesService 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
Take action
on “variances”
Impact on future years?
Service
Performance
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
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.
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