Councils in Wales have responded well to significant financial stress

Wednesday, April 1, 2015 - 3:21pm

But they need to improve their financial management and planning to meet the increasing financial challenges ahead.

Councils in Wales are under significant financial pressure and have been active in meeting the challenge. Over the next few years councils will face increasing financial pressures and will need to improve their strategic financial management and planning. This is the main conclusion of a report published today by the Auditor General for Wales which looks at the financial resilience of councils in Wales. 

Auditor General for Wales, Huw Vaughan Thomas said today:

Welsh councils are facing a financial tipping point. Although they have made progress in addressing some of the pressures they face, they now need to strengthen their strategic financial planning and management and revise their service delivery structures. If they fail to embrace the need for transformational change, their financial management arrangements will not be fit for purpose to meet the growing financial challenges they will face in the future.

The report looks at the current financial performance and resilience to meet the future financial challenges of 22 councils in Wales. The report examines the quality of financial management arrangements, focussing on how each local authority is planning and then delivering their budget commitments. The report also draws upon work undertaken by Grant Thornton on English Councils in 2013-14, and draws comparisons and lessons to support Welsh councils to become more financially resilient in the future.

Although most councils are setting clear corporate objectives, today’s report found they need to ensure that their medium term financial plans and service plans are sufficiently joined up to deliver these priorities. In most of the key areas reviewed, the report finds that without improvements, planning arrangements that were once good enough, are unlikely to be able to deal with the growing financial pressures councils will face in the future.

The overall level of reserves held by councils has continued to increase, which suggests that councils in Wales are managing to deliver surpluses in spite of the financial challenges they face. These surpluses provide councils with the opportunity to build a financial buffer, as well as to invest in service transformation as well as supporting delivery of local priorities. However, today’s report highlights concerns that without a clear strategy for the use of reserves, councils will be criticised for hoarding funds without a clear and agreed purpose.

Financial management and controls are sound in most councils, and this provides a good foundation that councils can build on to address future pressures. However, many local authorities need to improve their budget setting and monitoring and need to do more to fully exploit the potential to generate income. They also need to ensure there is sufficient capacity and capability in the finance team to meet the challenges ahead.

Whilst councils’ financial governance arrangements are generally satisfactory, there were areas of weakness identified which included the monitoring of and accountability for ensuring savings plans are delivered. The report also concludes that the significant stress that Welsh councils’ financial arrangements are being placed under means those management arrangements which were once good enough will not remain fit for purpose unless they evolve significantly.

In all, the report makes nine recommendations for improvement, including:

  • councils ensuring their corporate plans maintain a three to five year forward view and are aligned with the medium term financial plan and support strategies;
  • the medium term financial plans of local authorities should identify major financial risks, and should be the subject of effective scrutiny by senior officers and councillors before being adopted;
  • local authorties should review their finance team, to ensure they have sufficient capacity and capability to meet future demands; and
  • comprehensive reserve strategies should be developed by councils, that outline the specific purpose of usable reserves as part of the financial plans.