Public Finance magazine April 2015

PublicFinance

The business monthly of the public sector

publicfinance.co.uk

Issue 4 April 2015

APRIL 2015

Audit adieu

Cupboard’s bare

Digging deep

Farewell to the Audit Commission

Why we can’t afford local government pensions

The infrastructure skills challenge

RUNNING WITH Why the election lacks debate about the scale of cuts to come

ALSO INSIDE

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PublicFinance

CONTENTS

April 2015

Features 38 COVER STORY A snip here, a snip there As the nation prepares to go to the polls, there is a reluctance by the political parties to discuss the details on spending cuts and future funding of public services. Rachel Willcox reports

38

‘I’d be surprised if we got any meat on the bones, especially in terms of bad news, before the election.

Whatever government we get, there will be a Spending Review before the end of the year’

44 The fifth element The four things you need to know about the National Infrastructure Plan – plus what is missing: certainty that the construction industry can deliver

50 Farewell to the watchdog with bite Staff from the Audit Commission’s early days share their recollections of professionalising public audit

21 Top 50 Trailblazers Applauding innovation in public finance, we profile 50 pioneers – all nominated by their peers – with the drive and determination to do things differently

44

21

Regulars 4

Leader Progress, despite darkness

5

Second thoughts Tony Travers says George Osborne has made it harder for Labour to raise taxes

6 News Manchester’s £6bn NHS deal sparks ‘queue to be next’; Free schools ‘a threat to academy rescues’; Charity urges early intervention target

Need to Know

8 News Analysis After two years on the statute book, has the Social Value Act achieved its aims?

57

10 Opinion Chris West on local government pensions; David Innes & Gemma Tetlow on council cuts; and Simon Parker on devolution

Smart Thinking?

Smart cities are not enough. Tomorrow’s world needs smart communities

60

Management Development How to collaborate to save and innovate

62 64

On Account CIPFA on tools to measure social value

65

16

Numbers Game

Cipfa Events

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60 Subscribe today for the latest expert comment on public policy and finance

Watchdog Watch

18 Voice of the Nations CIPFA favours Scots local tax rethink; Cameron hails Welsh power switch 20

Restless Nation

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CONTACTS

Leader Progress, despite darkness

T

he last five years have seen enormous pressures applied to the public sector, but many individuals have responded by dramatically raising their sights. In this issue we profile 50 outstanding people who have one thing in common – they are all champions at driving change for the better, even in today’s straitened circumstances.

Our Top 50 Trailblazers (pages 21-37) are all extraordinary pioneers, possessed of the determination, diligence and creativity needed to do things differently.

One pioneer in particular has relevance for the broader issues that face us all as voters, as we prepare to go to the polls in May. Steven Mair, city treasurer of Westminster, joins the Top 50 for work done in his former post at Oldham, where he seized on the authority’s accounts as a vehicle to drive cultural change for the better within an ailing finance department.

When Mair arrived in 2009, Oldham’s audited accounts were scraping within the statutory limit for publication, the most visible facet of a much deeper professional malaise. By 2014, the reorganised and re-energised team was not simply the quickest among local authorities to publish an audited report, it was as prompt as the top half of the FTSE 100.

The pace achieved at Oldham puts the government to shame. As CIPFA International chair Ian Ball has pointed out, the most recent Whole of Government Accounts were released in June 2014 and relate to the year ended 31 March 2013 (see bit.ly/Ball-on-WGA for more). That means voters must next month judge the effectiveness of the coalition government based on financial data more than two years out of date. And on a qualified report at that.

By contrast, listed UK companies must publish within four months of their year-end, while the New Zealand, Australian and Canadian governments report in around three, five and six months respectively.

Slow reporting is just one facet of an electoral process that leaves voters in the dark, with little to go on but rhetoric, sound-bites and spin. As CIPFA chief Rob Whiteman observes in our cover story (pages 38-43), this year’s could be the most disingenuous general election yet seen, with pledges being made to buy votes that are simply not going to be affordable.

Improved transparency would be a worthy goal for whoever takes up residence in Downing Street after the ballots have been counted. However, given the demise this month of the Audit Commission (commemorated in our retrospective on pages 50-55), perhaps expecting change for the better in financial accountability is a somewhat forlorn hope.

■ Lem Bingley CONTENT DEVELOPMENT DIRECTOR lem.bingley@publicfinance.co.uk 4

REDACTIVE PUBLISHING LTD 17-18 Britton Street London EC1M 5TP 020 7880 6200 www.publicfinance.co.uk Associate editor Judy Hirst 020 7324 2769 judy.hirst@publicfinance.co.uk Managing editor Vivienne Russell 020 7324 2788 vivienne.russell@publicfinance.co.uk Content development director Lem Bingley 020 7324 2768 lem.bingley@publicfinance.co.uk Senior reporter Richard Johnstone 020 7324 2796 richard.johnstone@publicfinance.co.uk Reporter Judith Ugwumadu 020 7324 2794 judith@publicfinance.co.uk Contributors Paul Nettleton, Keith Aitken Senior designer Gene Cornelius 020 7880 6227 gene.cornelius@redactive.co.uk Picture editor Akin Falope 020 7324 2713 akin.falope@redactive.co.uk Editorial assistant Tania Forrester 020 7324 2793 tania.forrester@publicfinance.co.uk Digital content manager Harriet Patience 020 7324 2733 harriet.patience@redactive.co.uk Sales manager James Condley 020 7324 2750 james.condley@redactive.co.uk Display Sales executive Vlad Harmanescu 020 7324 2726 vlad@redactive.co.uk Sponsorship sales manager James Brunt 020 7880 6230 james.brunt@redactive.co.uk Recruitment sales executive Emmanuel Nettey 020 7324 6234 emmanuel.nettey@redactive.co.uk Senior production executive Aysha Miah 020 7880 6241 aysha.miah@redactive.co.uk Printing Polestar Stones, Banbury, Oxon To subscribe to Public Finance at the annual UK cost of £100, call 020 8950 7010 or email publicfinance@alliance-media.co.uk.

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Public Finance is editorially autonomous and the opinions expressed are not those of CIPFA or of contributors’ employing organisations, unless expressly stated. Public Finance reserves the copyright in all published articles, which may not be reproduced in whole or in part without permission. Public Finance is published for CIPFA by Redactive Publishing Ltd. Public Finance 17–18 Britton Street, London EC1M 5TP Tel 020 7880 6200 Fax 020 7324 2790

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Average circulation 15,698 (Jul 13–Jun 14)

Tel 020 7543 5600 Fax 020 7543 5700 Email corporate@cipfa.org Address CIPFA, 77 Mansell Street London, E1 8AN

PublicFinance APRIL SEPTEMBER 2015 2011

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12/03/2015 16:18

Second thoughts pfOpinion

■ Tony Travers

The shrinking state Whatever the election brings, something that feels like austerity will continue. George Osborne’s tenure at the Treasury has locked Britain into permanently lower taxes and smaller government The 2015 Budget offered George Osborne his last opportunity (in this Parliament, at least) to affect the future of the UK economy. A Budget is always a political opportunity for a chancellor. New optimism can guide the near future, particularly with an election just a few weeks away. Even though the government’s deficit remains substantial, there has been media speculation that Osborne would begin to hint at less severe public spending austerity in the years ahead. Tax cuts have already become part of the pre-election bidding war between the parties.

The recent American campaign to keep Nato-member defence expenditure at 2% of GDP was remarkable to behold: it is rare to see overseas governments lobbying, in effect, for higher public expenditure in Britain. Defence

spending will have fallen from 2.6% of GDP in 2010/11 to about 2% in 2015/16.

Under the chancellor’s plans for spending to 2019/20, there is no way that defence can avoid dipping to significantly below 2%.

The Office for Budget Responsibility shows local government budgets declining from about 3.5% of GDP to about 2.8% in 2015/16, a similar relative fall. It, too, is doomed to decline further in the coming years.

The Budget and the forthcoming general election are stages on the road to a very different kind of state in Britain.

It appears to be the settled will of the people that taxes should not rise above 37-38% of GDP. Every time the Conservatives lower taxes as a share of GDP, it is harder for Labour ever to raise them again: by adopting a ‘we are the 99%’ approach to taxes, it is impossible to raise much additional revenue from the rich 1%. As the deficit is reduced, government spending as a share of GDP will drop.

Of course, it is possible that if Labour were to win the general election they

EVERY TIME THE CONSERVATIVES LOWER TAXES AS A SHARE OF GDP, IT IS HARDER FOR LABOUR EVER TO RAISE THEM AGAIN

will simply allow the deficit to stay at, say, about 3% of GDP and allow slightly higher public spending than might otherwise be the case. As long as there is not another recession in the coming years, such a policy might just work. But even if this happened, it is hard to see overall public expenditure rising much faster than growth in the whole economy: perhaps 2% or 2.5% per year.

Compare this with the average annual increase of almost 6% while Labour was in power between 2000/01 and 2010/11.

During this period, NHS spending rose from 5.2% to 8.0% of GDP and social protection from 12.8% to 15.3%. The major parties are all committed to real increases in NHS funding, while pensions enjoy a ‘triple lock’ protection.

Pupil numbers are growing sharply, so schools’ spending will rise.

Never again will NHS spending rise by 72% in real terms in a decade as happened between 2000/01 and 2010/11. But health, social protection, schools and possibly defence will expand in real terms and possibly as a share of GDP. Other public provision will face continuing reductions up to 2020 and beyond. Whatever the outcome of the election, something that feels like austerity will continue.

The only way to change this inevitable progression would be for a government to raise taxes as a share of GDP. But a combination of international tax competition and fear of voters stops mainstream politicians from taking such a step. The UK is locked into a path of permanently lower taxes and a smaller state. The general election campaign will attempt to disguise this reality, with small offers to sections of the electorate.

George Osborne’s tenure at the Treasury has been the shape of things to come.

Tony Travers is professor of government at the London School of Economics

Photo: iStock

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13/03/2015 12:14

News Integrated care

Manchester’s £6bn NHS deal sparks ‘queue to be next’

BY RICHARD JOHNSTONE

The leader of Manchester City Council has said he expects other cities to replicate the landmark agreement for the conurbation’s combined authority to take control of its £6bn NHS budget.

Speaking to Public Finance after the historic deal between the government, councils and the NHS in Manchester, Sir Richard Leese said the reforms provided the basis for improved integration between health and social care.

The ‘ultimate task’ of the integration arrangements, which are set to take effect from April 2016, would be to increase the amount of money spent on preventive medicine, he said.

‘We have to reduce unnecessary admissions to hospital and we need to minimise stays by having proper care packages and support for people in both health and social care.

‘That means that we have to transfer a lot of what we currently do from the acute sector into the primary and community sector. Having the potential to join all of those budgets up gives us a better chance of doing that.’

A memorandum of understanding was signed on February 27 between Greater Manchester’s 10 local authorities, 12 NHS clinical commissioning groups and 15 NHS providers, as well as NHS England chief executive Simon Stevens and Chancellor George Osborne.

Under the plan, a new joint decisionmaking process for all £6bn of health and social care spending will be developed over the next year. A Greater Manchester Strategic Health and Social Care Partnership Board will be formed 6

to oversee development of the health and care system, while a joint commissioning board will be responsible for financial plans and budget proposals.

An outline business plan, to be published in October, will set out the scope for possible savings through integration, as well as the capital investment needed to deliver the shift from acute care to the primary and community sectors.

Leese, who chairs both the Core Cities Cabinet of England’s eight largest urban areas outside London and the Local Government Association’s city regions board, said Manchester offers a potential template for other areas.

There is ‘a queue of people who want to be next’, he added, and they are learning from the work of Manchester in establishing its combined authority, which was the first in the country when formed in 2011. ‘Other places don’t need to take so long to do it now because they can use our experience as a template to develop their own models, so I think other places will catch up pretty quickly.’

Leese also highlighted the key role of Simon Stevens, who ‘played a significant part in getting us to this point’.

NHS England understood the need for greater local control of provision, he added. ‘I think they recognise that if they are going to deliver their national mandate, which is effectively the what they have to do, they are far better in leaving the how to local partnerships to deliver on their behalf.’

Newcastle City Council leader Nick Forbes, who is also the Core Cities Cabinet member for public sector reform, said the

agreement was ‘a trailblazing deal’.

‘The boldness and visionary nature of the deal is terrific, and the Greater Manchester authorities and the CCGs should be congratulated on having such tremendous vision,’ he said.

Forbes added that, although settlements for other cities would need to be bespoke to reflect different patient flows across the country, Manchester’s pact had ‘taken the lid off the box’.

He told PF: ‘The significant thing about the Greater Manchester deal is that it wasn’t just signed up to by the local authorities, it was signed up to enthusiastically by the clinical commissioning groups and NHS England. Getting health, social care and public health onto the same page within the same plan is the kind of thing all of us aspire to.

‘The Manchester settlement is starting to open up a new way of working, and I think NHS England can, and should, accelerate that pace by being more explicit with clinical commissioning groups that they expect to see this level of ambition in other local areas too.’

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publicfinance.co.uk/news Trailblazing trusts: Fifteen NHS providers have signed up to the deal devolving £6bn health spending in Greater Manchester

EducationReform Richard Johnstone

Free school ‘threat to academy rescues of failing state schools’ Senior figures in the academy sector have warned that the government’s free school programme could undermine plans to improve existing institutions.

At a roundtable hosted by CIPFA in London on March 10, Sir Rod Aldridge, chair of the Aldridge Foundation, which sponsors seven academies, two university technical colleges and two studio schools, said free schools could draw pupils and funding away from nearby academies. As a result, publicly funded school turnaround schemes would not have the time needed to work.

‘If you take over an underperforming school, generally speaking, it’s not full, and it’s not full because there’s an historic reputation around it and results have been poor,’ Aldridge said.

‘So the school is not full, you have a deficit, staffing levels have been allowed to get to a level that they shouldn’t be at,

Children

Charity urges early intervention target

BY RICHARD JOHNSTONE

The next government has been urged to set a fiscal target to increase the proportion of public money spent on early intervention programmes as part of its deficit reduction plan.

Leon Feinstein, director of evidence at the Early Intervention Foundation, said the charity – which was backed by government when it was formed in 2013 – wants the Treasury’s help to improve its estimate of the costs of late intervention.

A report by the foundation in February judged these costs to be £17bn a year, with councils picking up £6.5bn, followed by welfare spending of £3.7bn and £3bn in the NHS. Feinstein said the figures had ‘helped people get around the table to think about how to shift that cost into early intervention’ and that it is now vital that the next government boosts these initiatives.

Photos: Alamy

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and you’re trying to transform the senior leadership team. It’s going to take probably three to four years to get through such a change programme which needs supporting, rather than being left to struggle.’

He highlighted an example where a free school opened near to one of his academies, resulting in 40 pupils moving to the new institution – effectively putting both at risk.

‘This is therefore not only about having the right financial management in the school, it is more about poor visibility around decisions that are taken at a point when you’re going through a really fragile transformation of a community asset that you have agreed to take over long-term responsibility for.

This needs time to implement effective sustainable change rather than facing short-term increased competition.’

His comments come after David Cameron said a future

Early intervention programmes are focused on taking action as soon as possible to help children, young people and families who are suffering from neglect and deprivation to avoid picking up the costs later in life. They are mainly aimed at people aged up to 18, with high-profile examples

Early promise: The Early Intervention Foundation wants to see spending commitments from the Treasury

Conservative government would open 500 more free schools on top of the 255 already opened.

Aldridge, the founder of Capita, said: ‘Above all, we should constantly remind ourselves that it is all about the long-term best interest of a child’s education since they have only one chance at getting this right and it is therefore above politics.’

Another senior figure in the sector, who asked not to be named, said the lack of a national strategy for free schools was an issue.

‘It does seem pointless to put free schools into areas where there is no shortage of school places and to place them right on the doorstep of a struggling academy that you’ve just handed over to a sponsor who has the wherewithal to transform that school.

‘What we desperately need is some sort of evidence of strategic intent coming from the Department for Education.’

including Sure Start children’s centres and primary schools that improve children’s social and emotional skills.

‘A key test for us will be in the Spending Review [after the general election] that the Treasury use the numbers to try and find systems reforms as one way of achieving fiscal consolidation, without just salamislicing,’ said Feinstein. ‘I think we’ve made a case that there’s a lot of activity that is late and is very expensive, and we need to think about how that spending can get shifted.’

He said this should include Whitehall assistance in helping to calculate how much is being spent on addressing the root causes of social problems.

‘An analysis that we need to do, and that we haven’t done yet, is an estimate of early intervention spending,’ Feinstein added. ‘What we’re calling for government and local authorities to do is work with us over the five years of the next parliament to get a measure of early intervention spending, and demonstrate over that parliament a shift from late intervention to early intervention.’

APRIL 2015

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16/03/2015 09:53

News

Analysis Social value

Fluffy, yes. But just look at the benefits Two years after a Private Member’s Bill put social value onto the statute book, Vivienne Russell reports from a CIPFA summit to assess progress The 2012 Public Services (Social Value) Act recently passed its second birthday. It got onto the statute book thanks to the hard work of Conservative backbencher Chris White, MP for Warwick and Leamington, who introduced the legislation as a Private Member’s Bill shortly after the coalition government was formed.

What the Act does is require public service commissioners to consider how their procurement activities might improve the economic, social or

On the road: Community Speed Watch teams work with police to monitor traffic – co-production in action

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environmental wellbeing of their areas and how these gains can be built into the procurement process.

In March, CIPFA invited a range of commentators and practitioners to a summit to consider the broad question of social value and how the agenda might move forward. Social value can be dismissed as being at the ‘fluffy’ end of the spectrum and hard to do in the current fiscal climate, but there’s a growing sense that this is an area finance professionals need to engage in because of the wider value and benefits it can secure.

‘People think they haven’t got time to do social value,’ said Jayne Stephenson, a CIPFA council member and chief finance officer for the Greater Manchester Police and Crime Commissioner, at the meeting. ‘But I tell them they can’t afford not to do it.’

The summit was timely, as a Cabinet Office review of the legislation, led by Lord Young, the prime minister’s adviser on enterprise, was published in February.

The review attempted to assess how the Act is working, who is using it and how.

Aigneis Cheevers, the civil servant who led the secretariat for Young’s review, told CIPFA’s summit that the review team had been struck by the range of stakeholders engaging in social value.

‘We unearthed lots of good case studies where the Act is having a very positive effect,’ she said. ‘People are using the Act to do things differently. The review

clarified the Act’s potential as a tool for smarter procurement and delivering real value for money.’

But the review also uncovered barriers that are preventing the law from gaining the traction it might. Awareness and take-up is mixed. In general, local authorities and housing associations are leading the way, while central government and health are not making as much use of its provisions.

On the provider side, there is a high level of awareness among voluntary sector organisations and a growing understanding among big business, but a fairly low level of recognition among smaller firms. Cheevers also noted that there are inconsistencies in how the Act is applied, with some very different approaches to how social value is commissioned and how it is evaluated.

‘This mixed understanding is preventing people from running with it,’ she said.

Photo: Alamy/Getty

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QuoteUnquote ‘We unearthed lots of good case studies where the Act is having a very positive effect. People are using it to do things differently.’

Aigneis Cheevers, head of secretariat, Public Services (Social Value) Act review

‘The Act has been largely ignored or misunderstood. As long as it stays a permissive piece of legislation, it’s not going to deliver its potential.’

Keith Ward, head of social impact advisory at Baker Tilly

Boxing clever: many retired people, like these food bank volunteers, have the time and experience to help out

Finally, commissioners don’t know how to measure and qualify social value gains.

‘People feel they’re leaving themselves open to making a subjective judgment – and they don’t want to do that as commissioners,’ Cheevers added.

The Young review concluded these barriers need to be overcome before the reach of the Act might be extended.

Cheevers added the Cabinet Office is currently considering what the best next steps might be. ‘We don’t want to lose any of the momentum we gathered over the last four months [of the review].’

Tony Bovaird, professor of public management and policy at the University of Birmingham, told the summit that ‘huge change’ to the way social value is commissioned is under way. He focused on the potential benefits of co-production,

whereby citizens and service users are actively involved in the design, delivery and evaluation of public services.

‘In principle, co-production flies in the face of everything we’ve done since the 1880s, but that way of doing things has finished,’ Bovaird said. ‘We need new provider models – and we’ve got them.’

Bovaird described how to address the lack of alignment between community resources and community needs. For example, rather than seeing the ageing population as an impending disaster, the skills and energy of fit and healthy retirees could be mobilised, while many public amenities, such as schools and day centres that are closed for large parts of the day, could be used for more activities.

‘We are not remotely resource poor, but we have been unable to match the resources we have to our needs.’

The advantage of co-production, he said, is that communities often know things that professionals don’t, and it helps to preserve community links and contact that is highly valued by potentially vulnerable groups, such as elderly or disabled people.

Social and economic value can emerge in surprising ways, he noted. Members of South Somerset Community Speed Watch work with police to carry out speed checks on cars passing through their towns and villages. Bovaird said this has not only secured a 40% reduction in vehicles exceeding the speed limit, but also boosts the local economy as volunteers buy a cup of tea in a café or a pint of beer in the local pub after their shift.

Many of Bovaird’s points were echoed

by Henry Kippin, director of Collaborate, a policy and practice hub, who suggested that people’s increasingly complex needs and demands require equally complex responses from services. The model of

increasing economic growth leading to ever greater service entitlement has gone and a rebalancing of relationships between service users, providers and communities is going to have to take place. ‘An eco-system is what we’re aiming for. It’s about interdependence,’ Kippin said.

He questioned whether the public service frontline might be changing, shifting away from traditional service centres to high streets and barber shops and post offices.

‘How do you mobilise that and generate a sense of common purpose?’ Behaviour, culture and relationships all needed to change and it was therefore ‘disconcerting’ the Cabinet Office review had uncovered relatively low levels of awareness, Kippin observed.

One summit attendee, Keith Ward, head of social impact advisory at Baker Tilly, agreed it was disappointing that the Social Value Act has not yet delivered on its early promise. ‘The Act has been largely ignored or misunderstood. As long as it stays a permissive piece of legislation, it’s not going to deliver its potential. We need more campaigning and vigour.’

The barriers identified by the Cabinet Office are ‘colossal’ and the review rather undersold them, Ward suggested.

But Stephenson said hearts and minds need to be changed rather than legislation. ‘That’s the approach we want to promote at CIPFA.’ Brett Crabtree, the institute’s corporate partnership manager, added that CIPFA is keen to ‘push awareness of social value as a tool to create new solutions in delivering social outcomes and securing best value for providers’.

CIPFA is looking at how social outcomes and impacts can be measured. See On account, p64 APRIL 2015

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PublicFinance 9

13/03/2015 15:21

The Emperor’s new pension scheme, by ChrisWest

No change for funding losers, by David Innes &

Opinion Chris West

The Emperor’s new pension scheme Few will admit to the naked truth, but reforms to local government pensions have left in place a scheme that is wholly unaffordable and unsustainable On April 1 last year, the old Local Government Pension Scheme (LGPS) arrangements ended and new ones began – a product of a compromise thrashed out after Lord Hutton’s review into public sector pensions, commissioned by the incoming coalition government. Many members of the scheme will have hardly noticed the change, and those who did probably assume that the scheme is now sorted, at least for a few years to come.

In reality, few people are really on top of the issues facing the scheme. The complexity and jargon surrounding pensions and the LGPS does not help councillors, scheme members or taxpayers to understand the issues.

Most councils do not operate their own schemes but are part of a wider one.

For example, Coventry is part of the West Midlands scheme. Even finance directors struggle to keep on top of developments.

The truth is, though, that the reforms have left in place a scheme that is still wholly unaffordable and unsustainable for local authorities, and almost no one feels able to say so.

For many directors of finance or resources the escalating cost of pensions, along with grant reductions and pressures on social care costs, will be the top three financial challenges facing their authority. Yet the issue gets very little coverage in discussions and analysis of the impact of austerity. A recent report by Michael Johnson of the Centre for Policy Studies – What 10

price localism? A case study: the Local Government Pension Scheme – robustly challenges the new arrangements, but has been largely ignored or sidelined by the sector.

Measurements of the overall position raise significant concerns. At the last actuarial revaluation in 2013, the overall LGPS was in deficit by £47bn, with an overall funding level across the 89 different schemes of 79%. Over a third of the schemes were cash flow negative – paying out more in benefits than they collect in contributions. To put this in perspective, the Revenue Support Grant for 2015/16 announced in the recent finance settlement totals just £9.4bn.

Local authorities are caught in the vice of two elements of pension costs: historic deficits and future contributions. Pension funds are trying to recover historic deficits by raising the amounts they charge authorities, sometimes dramatically. At the same time, the new scheme remains extremely generous, with employer

contributions typically in a range of 12% to 15% of gross pay, and rising.

In any ‘normal’‘ financial climate, this would be challenging. In the current context it is wholly unsustainable. As local authority budgets reduce, and staff numbers fall, the overhead of pension costs falls on a smaller base and a smaller number of employees.

Both in absolute and relative terms this is totally unmanageable.

The position in Coventry City Council is an example (see chart below). On the basis of figures supplied by the West Midlands Pension Fund, and predictions of grant cuts and staffing reductions, total pensions contributions will rise from £22.8m in 2013/14 to £39m in 2019/20. Expressed as a percentage of the gross pay bill for those in the scheme, this shows a rise from 16% to 47% – the combined impact of escalating costs and a falling workforce.

On this basis, by 2020, pension costs would amount to 20% of the council’s net budget and a staggering 34p of every £1 collected in council tax – and rising.

LGPS contributions: £m

2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20

Future service

15.6

16.1

16.8

17.3

17.3

17.3

17.3

Past service deficit

7.2

9.7

12.7

15.9

20.2

20.9

21.7

Total

22.8

25.8

29.5

33.2

37.5

38.2

39.0

Consolidated rate as % of gross pay

16%

20%

24%

30%

40%

43%

47%

Total pensions contributions 9% as % of net budget

10%

13%

15%

18%

19%

20%

Total pensions contributions 24% as % of council tax income

26%

29%

32%

35%

35%

34%

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12/03/2015 16:19

publicfinance.co.uk/opinion

Gemma Tetlow

Put councils in the devolution driving seat, by Simon Parker

Bare facts: Escalating local government pension costs are largely invisible in discussions about the impact of austerity

Johnson’s study lays out many of the problems with the LGPS, but he does not expose the affordability issue this starkly. There is no chance that local authorities can deal with this level of cost escalation while facing the other challenges arising from austerity.

There is a policy and equity dimension to this as well. An increasingly large percentage of local authority spending will bring no direct service benefit to residents, the vast majority of whom could never aspire to this kind of pension benefit themselves. This level of outlay on pensions can be preserved only by cuts to services, and we are now at the point where those cuts are really hurting – libraries, social care and environmental services are being lost to support spending on pensions. Surely, some action is required.

Maintaining a fair pension offering to local government staff is important, but there has to be a balance. Schemes resembling the LGPS have been largely abandoned by the private sector because they are unaffordable. The same is true in local government, and Photo: Shutterstock

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we must step up to that challenge.

The government and much of the scheme's machinery are carrying on as though these huge issues are not there.

Discussions centre on more reform to governance and further centralisation of investment management. The naked Emperor is adjusting his hairstyle.

The analysis above, and some of the points made by Johnson, mean that the incoming government must grasp the nettle of further reform to the LGPS – the problems are clear and will not go away if we ignore them. There is a range of potential actions that could be looked at, many of which are not mutually exclusive. They include: ● Revisiting employee contribution rates – the balance between employer and employee contributions is out of kilter.

The employee contribution for staff earning £21,000 to £34,000 is 6.5% or 5.2% allowing for tax relief. Depending on the authority’s scheme, the employer rate could easily be 15% or more. ● Revising the ‘accrual rate’ – this is the way in which pension benefits are earned by members of the scheme. The

pre-April scheme accrued benefits at a rate of 1/60th final salary for each year of service. The new scheme has improved that rate to 1/49th, albeit of the average salary over a career rather than final salary. Many were astonished by this, and reverting to a higher accrual rate like 1/60th would have a major impact. ● Despite fierce defence of the current organisation, is there really any case for 89 local pension funds, with their associated overheads? For most scheme members, taxpayers and Section 151 officers, the most cost-effective arrangements must be the best. ● Pension funds are currently seeking to recover historic deficits over the medium to long term – for example, in the West Midlands the estimated deficit of £4.2bn is being recovered over the next 20 years. These deficits are based on actuarial reviews and do not suddenly materialise – they are estimates of liabilities for very many years to come at current prices. The government could act to enable funds to recover these theoretical deficits over a much longer period, reducing the costs to councils in the short and medium term. ● Could the government be even more radical and change the way it looks at LGPS? The current scheme has deficits calculated by actuaries based on private sector approaches. In practice, all that matters is that annual cash flows can be managed. There may be a way that local and central government can thrash out a new approach to the scheme that relieves the financial pressures on authorities, and also contributes to management of the national deficit.

The size and scale of the problems facing LGPS require bold and decisive action. The first step is getting people to acknowledge there is a problem.

The Emperor is naked – there you are, I’ve said it. What should we do now?

Chris West is executive director of resources at Coventry City Council, vice-president of the Society of Municipal Treasurers and a member of the CIPFA pension panel APRIL 2015

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Opinion ■ David Innes & Gemma Tetlow

No change for funding losers

Spending power: Grimsby in North East Lincolnshire, where council spending has been cut by 6% in the past five years compared to 46% in Westminster

Council spending cuts have varied markedly across England, with the most deprived areas and those with rapidly growing populations bearing the brunt. It’s a pattern that looks set to continue Central government grants to English local authorities have been cut by more than a third in real terms since 2009/10, helping to deliver part of the overall cut to public spending over this parliament.

This sharp fall in local authorities’ spending power has led to councils implementing large spending cuts, and has presented them with tough choices about how to spread these across service areas.

Council spending on services in England fell by a fifth between 2009/10 and 2014/15, after accounting for economy-wide inflation. The measure of spending used here excludes education spending, since this takes place mostly (and increasingly) outside local control, and also excludes the additional responsibilities for public 12

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health and social care that local governments were given during the period. This cut is roughly the same size as the cuts seen on average by the nonprotected Whitehall departments – that is, those outside the NHS, schools and overseas aid. Taking account of population growth, the cuts to spending per person by local authorities were 23% in real terms.

Some local authorities have seen much greater spending cuts than others.

Westminster saw a cut to spending per person of 46%, compared to a cut of 6% in North East Lincolnshire. Generally, it is areas with least local revenue raising capacity, the highest levels of deprivation and the highest population growth that have seen the largest cuts to spending per person. Regionally, the largest cuts were seen in London, the Northwest and the Northeast.

Why have local authorities seen such different sized cuts? Local governments fund service spending through a mix of council tax and central government grants, but the relative importance of

each component differs across councils.

Council tax revenues per person declined only slightly, while central government grants were cut by 39% per person. This provides one reason that councils least able to raise revenues locally have been hit hardest.

In reality not all councils saw the same cuts to their grants, but the size of the cut to grants was not related to the councils’ revenue-raising capacity or level of deprivation. In other words, the most deprived local authorities on average saw the same percentage cut to grants as the least deprived, but – because they tended to have less capacity to raise revenues through council tax – this has led to a much higher percentage cut to their overall spending power.

Local authorities have been faced with the difficult task of deciding how to allocate these cuts across the services they are responsible for. By far their largest area of spending (excluding education) is social care (including both adult social care and children’s and Photos: Alamy/Shutterstock

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■ Simon Parker families’ services), which nearly all councils chose to protect from the brunt of cuts. Social care spending per person in England was cut by 17%. But this relative protection for social care means larger spending cuts elsewhere: transport, housing, culture, library, regulation and safety spending were all cut by more than a third, while planning and development spending fell by more than half.

The difficult decisions facing local governments are not diminishing. Local government minister Kris Hopkins recently confirmed that councils in England face a further cut to revenues per person of 4.1% in 2015/16, and all three main UK political parties’ spending plans imply further spending cuts in the next parliament, from which local government spending is unlikely to emerge unscathed.

Many of the local authorities that have seen the largest cuts to spending over the last five years are also likely to be those that see the largest cuts over the coming years. A system of grant allocation introduced in 2013 applies the same percentage cut to core grant funding for all local authorities. If kept in place it would mean that authorities with least revenue raising capacity would continue to see the greatest cuts to their overall spending power. Plans for 2015/16 range from a cut of 9.5% in Hackney to an increase of 0.2% in Windsor and Maidenhead.

What policies could the next government consider to ease the burden on councils? One policy that might help local authorities cope with the cut to grants would be to loosen the cap (set at 2% in recent years) on increases in council tax rates that a council can apply without holding a local referendum. Yet this policy would be of least benefit to the councils facing the greatest cuts. Ensuring future spending cuts are more evenly distributed across councils – taking account of their local revenue raising capacity – would require more fundamental reform to the way central government grants are allocated.

David Innes is a research economist and Gemma Tetlow is a programme director at the Institute for Fiscal Studies. Their briefing document can be read at bit.ly/localgovernmentcuts

Put councils in the devolution driving seat It’s probably time to give up on the idea that central government has the political will to fix local government’s problems. We need a bottom-up transformation What is local government? Is it a delivery organisation, there to ensure people get a certain range and quality of services? Or, should it be the political expression of a community?

The question sounds academic, but suggests two different approaches to reforming the sector as austerity continues to bite. If councils are basically there to deliver services, then the way to save the sector is probably through a national policy fix. This view dominates February’s Independent Commission on Local Government Finance, a document that blends incisive analysis with the surprising conclusion that the answer is another independent review of the problem.

The implication is that a Royal Commission could force ministers to confront issues in the ‘too difficult’ box. We might expect it to recommend the reorganisation of two-tier areas, the promotion of service integration and the reduction of statutory duties.

It is far from clear why the next government should want to hear these messages. Frontbenchers have ruled out top-down reorganisation because the savings do not justify the political pain and the parties think they already do

Just the ticket? Manchester’s Central Library. The city is taking more powers under existing funding systems

promote integration. While there are splashes of colourful radicalism in proposals for ‘pioneer’ areas, the recommendations for universal reform amount to ending council tax referendums and allowing councils more control over fees and charges.

Yet financial reform could be a lever for a bottom-up transformation of the way local services – and democracy – work, driving change in local government structure and the ways in which councils engage their citizens.

Instead of simply handing councils more control over the existing finance system, ministers should insist on debates in Manchester, Liverpool and Leeds about the future funding of public services.

If Labour is in power in May, councils could demand a federal approach to the party’s plans for a constitutional convention.

The starting point for any discussion on the future of funding is to give local authorities a much bigger stake in the growth they help to deliver in their localities. Councils need to benefit from development and rising wages.

Assigning cities and shires a fraction of local income tax or corporation tax revenue might be a good starting point.

It is probably time to give up on the idea that the centre has the political will to fix local government finance.

Looking ahead over the next five years, we might question whether the next government will even have the legitimacy to address such difficult problems. It will take some sort of systemic crisis to drive real reform. But everything we have seen since 2010 suggests that savvy and forceful action from the ground-up can drive real change. That principle will probably deliver far more in practice than would yet another national review.

Simon Parker is director of the New Local Government Network. The commission report can be download from bit.ly/ICLGFfinalreport

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Watchdog

Watch WHAT’S GOING ON IN THE WORLD OF REGULATION AND INSPECTION Monitor Health service regulator Monitor has revealed that increasing demand and funding pressures have led to foundation trust hospitals running a cumulative deficit five times higher than forecast in the first nine months of the financial year.

Its latest survey of the 149 foundation trusts, which make up nearly two-thirds of all hospital trusts, found there was an 8% increase in the number of people treated in accident and emergency departments in the last quarter of 2014, compared to the previous year.

Foundation trusts also treated more than 2.3 million non-emergency patients in the quarter, up 7%.

This is reflected in an increase to £321m in total deficits in the sector over the nine months to December 31. More than half of the trusts (78) are now in deficit and, as a group, the trusts failed to meet national waiting times targets for A&E, routine and cancer care for the third successive quarter.

The watchdog announced a review of the finances of Basildon and Thurrock University Hospitals NHS Foundation Trust after an investigation found shortcomings in financial management.

An examination is also underway at Warrington and Halton Hospitals NHS Foundation Trust, where the watchdog said finances have deteriorated.

Meanwhile, Monitor revealed that the special administration process at Mid-Staffordshire NHS Foundation Trust took longer and cost more than planned. Sending in special administrators to run the troubled trust cost the regulator £19.5m over 18 months. This includes the cost of finding 16

Pickles’ choice: Sir Derek Myers is leading the team of five commissioners that will run Rotherham council

and implement a solution at Mid-Staffs and the cost of having the Trust Special Administrators run the hospitals at the same time. The work had been budgeted at £15.25m, but timescales were extended twice.

Mid Staffs also paid EY, the team supporting the trust special administrators, for professional services costing £3.55m. This work was needed because the trust did not have the specialist staff required, Monitor said.

The costs have been reimbursed by the Department of Health.

Rotherham Eric Pickles has appointed Sir Derek Myers, former chief executive of the London Borough of Hammersmith & Fulham and the Royal Borough of

Kensington and Chelsea, to lead the government’s intervention into Rotherham council.

Pickles sent in five commissioners to run the authority after a review by Louise Casey, a Department for Communities and Local Government official, found it was not fit for purpose.

The communities secretary said he would intervene because the council was not meeting best value duties.

Myers, who chaired the government’s Service Transformation Challenge Panel, is lead commissioner, with the former chief executive of Barking and Dagenham, Coventry, Redditch and West Berkshire councils, Stella Manzie, as managing director commissioner.

The team also includes chidren’s services troubleshooter Malcolm Newsam as commissioner for children’s

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COMINGUP… EYE ON WHITEHALL TRAINING The National Audit Office is looking into the effectiveness of central arrangements for procuring civil service training on behalf of all government departments. Outsourcing firm Capita has the contract to manage training across Whitehall. The NAO said it would consider whether departments are paying more for individual training courses as well as looking at the management of the deal, including payment of subcontractors and calculation of fees.

CQC CONSULTS ON NHS 111 The Care Quality Commission is consulting until April 2015 on its plans to regulate and inspect NHS 111 services. The watchdog is proposing that its regime for regulating GPs, including their

social care; former Greenwich council chief Mary Ney; and Julie Kenny, a businesswomen and member of the UK Commission for Employment and Skills.

Pickles set out plans to intervene in January after Casey concluded the council remained in ‘resolute denial’ of child sexual exploitation in the borough and was failing to protect children and young people from harm.

The commissioners will exercise all the authority’s executive functions and others, in particular all licensing functions. Pickles said the intervention was likely to last until the end of the 2018/19 financial year.

Audit Scotland Audit Scotland has endorsed the Scottish Government’s emergency takeover of Prestwick Airport, but warned ministers that they urgently need a clear and robust business plan for the future of the Ayrshire facility.

The Scottish Government bought the troubled airport for £1 in November 2013 to prevent its closure. Passenger services at the airport, which once held a long-haul monopoly in Scotland, have dwindled. Some 1,810 jobs remain, in an area of high unemployment, including in freight handling and aircraft engine repairs and overhauls.

Ministers have allocated £25.2m in loan finance up to March 2016, of which they have so far paid out £9m. Audit Scotland estimates the funding need could reach £39.6m by 2021/22, but put the airport’s positive contribution to the economy at £61.6m.

The watchdog said the purchase process had been reasonable, given a decision had to be taken within six Photos: Akin Falope/Network Rail

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out-of-hours services, be expanded to cover the phone line, which offers medical advice in non-emergency cases. This will focus on five key questions – are services safe, effective, caring, responsive to people’s needs, and well led? With inspections beginning in June, CQC expects all 111 services to have been inspected by September 2016.

FOCUS ON THE VULNERABLE A new inspection regime for children’s homes will take effect in April, regulator Ofsted has confirmed.

It will increase focus on the progress and experiences of children and young people, particularly the most vulnerable. Homes will be rated either ‘outstanding’, ‘good’, ‘requires improvement’ or ‘inadequate’. How well children

weeks. While the administration’s business plan for the airport was too optimistic, auditors had recalculated it using new assumptions and concluded the possibility remains of a positive return on investment.

Office of Rail Regulation Public subsidy for the rail industry fell below £4bn in 2013/14, analysis by the Office of Rail Regulation has found.

According to the watchdog, the total public subsidy for railways was £3.8bn, down £0.2bn on the year before. The subsidy has fallen 16.4% since 2010/11.

The spending was split between the Department for Transport (£2.6bn), Transport Scotland (£762m) and the Welsh Government (£152m). Funding was also provided by regional passenger transport executives (£178m) and Transport for London (£83m).

Nearly all of the public funds – £3.7bn – were provided in an operating grant to state-owned Network Rail.

The Department for Transport only provided £100m net to train operators,

Cash points: Network Rail’s operating grant accounted for £3.7bn, nearly all of the rail subsidy in 2013/14

and young people are helped and protected will be the key factor of the reviews, Ofsted said. If a home is not protecting children or promoting their welfare, it will automatically be graded ‘inadequate’.

IS FURTHER ED SUSTAINABLE? A review of financial sustainability in further education is to be published by the National Audit Office this summer. It will assess the performance of the Department for Business, Innovation and Skills and the Skills Funding Agency in overseeing the financial sustainability of the further education sector, including whether the funding and oversight bodies can effectively monitor institutions’ financial health. Auditors will also judge if there is a clear framework for intervening if a college is in financial difficulty.

as nearly all of the £2bn of operational support was recovered in £1.9bn of premium payments from franchise holders across the network.

The total cost of running Britain’s railways was £12.7bn in 2013/14, an increase of 0.7% year-on-year. ORR chief executive Richard Price said the industry has been keeping costs stable despite carrying significantly more passengers over the past four years.

Wales Audit Office Welsh public bodies have spent £254m on early departure packages for more than 10,000 staff over the past four years, according to the Wales Audit Office. But it added that such deals could bring savings of up to £305m a year.

Some 72% of the early departures were from local councils and national park authorities, 11% from the NHS and 9% from the Welsh Government.

Governance was judged satisfactory, although the auditors identified scope for improvement in the use of business cases and record-keeping.

Auditor general for Wales Huw Vaughan Thomas said: ‘Early departures provide public bodies with an opportunity to reshape their workforce and make cost savings in a time of austerity. However, it is vital that early departures are managed properly so that the public can be confident that services can still be maintained and that the promised savings are being made.

‘The upfront costs of early departures can be substantial and my report emphasises the importance of adequate scrutiny of high value exit packages in particular, such as those for senior managers.’

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