Examination of Witnesses (Questions 100-119)|
MONDAY 8 JULY 2002
100. I am very surprised you as accountants
came out with a recommendation which did not say to have a minimum
set of balances. Are you not being more realistic in a sense than
the Government? You are recognising the world the councils have
to live in and the fact that huge distortions such as social service
expenditure can go up overnight really and to some extent that
is due to the way the Government behaves. If you go on to the
definition of old people, as in fact they did, the cost of residential
homes bears down very heavily on some local authorities. In a
sense for you to go along with the minimum level of reserves would
you not have to demand from the Government a more predictable
and equitable way of behaving because often they are the principal
burden, are they not?
(Mr Bilsland) It is true that Government changes can
have a bigger effect than almost anything else. To be fair to
the Government, although changes do happen they are usually signalled
some time in advance. As we are looking towards next year, for
example, and we are looking at new legislation which is going
to come in place next April, then we are factoring in a degree
of uncertainty. One of the processes we have to follow is a very
formal risk assessment of reserves and balances. It used to be
done really almost on the back of a cigarette packet, you cannot
do that now, you have to do it in a very formal way, you have
to report it to members. Again there are already very tough procedures
in place in well run councils which does not need additional prescription
from the centre.
101. Clause 26 places new duties on chief finance
officers to comment on the robustness of the budget itself and
also on the question of reserves. Is there any purpose in those
(Mr Soare) I suppose we view that what is intended
by Clause 26we would say going back to the general pictureis
already happening in the vast majority of local authorities. In
terms of a local authority treasurer giving advice on the robustness
of estimates and the reserves position, there is legislation already
around balanced budgets, there are also, if you like, interventionist
type powers which local authority treasurers can exercise under
Section 114 of the 1988 Local Government Finance Act. We feel
that those already statutory powers, plus the guidance that we
are developing for local authority treasurers should be sufficient.
In a sense, again, we see the intent but our take on this is the
vast majority of local authorities are doing this and the vast
majority of treasurers in a professional capacity are doing this
102. If it is recognised that this is happening
already, why do you think the Government wants to impose this
as a duty?
(Mr Soare) It is difficult in one sense to speculate
on what is in the minds of the Government. I would say that potentially
some of the recent very high profile cases of the minority of
authorities where the financial position has become very, very
bad may have prompted the thought that this is a sort of belt
and braces job.
103. Would this have stopped those problems
(Mr Soare) That is very difficult to say.
104. Was not the problem that they did not really
know what was happening?
(Mr Soare) Not being party in detail to any of the
authorities which have found themselves in this position, again
it is difficult to say. Having something on the Statute Book potentially
would not have altered the set of circumstances which took place
on the ground in those small minority of authorities.
105. What about Clause 27, again giving new
duties to local authorities to monitor budgets during the year?
That is something that is already done.
(Mr Soare) In the sense of it being a professional
requirement on the local authority treasurer, that is already
there. In terms of best professional practice, invariablyand
again if you look at Audit Commission work in this areayou
do not find the vast majority of local authorities being unaware
of the in-year budget position. Indeed, there is a regular cycle
of reporting, as is commonly known. We are developing our guidance
into a professional practice standard for those treasurers who
are CIPFA members, that is coming out later this year. We would
say in the vast majority of authorities that in-year budget monitoring
is part and parcel of the professional round and it is acknowledged
that it is an essential element of financial management.
106. Why do you think the Government is pursuing
this in the knowledge that you are bringing out your best practice
guidance later in the year?
(Mr Soare) Whether they are aware of our best practice
guidance I do not know but I think the comments I have already
given on that is our best surmising of that position.
107. Clause 10 of the Bill suggests an increasing
degree of central control over the use of capital receipts by
local government. How would the pooling of capital receipts impact
on the prudential rules system?
(Mr Soare) I would just say in general that I think
some other commentators on the draft Bill have picked up that
it is a little bit unclear as to whether this Clause 10 refers
to housing capital receipts only or is intended to be all capital
receipts. I think there is a little bit of tightening that needs
to be done there.
108. Which should it be? Should it be all or
should it just be housing?
(Mr Soare) I think we would say it should only be
housing. I do not think there is a case for pooling non-housing
109. What safeguards should be proposed over
the control do you think?
(Mr Soare) In our evidence we say that we do think
there is going to be a great need for a transparent criteria for
how these capital receipts, if they are housing capital receipts,
are going to be redistributed because in one sense if an authority
could have certainty on planning ahead, and there is a link here
to the prudential system, it is obviously more helpful the more
certainty an authority has over what its capital receipts position
is going to be year on year. Perhaps I can ask Maureen to say
a small bit about the link with the prudential system here.
(Mrs Wellen) The direct link with the prudential system
is that local authorities are going to have to regard to all their
income sources, so if they are keeping all their capital receipts
they can do their programme of activity for capital receipts in
the knowledge of what they are going to get. If those capital
receipts are going to be pooled and then redistributed, in order
to take proper account of the income they are going to have they
will need to know how that pooling is going to operate because
otherwisewe are talking quite large amounts of money herethey
will not know what income is going to come in to support the capital
investment. So the pooling will have a direct impact on how the
prudential system operates.
110. In your evidence at 1.3 you say "In
other respects, however, CIPFA's view is that the Bill does not
move far enough in encouraging the `new localism' that is key
to achieving the Government's vision." Do you consider that
this issue of capital receipts and the services that will follow
needs some further adjustment or amendment to the Bill to meet
that new localism?
(Mr Soare) I think that comment at 1.3 was specifically
related to the balance of revenue funding but as we have already
discussed here there is an impact on the sustainability of the
capital investment programme. I think CIPFA has consistently taken
the view that one of the difficulties in terms of financial management
and other issues is the very high level of direct Central Government
grant and allied ring-fenced or specific grants. I think we have
always thought that a lot of the debate and concern generated
around Revenue Support Grant would be dissipated if it was, say,
a 50:50 allocation because obviously the more that hinges on the
formula, the more people are going to be concerned to make sure
they maximise their own authority's take of that.
111. Do you think the pooling arrangements will
actually create an accounting industry within local government
to try and avoid declaring capital receipts?
(Mr Soare) I would hope very much not.
112. You might hope not but do you think that?
(Mr Soare) Should I rephrase that? CIPFA's professional
practice standards would make it very clear, and our ethical standards
make it very clear, that transparency and straightforwardness
is an absolute requirement of CIPFA members. If you like, that
is the incentive but I suspect that external auditors will be
taking a very close look at what happens both in the transitional
phase between the old capital system and the new one and ongoing
113. Do you think that there may be a tension
between elected members and your members over whether or not things
are accounted in an attempt to minimise the amount that is paid
from the authority's main out of capital receipts into the pool
when elected members will not want that to happen?
(Mr Soare) Maybe I can ask my colleague who is a County
Treasurer to comment on that relationship.
(Mr Bilsland) I can see the drift of your argument.
I think it is more likely that members are going to be reluctant
to sell assets if they think they are going to be pooled. I think
it is highly unlikely once an asset is sold that they would try
and interfere in the accounting to try and disguise it because
at the end of the day that just cannot be made to work, there
are too many people who would know the full story.
114. We talked previously about the issue of
Central Government support through grant for capital schemes.
You say in your evidence you feel the form of that support should
not be by way of capital grant but by way of revenue grant because
capital should not be a free good.
(Mr Soare) Yes.
115. If Central Government effectively gives
local authorities the cost of borrowing, the interest charges
they have to pay, is it not a free good to all intents and purposes?
(Mrs Wellen) We would recommend that the support for
capital should take into account the interest costs and depreciation
costs and that support should move towards that because those
are the costs that should be charged under generally accepted
accounting practice to revenue for capital. The intention there
is to be able to look equally at whether things are being funded
direct from revenue or from capital. In fact, the Government's
own fiscal strategy has now moved to a definition of current expenditure
that includes interest costs and depreciation, so moving the funding
for local authorities to that would be a move in tandem to the
Government's new fiscal strategy. I do think this is extremely
significant, although it sounds very technical, because Government
themselves have not in the past had that kind of definition and
arguably the fact that depreciation has not been considered for
public service assets has led to one of the major reasons why
public service infrastructure generally in this country actually
needs now an awful lot of investment whereas if over the years
you had been funding for current revenue, including depreciation,
that would not have been the case. I do think that is a very big
116. And it does not mean that it is a free
good then if Government is supporting the revenue transfer of
the capital itself?
(Mrs Wellen) It is not a free good at the point of
delivery, it means that those assets are funded over time and
they are funded as they are used up and that provides management
incentives for better use of assets and it also guarantees long-term
sustainability of assets. They are not free at the point of delivery,
they are paid for over time.
117. What changes would you like to see between
central and local funding of local government services?
(Mr Soare) I think CIPFA's line on this has been quite
consistent over the years. We felt that we would like to see a
reduction in the reliance on Central Government grant as a proportion
of total revenue funding. The gearing effecta technical
term but I think most people understandmeans that it makes
it difficult for local authorities to raise more revenue without
impacting heavily upon the council tax. We have said consistently
that we do believe that a return of the Non-Domestic Rate would
be helpful for the reasons we outline in our written evidence.
On specific grants, again I think we recognise there is a place
for specific grants, especially for pump priming initiatives,
but an over-relianceI think the percentage has gone up
quite considerablymeans there is less and less room for
local discretion in terms of how you respond to your local circumstances
if a large amount of the funding is actually ring-fenced. I do
not know whether Chris wants to say something on this issue.
(Mr Bilsland) Just specifically that we think the
proposals to return to Non-Domestic Rates are premature in advance
of the work that is still to be carried out on the high level
review of local balance of funding. Also, I think that we would
be sorry to see the loss of NNDR because of the connection with
the business community which is quite important. I think specifically
we need the retention of the National Non-Domestic Rates, certainly
until the review is completed.
118. How urgent is the Bill? Do we need it and
when do we need it for?
(Mr Soare) I think we would say we do need the Bill
urgently, particularly with respect to the prudential system.
It does need primary legislation to replace the current system.
119. The prudential system is for April 2004,
is that right?
(Mr Soare) Yes.