Learning from councils which faced finance and governance challenges

In September 2022, the LGA commissioned Human Engine to conduct a desktop study on five councils with experience of finance and governance challenges which led to either a S114 report or a capitalisation direction with a governance review at the time the research was commissioned. The first stage of the research was completed in April 2023 and since the LGA commissioned the research, a further four local authorities have issued a S114 report, demonstrating that this is an increasingly important issue.

The aims and objectives for this research were three-fold:

• synthesise the main messages from publicly available reports

• identify factors impacting financial resilience and the reasons for this

• identify common factors which apply to all three councils which published S114 notices and the two councils receiving capitalisation directives.

The research did not include in its scope: 

• interviews with former political and managerial leadership of the five councils

• analysis of the culture of the organisations

• identification of accountability of individuals / groups.

In order to discuss the research findings and consider actions to support the sector going forward, four roundtable events were held in November and December 2023. The roundtable events were attended by 45 delegates in officer leadership and commissioner roles from councils across England, including the four councils still in existence which were the subjects of the research. The events were facilitated by Human Engine and the LGA; a representative of CIPFA attended as an observer. The roundtable delegates were asked to discuss the following questions:

1. Do the findings sound familiar to some of the issues you/ your council have experienced?
2. What more can we do to share learning from these examples?
3. Is there more that can be done to ensure these challenges are a shared endeavour between officers and members?
4. Are you experiencing any other concerns or challenges related to finance and governance which are not reflected in the findings?

This report provides a summary of learning arising from the research and roundtable discussions for the sector. 

The research gathered publicly available documents dating five years prior to S114 notices and/or capitalisation directives for the following councils: Northamptonshire County Council, Croydon Council, Slough Borough Council, Peterborough City Council and Wirral Council. It is estimated in the region of 5,000-6,000 pages of reports have been analysed during the research.

The immediate causes of S114 reports and financial difficulties in these places have been subject to thorough scrutiny and investigation, so it was not the intention of the research to revisit old ground. Instead, the work examined published sources going back up to five years to identify anything that might have been missed in those official reports. This identified five themes that contributed to conditions that led to S114 reports or capitalisation directions. 

Four roundtables were held to test the desktop research findings with a range of stakeholders including, chief finance officers, chief executives, monitoring officers and commissioners. The key themes discussed focussed on the importance of an open and transparent culture, the need for effective member and officer relations, recruitment and capacity, a hollowed out corporate centre and the inability to make long term plans on one year funding settlements. Many of these themes were interlinked with the findings from the desktop research and should be viewed together. 

The research has provided invaluable insights into councils facing difficulties and the possible reasons for this. These learnings will help to inform LGA’s 2024/25 sector support programme. In summary, the following learning points and recommendations have been identified:

1. Quality of strategic risk management

• The research found that annual governance statements in some of the five councils had identical risk statuses and mitigating actions year on year. This was despite the inclusion of statistics showing changes in circumstances at the council.

• Actions plans had been presented, agreed and timelines for reporting progresses set out, but there is no evidence that these had been presented back to Members.

• Often risk management policies/ strategies did not clearly set out respective roles and responsibilities for risk between Members and Officers.

To improve the quality of strategic risk management, it is recommended that councils:

1. Adopt stronger approaches for the management of long-term strategic risks and ensure appropriate awareness of the knock-on impacts of such risks.
2. Assign clearer roles and responsibilities for the implementation of mitigating actions.
3. Have processes to ensure that Internal Audit recommendations are addressed by the council’s leadership.
4. Scrutinise mitigating actions to ensure they are implemented and have had the anticipated impact.
5. Report transparently on where mitigating actions have been successful and unsuccessful in managing risk levels.
6. Be more explicit in the recognition of the severity of the risks identified.

2. Quality and timeliness of scrutiny and reporting

• The research showed that public reports were often unavailable or missing, including contract registers and spend data.

• There was also evidence that pre-scrutiny, decision making, and use of committees was not undertaken properly, with items agreed for consideration by scrutiny committees but never appearing on agendas before being presented to Cabinet and Council.

• The publicly available documentation, or lack of it, showed consistently that accounts were missed, spend data was unavailable.

• The research found a lack of evidence of scrutiny being followed, and committee meetings not taking place, highlighting governance issues. Delegates noted the importance of monitoring progress in addressing issues identified in Annual Governance Statements throughout the year and viewing the statements as an opportunity to consider how value for money is being achieved. 

• There was recognition of the leadership role that audit, and risk committees can play, and the need to strengthen overall governance.

• It is important that the basics are done well. This includes committing to record all key decisions, share relevant papers in advance of meetings and ensure all reports are supported by evidence.

To improve quality and timeliness of reporting and scrutiny, it is recommended that councils:

1. Ensure better quality assurance of reports to Members so that reports present relevant information clearly and respond to challenges previously raised by officers and Members. This could involve rolling out training and capability building for report writing to ensure officers and Members are aware of expectations of public reporting.
2. Ensure that robust scrutiny is factored into the decision-making timescale.
3. Implement stronger project management for statutory processes (publishing budgets, signing off statement of accounts etc.) to ensure the process takes place to agreed timelines.
4. Improve data management of contract management and compliance data to ensure publicly available documentation is representative of spend and published in a timely manner.
5. Ensure the respective roles of both the Audit and the Scrutiny committees are clear.
6. Ensure that sufficient meetings of the Audit Committee are held to enable the Committee to meet the terms of reference set out in the Constitution and members are appropriately supported through training and briefings to acquit their roles effectively.
7. Ensure the basics are being done well. Treat good risk management, regular reporting and quality scrutiny as key indicators of a well-managed council. 

3. Delivery of savings programmes

• Savings programmes or initiatives were often presented with speculative lines such as ‘general efficiencies’ or ‘transformation savings’ or ‘contracts review’ with many millions assigned to each.

• Whilst there is not always a requirement for individual projects and programmes to have public scrutiny or be quoted in public reporting, the significance of savings programmes at each council meant that savings lines attributed in budgets should have a level of detail and rigour to stand up to scrutiny.

• Public reports also showed year-on-year non-delivery of savings projects. The snowballing impact of this can be traced through papers, often in the region of only 50-70 per cent of savings being delivered.

To ensure delivery of savings programmes, it is recommended that councils:

1. Create savings plans that have realistic lead in times so that savings can be delivered in year and the full-year effect of savings can be realised.
2. Use language that is tangible and explicit to describe savings initiatives and avoid use of speculative savings that do not relate to a council service or function.
3. Adopt processes to ensure there is better scrutiny of savings proposals before they are agreed. For example, work with an external partner such as the LGA to run a challenge session, setting out a RAG status for savings delivery by initiative.
4. Use programme dashboards presented to Cabinet and Scrutiny to improve governance and transparency of in-year savings delivery and improve reporting of the consequences of non-delivery of savings.

4. Commercial investment and arm’s length bodies

• Having used the publicly available documentation to track the decision-making process of large commercial investments across the councils, the research found little of no scrutiny had taken place ahead of multi-million pound purchases.

• This aligns to many of the other themes, particularly around risk management and quality of scrutiny.

To improve transparency and management of commercial investments and arm’s length bodies, it is recommended that councils:

1. Set clear decision-making pathways and governance structures for commercial investment and arm’s length bodies.
2. Ensure the rest of the council and wider stakeholders are kept informed of decisions by setting clear reporting requirements.
3. Conduct regular reviews of commercial investments, tracking the progression and management of risks.
4. Ensure that a clear and appropriate decision pathway is followed and sufficient time is allocated to debating contentious and significant investment proposals and that where possible these decisions are taken in public.

5. Demographic pressures

• The councils in the desktop study varied in the extent to which they perceived themselves as demographic outliers.

• Some of the councils' within the desktop study, use of narratives relating to demography were inconsistent in that demand pressures would be stated throughout budget setting cycles but featured far less specifically through risk management, mitigations and savings programmes to project future demand.

To better manage local demographic pressures, it is recommended that councils:

1. Regularly review and monitor the demographics impacting on the design and provision of council services.
2. Regularly triangulate perception of demographic pressures with recent data.
3. Take action to manage demand related costs and detail such actions in publicly available reports and documents.
4. Take ownership and accountability of their jurisdiction's unique demographic pressures and therefore be willing to invest in initiatives to manage these.
5. Regularly report on how demographic pressures are being managed and how vulnerable populations are being cared for.

6. Culture and leadership

• Delegates identified that the first five themes above are often indicative of underlying issues with culture and management.

• A key point noted throughout the research was the importance of transparency when it comes to decision making and risk management.

• The need for trust between officers and members was also highlighted as being key to effective management.

To create and maintain a healthy organisational culture, it is recommended that councils:

1. Support collaboration and transparency. This should be both internally, including effective member-officer relationships in order to establish trust and informed decision-making, as well as externally, with other councils alongside bodies such as the LGA in order to share best practice.

7. Today’s context

• Delegates noted the seismic shifts in the external environment, making long-term financial planning increasingly difficult.

• National circumstances outside of council control, including a huge increase in both demand and cost, lead to financial pressures and risks to statutory services in many councils.

• There is a risk that some councils may lack the flexibility with assets or their council tax base to make a difference to their income.

• Staff shortages and hollowed-out corporate centres have resulted in a lack of capacity to plan and deliver any long-term savings.

To better understand / react to changing contexts, it is recommended that councils:

1. Be prepared to make changes in order to support better ways of working and delivery. As external factors and national pressures are in a constant state of flux, local authorities must also be willing to adapt and explore innovative ideas in order to manage financial and governance challenges.

8. Discourse around S114

• Discussions emphasised the need to move away from always placing blame on councils for issuing a S114 report. Rather, there were calls for S114s to be viewed as potential instigators of positive change.

• The view from some roundtable attendees was that the funding gap facing councils was an emerging driver for councils’ wider challenges. There were therefore calls for a shift in the public discourse around S114 reports, highlighting that this is not necessarily an indication of a dysfunctional council, but of chronic underfunding.