A tale of two sustainable Cities

Today Bradford City and Swansea City meet at Wembley in one of those rare and romantic sporting occasions on which the underdog is bound to win.  Neither club has a glamorous name or a trophy-rich history, but each has built up a deserved reputation for financial sustainability, especially Swansea, which has matched its fiscal rectitude with more than the usual degree of success.

Football and local government have a lot in common.  Both are businesses in which there is an imperative for quick success and where the current year or two often seems to looms much larger in planning than the next ten.   Both are largely driven by cash expenditure and income while long-term investment can be a bit of an after-thought.

The National Audit Office’s recent report ‘Financial sustainability of local authorities’ is the central government watchdog’s contribution to the West Somerset Question. West Somerset, it will be recalled, is the tiny District Council which was the first to admit that it might not have a future if funding cuts go much further.  It is an episode that has left many in local government asking who is next?

The NAO is in a difficult position when it talks about local government.  It is responsible for auditing the distribution of grants to local authorities but doesn’t have a role in what happens when the money reaches local level: that was the job of the Audit Commission, of blessed memory.   As such, the report is understandably limited in scope but nevertheless it is an interesting and worthwhile bit of number crunching which ends up exhorting the DCLG (if I can paraphrase) to have a little bit more thought before it acts.

What the report doesn’t contain, to my surprise, is a definition of financial sustainability.  To fill the gap, here then are my suggestions for five defining factors. 

1.            Where are we?

It helps to start from a good place.  The strength of the balance sheet, and in particular for the medium term the level of reserves is a signal of how well set up an authority is to suffer the slings and arrows of the next Spending Review.   Authorities also need to understand what their costs are and how these are affected by events.

2.            What happening? 

The external environment is also important.  There are many strands to this but a key one is the growing gap between those authorities where the local taxbases are growing (which is rewarded under the new system) and those where it isn’t (which is punished in relative terms).  The other side of the equation is the demographic time bomb as exemplified by the Government maligned Graph of Doom.   There is a limited amount local authorities can do to alter these trends, and nothing at all in the short to medium term. 

3.            How do we know?

It is necessary for every organisation to have a good early warning system.  The obvious manifestation of this is good information management- not just a good financial information system but people who know how to turn data into knowledge.   Good governance is also an aspect, reflected in transparency and trust: if decisions are made behind closed doors on the basis of no business case, the chances that one will turn bad are that much higher.

4.            What do we do?

Planning, in a word, is the key.  Knowledge of where we are and what is happening out there is one thing, but a sustainable authority needs to have a sense of how it will respond. That involves everything from a vision of where we want to be, the route we will take, the ‘business architecture’ we will need to make it happen and the detailed plans that will get us there.   To be truly sustainable an authority needs to have its eyes on the short term, the medium term and the long term simultaneously.  Not easy; order the special glasses.

5.            How do we make it happen?  

Finally, financial leadership will be the difference between authorities that look sustainable on paper and those that are still actually thriving in ten years time.   In local government we look to elected members for leadership but in difficult times Members look increasingly to officers too.  The reality is that everyone, from the leader to the most junior manager with a budget, needs to understand the problem, the solution and what it takes to move forward, and act every day in the interests of delivering that outcome.

I think there are two lessons from this; firstly, number crunching is not the whole of the answer, but what you do with those numbers is just as important; secondly,  whilst the Government can make things a whole lot worse by getting  the distribution of grants wrong, a big part of the outcome rests with local authorities themselves.  The Local Government Association’s sector-led improvement programme will have a big role to play,  but for most authorities – those not doomed by their circumstances – the path to survival and being in good shape once they have survived will depend upon what they do. 

As to whether financial sustainability should be put ahead of short term success, local government may want to have a word with the supporters of Portsmouth and Glasgow Rangers about that. 

They won't let us, so we'll find another way

As local authorities set their budgets in the next few days, many will be mulling over the Government’s offer to provide a temporary grant to cover two years worth of a 1% Council Tax increase, the latest manifestation of the Council Tax Freeze Grant which I have written about on this blog before.

If the Council Tax Freeze grant is the carrot, the stick is the legislative blunt instrument that requires any authority pondering a Council Tax increase of 2% or more to put the matter to local referendum.  There is a wealth of legislation and guidance setting out how the figures need to be calculated, how the ballot should be conducted, the question to be asked and so on.

It should not come as a surprise that Governments like to keep control over matters for which ultimately they will be held responsible. For all the localist rhetoric, it is interesting the extent to which our current Government’s relationship with the doctrine of localism harks back to the Victorian era.  Localists also need to learn lessons from the Nineteenth Century.

It was the Victorians, remember, who invented modern local government, from the 1835 Municipal Corporations Act (OK, pedants, that was two years before Victoria came to the throne)  to the Local Government Act 1894.  All the features of modern local government and the way it is governed from the centre came into being in that sixty year period, which was typified by ongoing debate about the extent to which local government should be independent of Government.

Even the simple idea of local decision making by centrally imposed ballot has its parallels.  Take the Public Libraries Act of 1850, the first piece of legislation that empowered local authorities to set up public libraries in the UK.  To those who live with the idea that the Victorian era was a golden age of localism, a look at the details of this particular piece of legislation provides a palliative.

The legislation was restricted to places of ten thousand inhabitants or more, limited expenditure to the product of a ha’penny rate and, bizarrely, forbade spending on the provision of books, which consequently had to be donated.   Moreover, a public library could only be provided in an area if a two-thirds majority of ratepayers agreed to it at a public meeting.  Despite this desperate attempt by some Parliamentarians to prevent the rise of the public library, twenty five towns subsequently set up libraries under the Act until it was replaced with a more enabling piece of legislation in 1855, testament to local government’s capacity for getting things done irrespective of the hurdles.

The main debate in 1850, as it always should be in matters of public expenditure, was about the balance between cost and utility.  As Colonel Chatterton, MP for Cork put it in the debate for the Third Reading;  “Though professedly for the amusement and instruction of the working classes of the people, (the Bill’s) real object now turns out to be actual, permanent, and forced taxation. …. I object to it, as it would not be of the slightest benefit in the city I have the honour to represent; for it cannot be imagined that a peasant, fatigued after his daily toil, could be so impressed with the love of literature, or the study of the antique, as to set off, even under the influence of a bright summer evening, to walk six or seven miles to improve his mind, and then walk back to ponder over and digest what he had seen and heard”.

Colonel Chatterton lost out, and in due course local authorities gained the right to set up libraries without strings, even to buy books, with the all the benefits that subsequently brought to the peasantry during the Nineteenth and Twentieth Centuries.

The degree to which Parliament and government will be prepared to enable local authorities will always be severely curtailed.  The power of general competence enacted last year only provides for local authorities to do things that are not otherwise prohibited, and central government through Parliament retains final control over what local authorities can and cannot do.    We live with the legacy of the way local government was formally established in this country during the Victorian age, arguably with the aftermath of a thousand years of growing central control, and continue to have the same debate.

The response in the Victorian era was often for civic leaders to take the limited powers they had been given and put them to good use, by degrees convincing Parliament that it was in its interests to allow local authorities to invest in localities and provide services for citizens.  The lesson should be learned by our local government leaders today, even in these seriously curtailed circumstances. It isn’t just Parliament that stands in the way at the moment, but the reality of economic circumstances.   A constitutional settlement for local government is a laudable aim, but it is not about to happen;  responsible, innovative and creative local  leadership may just convince central government that more trust in local democracy may be just what is needed.

The Jenga approach carries public services to the edge of collapse

The first instinct of many local authorities to cuts has been to adopt the Jenga Principle to reduce costs.   The problem is this is not a sustainable solution.

Many people will be familiar with the game of Jenga ®.   Fifty or so wooden blocks are stacked into a tower and the idea is to withdraw the blocks one at a time without the tower falling over. It sounds simple, but it is surprisingly compelling.   The game works because wooden blocks, even if they are engineered to be the same size, are all slightly different, so when they are built into a tower there are always some that are loose, and others that bear the weight of the tower.   

The critical thing is that as the game progresses the centre of gravity of the tower changes, so a block that was loose a couple of turns ago, and was consequently withdrawn, might later turn out to have been crucial to maintaining the integrity of the tower as it’s weight shifts and ….whoops! Game over.  

And in case the boys and girls at Jenga get cross with me for using their registered trademark to make a point, let me just say that the game is enormous fun for players of all ages.

There is a useful analogy here for the way organisations behave when cutting costs.   The temptation is to go for the easy targets- the loose bricks.   In our latest round of public sector cuts, deleting the posts of senior and middle managers has been a common recourse, as has doing away with temporary workers and cutting back office functions in general.     Voluntary redundancy is another Jenga Principle stalwart, especially in the public sector where we tend to pride ourselves on workforce-friendly employment practices and don't like telling people they are not needed. 

There is nothing wrong with this approach up to a point, but there are clearly limits to the extent to which it can work.  In the real world situation, just as in Jenga, it isn’t possible to say with certainty when the tower is going to collapse for want of a crucial piece. At times, an external influence can precipitate a collapse; say, when someone puts their drink down heavily on the table. 

As time goes by, however, it does become increasingly evident that the organisation/ tower is not as resilient as it once was.   As the game progresses, players become more risk averse, taking much longer over their moves,  prodding the tower gently to see what happens, desperately looking for the next ‘easy win’.  These tactics are fine in Jenga but it is exactly the wrong thing to be doing inside an organisation, because in times of change risk management is called for not risk aversion, innovation not more of the same.

Authorities that have done the Jenga Principle to death need to identify the risk and move on.   The mistake, of course, in carrying the Jenga approach too far is to assume that the organisation needs to stay the same shape but with fewer blocks in it.  The alternative approach is to rebuild the tower using fewer bricks.    In practice this means rethinking the way we delivering services and redesigning  service delivery and customer interfaces around more efficient models.  This can either be done as you go along or in one go, although the scope and complexity of local authority services I think tends to favour the incremental approach.   

This might be called the ‘Tower of Hanoi’ principle after the puzzle that requires the player to move the tower from one point to another in the fewest possible moves without putting a larger block on top of a smaller one.

One thing is certain. Whether organisations adopt the Jenga approach or the Tower of Hanoi principle, the next phase will be harder and more towers will be in danger of collapse.  It will take all the skill of public sector managers to prevent that happening. 

Government in a pickle over the financial message

One of this week’s more amusing media stories involved the response of the UK Statistics Authority (UKSA) to David Cameron’s gaffe when he told his audience in a party political broadcast that the Government was ‘paying down Britain’s debt’.

The public spending deficit – and hence the UK’s borrowing requirement - is still at historically high levels, so Britain’s debt, far from being ‘paid down’ is still climbing at an eye- wateringly unsustainable rate.

The UKSA received a request for clarification from the Labour Party after the broadcast and Chair Andrew Dilnot publicly wrote back to explain the difference between debt and deficit, copying in Downing Street for good measure. 

The PM’s words were especially surprising when you consider that actually the growing debt problem is something the Government should want people to know about, because it is the justification for the Government’s approach to the economy.   Having heard Cameron’s words people may have been entitled to ask, ‘So if debt is shrinking  then why austerity?’ Can’t we find money for more public spending out of all that debt interest we must be saving?’

It is highly unlikely that the Prime Minister would have deliberately misled in such a way because he was bound to get caught out.  Much more likely is that this is evidence of disorganisation at the heart of Government.  Who in the Prime Minister’s office should have more carefully proof read the copy?

For those of us who make our living in public finance,  however, this is not the first time we will have run across such confusion.

Take, for example, Secretary of State for Communities and Local Government Eric Pickles’ regular forays into the field of local government finance.   One of his common confusions is over the nature and role of Council reserves.  

He reportedly described a particular authority as having ‘£105 million in the bank’, meaning that it had reserves on its balance sheet of £105 million.   Now perhaps it takes a bit of expertise to know that these two things are not necessarily the same, but it is expertise that CLG does have if Pickles chooses to consult it.

Slightly more serious is Pickles serial confusion about the fact that it is sensible policy to keep reserves handy – in his terms ‘money in the bank’- when the cold winds of austerity and uncertainty are blowing.  Many thousands, perhaps millions, of householders have taken that view since the recession kicked in, which is why personal savings have grown over recent years despite the execrable rates of interest available.   

Even setting aside the need to manage risk, local authorities need to use their balances to manage downsizing on an unprecedented scale.  With budgets reducing by such large numbers you cannot necessary deliver savings  to balance off cuts in funding on a year by year basis.  Cuts may be applied one year while savings are delivered in another,and it is the reserves that provide the cushion.

But Pickles’ worst financial heterodoxy, that Council’s are ‘scaremongering’  when they talk about cuts while keeping hold of reserves, is about something that even a ten year old managing his pocket money can see through.  In order to keep spending on services – let say the amount is £1 million - you need to have the money this year, and then you need another £1m next year and another £1m the year after that, and so on. Spend your reserves now and you don’t have them to spend again.   Spending the reserves does no more than put off the inevitable, and does it in a way that leaves you seriously exposed if anything goes wrong.

But unless I appear to have a downer on politicians – heaven forbid – there is another group which not infrequently get the finances wrong and should know better.  The media.

Take the difference between funding and financing, which confuses journalists all the time.   A fairly clear example was the report that the government was thinking of allowing local authority pension funds to be used to ‘fund’ public infrastructure projects.  When talking about the Pension Fund the clue is in the title …. it funds pensions.   Of course, while it is sitting waiting to fund pensions, the cash is used to finance other investments for a return, some of which may include public infrastructure, who knows?   But just as reserves cannot be used twice, neither can the pension pot.

You may think this is just about a public finance professional getting grumpy about the misuse of terminology,  but confusion about finance is rife and the distinctions are important.  I don’t think politicians and the media are necessarily setting out to mislead people, but the slack use of terminology and the failure always to explain don’t help. And we also know that some of the World’s current economic ills are caused by spending money we didn’t have, so statements that suggest the use and reuse of the same money for different purposes is acceptable risk perpetuating an egregious error.   

Some politicians are better than others of course, and some journalists make it their business to be very precise and explain clearly the financial implications of stories.  Evan Davies of the BBC deserves honourable mention.   But when politicians and journalists make mistakes, experts in the public service, who are sometimes loathe to get involved in a political argument, do need to intervene more often and clarify.   More power to Andrew Dilnot’s elbow.