Local government used to be able to borrow cheaply from the Public Works Loan Board, but a recent increase in PWLB rates means that it could now be more cost effective for councils to issue their own bonds. The recent GLA bond issue suggests that, in the right market conditions, this financing option could save councils up to 20 basis points on their borrowing costs, amounting to millions of pounds on a large bond issue.

Against the backdrop of a 22% cut in central government funding for local infrastructure, the research shows that an astonishing 84% of councils surveyed face a capital funding shortfall. This translates into crumbling schools, potholed roads and slower economic growth for many parts of the country.

Nearly two thirds of the councils surveyed for the new research say the PWLB rate rise will change the way they borrow, suggesting that bond issuances will come back onto the local agenda for the first time in 17 years.

Capital Futures was supported by a Taskforce made up of experts from across the local government finance sector.

Report author and Taskforce member Tom Symons said:

“Councils must explore a completely new landscape of financing options to survive this Spending Review. Issuing bonds on the capital markets could enable vital investments to be saved, assuming the right market conditions. As a result of central government cuts we need to see a much more ambitious approach from the sector if our infrastructure deficit is to be addressed”

Chair of the Taskforce Paul Woods (and Finance Director at Newcastle City Council), said:

“The responsibility for driving economic growth and responding to the demands of communities in an uncertain and difficult climate has fallen largely on councils. Councils have a vital role to play, and it is important that as a sector we optimistically grasp this time as a moment of opportunity.”

The report was launched following the coalition’s planned introduction of a package of decentralist policies to designed rebalance local-decision making in favour of economic development. The Local Government Resource Review will allow local authorities to retain increases in business rates generated in their area. This represents a fundamental change in the way local government in England is financed. The report makes recommendations to ensure this business rates retention model achieves goals and reinforces a council’s ability to secure economic growth.

The report is guided by two principles.

• Firstly, if the government is going to move to a system designed to incentivise business growth, then the system must be geared towards this goal. A change in the system should not become a complex replication of the current grant settlement.

• Secondly, whilst we believe that a system of redistribution and equalisation is essential, we argue that it must operate outside the business rates retention scheme. We call specifically for a capital fund to be accessible by areas of lower business rates growth.

The innovation undertaken earlier this year by a Dutch organisation, Met de Stroom Mee, yielded a 20% saving in energy costs for households. If councils imitate this model in the UK, even a 10% equivalent efficiency would result in a £125 reduction in costs to consumers.

The media reports in recent weeks that more households in the UK could be dragged into fuel poverty over the coming years, highlights the need for more effective measures to reduce energy costs for consumers. The report, ‘Going Dutch’, suggests that a local authority advocating on behalf of a group of citizens can result in drastic reductions in costs to consumers.

Author of the publication, Liam Scott-Smith, said that:

“Government data show that a 1% increase in fuel costs causes another 40,000 people to go into fuel poverty. Costs are constantly increasing and show little sign of slowing down. With money tight, we need more radical solutions than just asking the state to give a handout to the poorest”

“By ‘going Dutch’ and clubbing together to buy in bulk from energy suppliers, consumers can drastically reduce their costs. This model means that UK consumers could save around 10% on energy bills – that’s £125 back in the pockets of every participant. Local authorities are ideally placed to negotiate on behalf of local citizens”

“The beauty of the model is that the more people councils can get to participate, the cheaper fuel becomes. A 10% saving means a £125 cashback and 20% means a £250 rebate for consumers. If councils fully buy into this new model, the potential for savings is massive”

The model of bulk purchasing, as used by Met de Stroom Mee in The Netherlands, offers a vehicle for councils to support their citizens without increasing financial outlay. The report shows that by taking the lead in ‘aggregating and negotiating’ for the services that constituents receive, councils can remain at the heart of their communities despite serious financial pressure as a result of spending cuts.

NLGN will lead a high-level taskforce consisting of local government and financial sector leaders to map out a new capital financing landscape for councils. The group will look for new means to ensure that councils can source the necessary investment to help deliver the infrastructure required for local economic growth as well as the provision of essential social infrastructure such as high-quality schools and housing.

Local government has traditionally relied heavily on grants from Whitehall to fund local capital investment projects, but the squeeze on public spending and the increased cost of borrowing from the Public Works Loan Board mean that councils will have to look to new sources for much-needed infrastructure finance.

NLGN Senior Researcher Tom Symons, said:

“Our research will explore what powers and freedoms councils will need to support Government’s local growth strategy. We will be looking at a range of measures, including Scandinavian-style ‘bond clubs’, to help councils continue capital investment in an environment where they can no longer depend on central government grants”

“Accessing new supplies of capital will be a significant challenge and will require councils to be equipped with a full capital finance toolkit – potentially including the use of derivatives and other financial instruments – to effectively manage risk and get the best deals for their taxpayers and communities”

The research will examine how the relationship between local authorities and capital debt markets can be developed to allow councils to access investment financing from new sources in a low-risk and low-cost way.

The new report, Changing Behaviours, has identified a number of innovative case studies and pilot projects where councils have afforded citizens an increased role in re-inventing services, resulting in cost reductions for councils of between 15 and 20 percent.

However, the report also warns that government itself must radically change to initiate and maximise these approaches. Greater resources and emphasis need to be invested in effective communication with residents and in putting support measures in place to enable a more active role for individual citizens in designing their public services.

Report author and NLGN’s Head of Research, Nigel Keohane said:

“With local government facing the daunting challenges of dealing with massive budget reductions whilst renewing their relationship with citizens, councils need to take the lead in adopting behaviour change techniques to make the Government’s ‘Big Society’ agenda a reality.”

“Our research shows that identifying ‘Citizen Pioneers’ who are prepared to initiate and lead increased public engagement with service design can encourage wider participation among communities as these practices become part of the norm.” The report sets out practical tools available to councils to better understand citizens’ underlying motivations so that services can be personalised to their needs and values. This detailed social insight allows councils to gauge and test what support, advice and messages citizens would respond positively to.

Based on extensive research across the sector, Show Me the Money: Accounting for localism is the first comprehensive analysis of the future of local government audit and warns that the abolition of the Audit Commission could have a disastrous effect on public faith in local government if ineffective safeguards allow council finances to fail. To prevent this, the government must actively encourage the public’s involvement and allow a ‘Citizen Right of Appeal’ in circumstances where auditor independence may be compromised.

The report also calls on government to avert the dangers of an uncompetitive audit market and higher costs to councils. NLGN recommends that the Audit Commission Practice is rolled out as a mutual, to create another ‘player’ to compete with existing providers and drive market competition and quality.

Report author Olivier Roth said:

“We’re pleased to see that the government has recognized the need for a more open and less centralized system for auditing local councils, but if the new model doesn’t work and we see the deterioration or collapse of some councils’ finances, then public confidence in localism will be seriously undermined. With the audit landscape and public finances in turmoil, the best way to reassure citizens is to let them take the front seat in the drive for stable council finances.”

“Without the Audit Commission Practice acting as an additional player in the market, there are real concerns that the market could become a closed shop, barring new business entry and raising the costs faced by councils. NLGN’s new model of audit would not only reinforce local accountability but also provide a unique chance to ensure an open, competitive and inclusive audit market”

Show Me the Money also argues that barriers to entry for small and medium tier firms should be removed by reducing the complexity of audit requirements and clear guidance introduced to guard against appointing on current ‘experience’.

Below researcher Olivier Roth discusses the details of his new report on the proposed shake up of local government auditing and accounting.

With some council budgets being cut by nearly 9% next year, a new report Power and Money highlights how some authorities are already starting to install solar panels on social housing and other council properties, thereby accessing new sources of funding through the ‘Feed-in Tariff’ and the ‘Renewable Heat Incentive’.

However, NLGN has also warned how a lack of clarity from the government on its support for schemes is hindering such development. With only 275 community properties among the 20,000 Feed-in tariff installations accredited last year, there is a danger that the vast potential for green energy solutions across the local government estate will be left largely unfulfilled.

Report author, Luke Hildyard said:

“We estimate that the Feed-in Tariff and the Renewable Heat Incentive could represent an estimated £12 billion investment in renewable energy. Local authorities will be able to access what could be a potentially vital source of revenue at a time of unprecedented budget cuts.”

“But by carrying out the review of the Feed-in tariff earlier than planned and delaying the renewable heat incentive, the Government has increased the risk factor for those planning to roll-out micro-generation installations locally. Renewable energy projects require costly and time-consuming planning and research, which councils may be reluctant to undertake in an uncertain environment.”

While direct financial returns are one potential benefit for councils, the NLGN report also shows how green investment can soften the blow of public sector job losses by creating new eco-friendly jobs in the private sector.

Case study examples in the report include Kirklees Council, whose Leader, Cllr Mehboob Khan, said:

“We viewed the new incentives as an opportunity to develop the local green economy, support and create jobs as well as reduce carbon and tackle fuel poverty. The projects we are developing build on previous experience and are good news for our residents.”

The Communities in Charge report calls for councils to be freed from Whitehall restrictions to introduce charges for services such as parking, planning and licensing, to vary charges based on usage and to means-test on users’ ability to pay.

NLGN’s report shows that the public would rather ‘pay as they go’ through new charges than see either big cuts or major increases in council tax. At a time of steep reductions in local government budgets, new charges could help maintain the quality of public services in a fair way.

Other areas that could be subject to new charges include health and safety food inspections and planning fees to suit local circumstances.

Report author, NLGN Senior Researcher Nick Hope said:

“Local communities need new freedoms to decide what public services they want and how to pay for them.”

“The power to raise or lower charges for things like parking and planning will be a powerful tool for councils as they try to manage deeply challenging budget cuts. If these charges are managed correctly, they will improve services and drive fairness.”

“With the government committed to localism and devolution, councils should no longer have to operate based on top-down financial prescriptions from Whitehall.”

The report draws on public polling commissioned by NLGN and a series of case studies analysed through the research.

In a new report the think tank urges the Government to abolish the ultra vires principle – in place to ensure that councils do not stray beyond their powers – and allow them to implement actions unless they are expressly forbidden by law.

With parliament shortly to consider legislating for a General Power of Competence for local authorities, NLGN’s report sets out a series of innovative activities that councils could consider adopting and makes recommendations on how the reform should be enacted.

In the context of local authorities losing a third of Central Government funding over the next four years, the research argues that councils must be freed to develop new revenue streams and income, and allowed to work more innovatively in partnership with the private sector, local community groups and other public bodies to drive out savings and re-design services.

The research analyses possible new ventures and activities for local authorities to consider, including

• offering banking, insurance and credit services to local businesses and residents;
  
• grouping together in innovative partnerships to drive efficiencies and generate income or to devolve powers and responsibilities to the neighbourhood level;
  
• trading and selling a wider range of products and expertise (such as recruitment services, energy, communication and business services) to the private sector as well as other public agencies;
  
• varying charging rates for planning and licensing fees to reflect local circumstances and costs;
  
• adjusting tax rates and reliefs to incentivise behaviour on recycling, business development or property usage.

In legislating for change, the report calls on the Government to consider a series of additional freedoms to make the reform meaningful. These include allowing councils to act as they like in the interests of their local communities as long as their action is not specifically illegal, permitting local authorities to flex and vary taxes within the existing tax regime and carrying out a thorough examination of current laws to remove inappropriate legislation.

Report author and NLGN’s Head of Research, Nigel Keohane, said:

‘This power has the potential to be a major piece of reform that heralds a new era of localism. For too long, democratically-elected councils have been restricted in what they can do and vulnerable to legal challenge for adopting innovative responses to local challenges.

‘In the difficult financial landscape ahead, local authorities need full discretion to engage in new ways with their community, to save money through efficiencies and to develop income to safeguard frontline services.

‘To work it will require a leap of faith from national politicians to give local areas the necessary latitude for innovation to thrive. It will then rest on the ambition and aspiration of local communities to determine how best to improve the lives of their residents.’

The Local Government Pension Scheme has 3.9 million members drawn from the full range of local government employment and maintains a £100 billion fund to supply its members’ pensions. The typical benefits received by LGPS members are comparatively low by comparison with other public pension schemes. For the LGPS as a whole, the average annual pension is £4,000. The scheme has been generally well-managed over the past decade and has experienced positive cash flows and increases in funding level. However it still possesses significant funding deficits, estimated at £20 billion at the last valuation in 2007, due in part to a central Government-mandated ‘contributions holiday’ by councils in the 1980s.

NLGN is proposing that one way for local authorities to mitigate the effects of impending fiscal consolidation is to divert a proportion of their ‘deficit recovery contributions’ towards revenue service provision in the short term. The constitutional permanence of local government means that greater flexibility can be found in the repayment of the deficit than is currently employed. It calculates that if councils cut their deficit recovery contributions by only 10 per cent in 2014-15, they would free up over £200 million for provision of otherwise threatened services. Due to the impact this would have on the future contributions needed for deficit recovery such actions should only be taken where there is agreement from local council taxpayers.

The think tank also makes recommendations about the reformation of the LGPS as part of a formal submission to Lord Hutton’s Review on Public Sector Pensions:

• The Public Service Pensions Commission should consider the LGPS separately from the unfunded public service pension schemes, in light of its differing regulatory scheme, funding history, and membership composition. Given its history of conscientious fund management, the LGPS should be extended greater individual discretion over the shape of future reform;

• A full consultation with LGPS stakeholders in local and central government, public sector workers’ unions, and the actuarial and investment sectors should be held as part of the Commission’s deliberations;

• In the same vein we encourage all participants in such a discussion to continue to take an open-minded approach to the reform process. This is essential to ensure any reform of the LGPS is both sustainable in the long-term, and fair to both scheme members and the taxpayer;

• The system of LGPS regulation currently in place should be reaffirmed by the Public Service Pensions Commission to give councils the flexibility to manage the ongoing costs of the LGPS alongside the effects of the titanic financial and social pressures resulting from the Government’s spending retrenchment;

• Local government pension fund managers should continue to prepare and publish regular and transparent funding status reports and a strategy for reaching full funding. This will ensure public confidence in the good management of the fund, and facilitate the strategic use of fund assets to solve short-term revenue problems, without jeopardizing the path to full funding.

“It is possible for councils to close their LGPS deficits in a long-term, sustainable way that is equitable to their workers and council tax payers. This can even be done in a way that frees up money to help mitigate the effects of the tsunami of funding cuts facing local services in the short-term. All of this is possible, but only if councils prepare cogent, transparent and well-structured long-term plans for the future of their pension funds, in collaboration with LGPS stakeholders.“