Finance and Budget Scrutiny Select
Committee
Introduction to local government finance
Agenda
• Revenue vs capital
• The Council budget
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The balancing act
Why budget?
Key activities
Approaches to budget setting [FBSSC only]
Budget variances
• Retention of business rates
• Treasury management [FBSSC only]
– Treasury management
– Counterparty risk
– Controls and governance
• Recommended reading
Revenue vs capital
• Revenue funded by:
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Council tax
Central government grants
Business rates
Fees and charges
• Capital funded by:
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Capital receipts
Grants
Borrowing
Contributions from the revenue budget
The balancing act
RSG
Grants
Employees
Business
rates
Premises
Council tax
Income
Expenditure
Transport
Rents
Supplies and
services
Fees and
charges
Capital
financing
Why do we need to budget?
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Planning
Monitoring
Controlling
Measuring performance
Key activities
• Previous year
o closure of accounts
o audit of accounts
• Current year
o budget monitoring & control
o budget updates
o updating forecast outturn
• Next year
o provisional/final grant settlements
o public consultation
o detailed estimates
o considering saving/efficiency proposals
o finalising formal budget proposal
o medium term financial strategy
Approaches to budget setting
• Incremental budgeting
+ Simple, focuses on changes
- Historic, inconsistent with effective planning
• Zero-based budgeting (ZBB)
+ Justifies activities, prioritises resources
- Resource intensive
• Other
o Activity-based budgeting (ABB)
o Planning, programming budgeting systems (PPBS)
o Rolling budgets
Monitoring budgets
Variances can occur due to:
• Delays in processing payments/income
• Uneven spending patterns
• Incorrect profiling of budgets
• Mis-codings
• Centrally managed budgets e.g. repairs and
maintenance
• Activity/demand changes
• Incorrect budget assumptions
• Poor management of resources
New developments: business rates
• Position up to 2012/13
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Collected business rates as an agent for the government
Rates set centrally
Business rates redistributed by govt according to perceived need
Redistribution NOT connected to amount collected
SCC net gainer
• From 2013/14
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49% retention by collecting authorities
System of tariffs and top-ups to set equitable starting position
System of levies and safety nets to protect big losers
Rates still set centrally
Benefit: authorities will keep 49% of any incremental increases in
rates collected
Business rates: illustration
120
100
80
govt
60
top-up
redist'd/retained
40
20
0
yr1 old
yr2 old
yr1 new
yr2 new
Treasury management (TM)
• "The management of the organisation's cash flows, its banking,
money market and capital market transactions and loan
management; the effective control of risks associated with those
activities; and the pursuit of optimum performance consistent with
those risks.“
• Management of RISKS
– Counterparty (creditworthiness)
– Liquidity
– Interest rate
• Predicting the future…
• Security of principal always more important than yield or liquidity
TM counterparty risk
• (for investments)
• Institutions on Sector’s weekly credit list (creditworthiness)
– Credit ratings (Moody’s, Fitch, S&P)
– Modified by Sector’s expertise
– Recommend durations, not £ limits
• Local authorities and government bodies
• EU only with Aaa sovereign rating
• Aaa-rated money market funds (MMFs)
• Our annual investment policy defines individual limits (£10m)
TM controls & governance
• Treasury management strategy statement
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Treasury management strategy
Annual investment strategy
MRP (minimum revenue provision) policy
Treasury management practices (TMPs)
London Code
Legislation/regulation
Prudential code/prudential indicators
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Annual change in capital financing requirement
Ratio of financing costs to net revenue stream
Borrowing limits
Maturity limits
Fixed/variable interest rate exposure
etc
• The role of this committee
Recommended reading
On the finance library intranet page at
http://intranet.salford.gov.uk/customer/finance/financeaccountancy/finance-links.htm
• A brief guide to local government finance for
councillors (CIPFA)
• A comprehensive guide to local government finance
(CIPFA)