Local context: support notes for the Financial Resilience Index

CIPFA has always emphasised the need for a local narrative to accompany the figures in the Resilience index. The table shows our rationale for the indicators and is intended to support explanation and understanding of the index.

The timing of the index follows the release of MHCLG statistics (i.e Revenue Outturn) and is based on publicly available data.

The table provides detail on the indicators and what they highlight in the context of the resilience index.

Indicator	Detail	Impact	Additional supportive note
Level of reserves	Earmarked + unallocated general fund reserves	Lower levels of reserves indicate higher risk	It is the responsibility of the S151 officer to utilise good financial management and decide what is an appropriate level of reserves. Good financial management can be achieved with relatively low reserves, while high reserves do not always indicate good financial management. COVID payments made at the end of March 2021 will have an impact on this indicator for earlier periods if the local authority recorded them as reserves such as section 31 payments for business rate relief.
Change in reserves	Percentage change in reserves over the past three years	Negative changes imply higher risk	This indicator shows the degree of change in reserve levels as an average over the last three years. An increasing use of reserves over this period indicates a higher risk to financial sustainability. The indicator should be viewed with the medium term financial plan (MTFP), total reserves, planned use of reserves, and the level of reserves which the authority determines to be an appropriate minimum. We would not suggest inter-authority comparison, as each will have differing reserves policy, reserves levels and planned use. This figure will be impacted by the increase in reserves due to COVID payment.
Gross external debt	Level of gross external debt	The higher the gross debt level, the higher the risk	The Prudential Code is clear that local authorities should borrow within their means. Minimum revenue provision ensures that there is suitable debt cover. Substantial debt must be monitored, and effective risk management must be evident. This measure includes HRA debt. Authorities holding significant social housing stock may also hold a proportionately higher debt. It is crucial to consider this alongside other local contexts when interpreting indicators for authorities with HRA.
Social care ratio	Amount of expenditure on demand-led adult and children social services – this impacts the level of flexibility in the budget	More flexibility, less risk The higher the ratio, the lower the flexibility	Relevant for those with responsibility for social care, therefore not relevant for district councils. There are areas of demand where councils have limited control. Demand for social care is increasing. Social care is a statutory obligation, therefore it is difficult to reduce this spend. Demographic growth will show a trend towards increased expenditure. Post-COVID, there is expected to be a rise in demand for social care for both adults and children
Fees and charges	Total fees and charges as a proportion of service expenditure	The higher the ratio the lower the risk (income) A greater amount of fees/charges will make councils more resilient as they have more control over funding for budgets	You have greater control over your own ability to put charges up or down, giving more control over budget. Local authorities can raise income through certain fees and charges. Fees and charges across different sources may reduce risk. CIPFA is aware of the alternative argument that councils with low fees and charges have greater scope to generate more income, but this approach was supported by the working group. CIPFA is aware that during the pandemic this has not proven to be true as grants have underpinned income losses but over the longer term we continue to support the principles of this indicator.
Council tax	Council tax requirement/net revenue expenditure	Higher the ratio the lower the risk (income)	Council Tax is a stable form of income. Collection rates and hardship schemes have resulted in minimal impact across the board.
Business rates	Percentage growth in business rates above the baseline	The higher the ratio the higher the risk	Local authorities have been able to maintain their growth in business rates. There is concern that if the government resets baseline, those with greater income above the baseline will face a greater negative impact. This makes them more vulnerable. The government proposed to fully reset the baseline business rates funding effective 2026/27. CFOs need to assess the potential risk to the council’s funding and adjust future financial plans accordingly.
Children's social care	Ofsted judgement on overall services	The lower the rating, the higher the risk	Possible correlation between the ruling and large requirement to invest spend. Many authorities with adverse children's social care judgements have increased spending to improve services.
Auditors VFM assessment	Auditors VFM assessment	Lower assessment, higher risk	The single judgement for Audit has been replaced with a narrative. As there is no single governance judgement this indicator provides a proxy to support the understanding of resilience. The index recommends users refer directly to the respective organisation website for VFM judgement from 2020/21 onwards.

All calculations are based on the latest available annual data unless otherwise stated.

Reserves measures exclude public health and schools reserves. These reserves are ring-fenced and cannot be used to support expenditure in other areas.

CIPFA will continue to discuss opportunities for improving the RO form data collection.

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