LOCAL GOVERNMENT FINANCE Bill

EXPLANATORY AND FINANCIAL MEMORANDUM

INTRODUCTION

1. This Explanatory and Financial Memorandum has been prepared by the Department of the Environment in order to assist the reader of the Bill and to help inform debate on it. It does not form part of the Bill and has not been endorsed by the Assembly.

2. The Memorandum needs to be read in conjunction with the Bill. It is not, and is not meant to be, a comprehensive description of the Bill. So where a clause or part of a clause does not seem to require an explanation or comment, none is given.

BACKGROUND AND POLICY OBJECTIVES

3. The main aim of the Bill is to modernise the current legislative framework relating to local government finance and councillors’ remuneration in Northern Ireland.

4. The greater part of the current legislative framework concerning local government finance is in Part V of the Local Government Act ( Northern Ireland) 1972 (“the 1972 Act”). Although this has been updated by subsequent legislation, provisions in relation to borrowing and council funds are mostly unchanged. This Bill will replace Part V of the 1972 Act.

5. The new capital finance system to be introduced by the Bill sets out the legal framework within which a district council may manage its finances and central government may regulate that activity.

6. The Bill will allow district councils to have greater freedom to manage their own financial affairs without having to obtain consent from the Department. Control by central government will be exercised, where necessary, through subordinate legislation and guidance.

7. The general grant will be replaced with two separate grants, the de-rating grant and the rates support grant.

8. The Bill will extend the general power to pay grants to district councils, which currently applies only to the Department of the Environment, to all departments to enable them to pay grants in relation to their areas of responsibility.

9. The Bill will update and consolidate the provisions of the 1972 Act which deal with payments to councillors, taking account of the recommendations of the Councillors’ Remuneration Working Group (CRWG) (see paragraph 12 below).

10. In order to ensure that all provisions relating to local government finance arrangements and payments by councils are consolidated into one piece of legislation, the Bill repeals and re-enacts the provisions of the 1972 Act relating to expenditure for special purposes.

CONSULTATION

11. It has been recognised for some time that the legislation for local government finance needs to be updated to reflect modern accounting practices. This need was identified by the Local Government Taskforce Finance Sub-group which reported in July 2006. Membership of the sub-group included elected members and officers from local government and officials from central government.

12. The Councillors’ Remuneration Working Group, which included representatives from the National Association of Councillors, Northern Ireland Local Government Association, trade unions, the business & voluntary sectors together with an independent member, carried out a review into councillors’ remuneration in Northern Ireland. After considering views received from a number of councils and local government representatives, the CRWG made recommendations, in June 2006, for the system of councillors’ remuneration both under the current 26 councils and also for the new councils following the re-organisation of local government.

13. The Department carried out a formal consultation exercise with interested parties on its proposals to modernise the current legislative framework relating to local government finance and councillors’ remuneration in Northern Ireland over a 4 month period from July 2009 to October 2009. Overall, the majority of the 28 respondents welcomed the Bill and were supportive of the Department’s proposals.

OPTIONS CONSIDERED

14. The Local Government Taskforce Finance Sub-group reviewed the financial arrangements for councils in Northern Ireland. It looked at the financial arrangements for councils in other jurisdictions and concluded that the financial regime needed to be updated and that a system should be introduced to enable councils to have greater control of their financial affairs.

15. The CRWG considered the options for a system of remuneration of councillors in Northern Ireland. It looked at the arrangements in place in Great Britain and Ireland. It did so with a view to recommending a system that was flexible enough to take account of both the current responsibilities of councillors and future arrangements following the re-organisation of local government. It recommended that there should be an independent panel to consider and advise the Minister about the system and level of councillors’ remuneration.

OVERVIEW

16. The Bill has 48 clauses and comprises 5 Parts together with 2 Schedules. Part 1 contains 25 clauses concerning financial administration; Part 2 contains 5 clauses concerning grants to councils; Part 3 contains 6 clauses on payments to councillors; Part 4 contains 5 clauses on the miscellaneous powers for councils to make payments; and Part 5 contains 7 clauses covering supplementary matters.

COMMENTARY ON CLAUSES

A commentary on the provisions follows below. Comments are not given where the wording is self-explanatory.

Clauses 3 to 5 – Annual budget

These clauses place requirements on district councils regarding the annual budget.

Clause 3 re-enacts section 53 of the 1972 Act, requiring a council to approve estimates, authorise expenditure and fix the amount to be raised by rates for the following year.

Clause 4 requires the chief financial officer to submit a report on the robustness of the estimates to the council and requires a council to have regard to the chief financial officer’s report when considering the estimates for the next financial year.

Clauses 6 and 7 – Reserves

These clauses make provision about financial reserves. The Department will have power to make regulations concerning reserves, and a council’s chief financial officer will be required to report to the council on the adequacy of its financial reserves for the financial year.

Where a minimum level of reserves is specified in regulations, each council will have to ensure that its budget makes allowance for reserves at least equal to the minimum. This would not prevent a council from using its reserves during the year, even if as a result they fell below the minimum. However, if it appeared that this was likely to happen, the chief financial officer would be required to report to the council, at the time the following year's budget and rates were being considered, to explain the reasons and any action considered necessary to prevent a recurrence of the shortfall.

Clauses 8 to 10 – Funds

Under current legislation, a council must establish a district fund, and may also establish a capital fund and a renewal and repairs fund. Subject to the Department’s approval, a council may also establish a consolidated loans fund for the repayment of its borrowings.

The Bill will rename the district fund as the general fund, and repeal the specific provisions for establishing a capital fund, a renewal and repairs fund and a consolidated loans fund. The Bill will provide district councils with the power to establish such funds as they consider appropriate, without the need for approval from the Department. As is currently the case, where income arises from the investment of money held in a fund, it must be returned to the fund.

Clauses 11 to 16 – Borrowing

The current legislative framework permits councils to borrow for purposes relevant to their functions, subject to the Department’s approval.

The present wide-ranging power for a council to borrow for purposes relevant to its functions is to be retained, but the requirement for approval from central government will be removed.

A council will also be able to borrow for the purposes of the prudent management of its financial affairs. This means that, for the first time, councils will be able to decide to take a loan to refinance existing debt, for example.

Clause 13 imposes a broad duty on councils to determine and keep under review the amount they can afford to borrow. Councils will have to comply with regulations made by the Department, and have regard to codes of practice specified by the Department, when determining an affordable borrowing limit. The code of practice which will apply to borrowing is the Prudential Code produced by the Chartered Institute of Public Finance & Accounting (CIPFA).

In the event of a national economic crisis, the Department (with the consent of the Department of Finance and Personnel) will be able to impose a blanket limit on all councils. It will also be possible for the Department to impose by direction a limit on an individual council. Limits of this nature would override the prudential limits determined by the councils themselves. These powers would only be used as a last resort.

Clauses 17 and 18 – Credit arrangements

These clauses require a council to treat credit arrangements in the same way as borrowing under the new system, and to take them into account when determining its affordable borrowing limit, or complying with limits imposed by the Department for national economic reasons.

Clause 19 – “Capital expenditure”

The new system will, as far as possible, take standard accounting practices and concepts as its starting point, which will reduce the need for special definitions in the legislation.

Clause 19 gives the Department power to include, or exclude, types of expenditure to be treated as capital expenditure by individual councils (by direction) or more generally (by regulations).

Clauses 20 to 22 – Capital receipts

The current arrangements require councils to use any capital money derived from the sale of an asset for the repayment of any borrowing for the acquisition of that asset. The approval of the Department is required for other uses of capital receipts.

The treatment and use of capital receipts will now be specified in regulations.

Clause 23 – Investment

This clause introduces a broad power of investment, permitting a council to invest for any purpose relevant to its statutory functions, or for the prudent management of its finances.

Clauses 24 and 25 – Miscellaneous

Clause 24 makes provision for security for money borrowed by a council, and for the appointment of a receiver in the event of default.

Councils will have to have regard to any guidance either issued specifically by the Department or identified in regulations.

Clauses 26 to 28 – de-rating grant and rates support grant

The separation of the general grant into two elements has caused some confusion in the past, which the Department aims to remove by replacing the two elements of the general grant with the proposed de-rating and rates support grants. The statutory formulae currently used to calculate the separate elements of the general grant will be applied subsequently, without amendment, to the calculation of the de-rating and rates support grants.

The Department will retain its current powers to reduce the amount payable to a council by way of the de-rating or rates support grants for a financial year. This arises only in cases where a local government auditor’s report identifies that a council has failed to achieve or maintain a reasonable standard of economy, efficiency or effectiveness, or has spent excessively in relation to its financial resources or other relevant factors. As is currently the case, any reduction proposed by the Department will require approval from the Assembly before it can take effect.

Clause 29 – Other grants to councils

Article 7 of the Local Government (Miscellaneous Provisions) ( Northern Ireland) Order 2002 provides the Department with a general power to pay other grants to district councils. This applies to any grant associated with a function of a council, other than the general grant.

The Bill will replace Article 7 and will extend the general power to pay other grants to councils to all departments.

Clauses 31 to 36 - Payments to councillors

To consolidate all of the provisions dealing with payments to councillors into one Act, the Department proposes to repeal and re-enact, with amendments, the relevant provisions of the 1972 Act.

Clause 31 – Allowances, etc. for councillors

Section 36 of the 1972 Act enables the Department to make regulations about the allowances that may be paid to councillors and to determine the maximum amount that may be paid for each allowance. This provision will be re-enacted in clause 31 of the Bill along with an additional provision enabling the Department to make regulations requiring a council, in the interests of transparency, to make and publish a scheme of allowances and to make this available to members of the public.

Clause 34 – Expenses incurred in attending conferences and meetings

Section 38 of the 1972 Act makes provision in respect of the payment of expenses incurred by councillors and officers in attending conferences and meetings. Section 38(1) restricts the payment of expenses to conferences ‘for the purpose of discussing matters connected with the discharge of the functions of the council or the development of trade, industry or commerce in the district or otherwise affecting the district or it inhabitants.’

This provision has given rise to disagreements in the past about the payment of expenses of councillors attending certain meetings or conferences in Great Britain.

The Department proposes repealing section 38 and re-enacting it, with amendments, in order to remove some of the restrictions on the payment of expenses incurred by councillors in attending meetings and conferences. It would now largely be for the council to determine whether a particular conference would be covering matters that relate to the interests of the district or the inhabitants of that district.

Clause 35 – Panel to advise on payments to councillors

Clause 35 confers a power on the Department to make regulations to establish an independent remuneration panel to advise the Department on the framework of allowances which should be payable to councillors and to make provision about the membership and functions of the panel.

It is intended that the chairman and members of the Northern Ireland remuneration panel will be appointed by the Department and that the public appointments process will be used for the competition.

Clauses 37 to 41 – M iscellaneous powers to make payments

In order to ensure that all provisions relating to local government finance arrangements and payments by councils are consolidated into one piece of legislation, the Department proposes to repeal and re-enact sections 111 and 115 of the 1972 Act. Section 111 is being re-enacted with amendment (as a result of the public consultation) and will clarify that a council may pay an officer’s membership fees of one professional body if it is considered necessary for, or beneficial to, carrying out the duties of their job.

FINANCIAL EFFECTS OF THE BILL

17. It is estimated that the cost of the independent remuneration panel will be approximately £20,000 per year. This will not necessarily be incurred every year as the panel will not be a permanent panel but will only meet as and when required to carry out a review as directed by the Minister. It is not anticipated that the other provisions of the Bill will impose any additional costs on central government.

HUMAN RIGHTS ISSUES

18. The Department believes that provisions in the Bill are compatible with the Human Rights Act 1998.

EQUALITY IMPACT ASSESSMENT

19. Under the terms of section 75 of the Northern Ireland Act 1998, the Department carried out screening for equality impact and is satisfied that the provisions in the Bill will not lead to discriminatory or negative differential impact on any of the section 75 groups.

SUMMARY OF THE REGULATORY IMPACT ASSESSMENT

20. The Department did not complete a regulatory impact assessment in respect of provisions in the Bill as they do not give rise to any associated costs or savings on business, charities, social economy enterprises or the voluntary sector.

LEGISLATIVE COMPETENCE

21. The Minister for the Environment proposes to make the following statement under section 9 of the Northern Ireland Act 1998:

“In my view the Local Government (Finance) Bill would be within the legislative competence of the Northern Ireland Assembly.”