LGR finance essentials: Ensuring strong financial governance and financial sustainability in the lead up to LGR

On 5 February 2025, the Minister of State for Local Government and English Devolution wrote to all councils in two-tier areas and small neighbouring unitary authorities to formally invite proposals for local government reorganisation (LGR).  

Councils have been asked to submit their final LGR proposals to government for consideration in autumn 2025 following which government will decide which options to formally consult on. Ongoing financial sustainability for a new authority is only one consideration but the government’s intention is that simpler local government structures can lead to better outcomes for residents, improved local accountability and savings which can then be reinvested in public services.

The process of LGR is complex and these finance essentials guides have been developed for Chief Finance Officers, elected members and LGR programme teams, to aid the development and implementation of local LGR programmes. 

They are informed by discussions with a number of councils which have recently been through LGR. They aim to provide practical and realistic advice on key areas where financial issues will need to be considered. 

Robust financial governance must underpin the LGR process to ensure accountability and transparency of decision making is maintained by all involved throughout. 

Financial governance is the system, policies and practices that are in place to ensure responsible financial stewardship of public funds. 

Local authorities are accountable to the public and other stakeholders for ensuring they have a sound system of governance and must publish an Annual Governance Statement (AGS) in accordance with statutory regulations. Councils should also comply with the principles of good governance set out in the Delivering Good Governance in Local Government Framework. A council must have proper arrangements in place to ensure that it can achieve its strategically agreed objectives and remain financially sustainable. 

It has been recognised from many of the best value reviews that have taken place recently that councils are at far greater risk of not achieving value for money when governance is poor. When compounded by a significant LGR change programme the need to maintain effective governance is paramount, and robust financial governance in particular is critical. 

Government have clearly stated that it is essential that councils continue to deliver their ‘business as usual’ services and adhere to their statutory duties until reorganisation is complete. This includes the Best Value Duty (Section 26 of the Local Government Act 1999). 

The Secretary of State reinforced this in a letter to Chief Executives, Leaders and key stakeholders on the LGR process, and associated note on financial decisions before local government reorganisation. This stated that it was essential that decision regarding ongoing service delivery and the medium term financial strategy of existing councils should not compromise the future sustainability of new councils. 

The Code of Practice on Good Governance for Local Authority Statutory Officers sets out advice and the expectations for the three statutory roles of Head of Paid Service, Chief Finance Officer and Monitoring Officer within the ‘Golden Triangle’. These roles have collective responsibility for ensuring good governance and demonstrating compliance with the Nolan Principles. These statutory officers need to work collaboratively within their own councils but also as professional groups across LGR geographies.   

Financial sustainability in its simplest form means that expenditure can be funded by available income over the medium term; however, it is also about ensuring longer-term financial resilience. This requires that financial plans provide adequately for risks and uncertainties to enable the authority to cope with unforeseen events. 

Maintaining effective financial governance is an important part of ensuring ongoing financial sustainability and maintaining financial resilience throughout an LGR process. This can be challenging as existing councils come to an end and new unitary councils begin.    

This guide provides some essential advice on how these challenges can be managed covering the different key areas of:

• financial governance and decision making in LGR programmes
• financial sustainability in the context of LGR
• successful collaboration
• understanding the financial baseline
• implementation costs and funding for the LGR programme. 

Existing councils will continue to have decision making authority until the new unitary council/s come into existence on vesting day. This is critical to ensure continuity of service delivery. However, it is important that the predecessor councils do not fetter the ability of the new councils to deliver effective services and financial sustainability in the future. 

Before a shadow council is established

Prior to the establishment of the shadow council/s and the formal Section 24 direction it is important that a unified financial governance framework is agreed by the predecessor councils where possible; this could include:

• Establishing a member-level body (eg a Leaders Board) and an officer level body (eg an LGR Programme Board) to have oversight of key financial decisions being taken by predecessor councils so that there is visibility and awareness of risks and opportunities already being discussed and managed.
   
• Identify mechanisms for cross party engagement throughout the LGR process and have clarity on the role for scrutiny and involvement of non-administration councillors. The wider ownership and understanding is important for continuity and managing the risks and opportunities of LGR.
   
• Agreeing a Memorandum of Understanding (MoU) that establishes which decisions by predecessor councils will be subject to agreement by partner councils within the LGR geography. This ensures that there is collective agreement for any significant decisions being taken by predecessor councils. This will not be legally enforceable but demonstrates intent to work together for the benefit of residents to ensure financial decision making provides value for money, for example, contract procurement decisions that are greater than three years and over a specific value (excluding adults and children’s service provision).
   
• Understanding existing roles and responsibilities (for both members and officers) linked to budget and policy frameworks to understand how and where decisions will be taken and therefore ensuring there is transparency of those. This includes the role of full council and the executive/cabinet or relevant committee in decision making, role of scrutiny and non-administration members. This should also include key decisions taken through delegation by officers. 
   
• Regular reporting to predecessor audit committee/s on the overall status of the LGR programme and what key controls are in place to ensure that value for money and best value requirements are maintained and all statutory financial requirements adhered to. Often Audit Committees have a responsibility to oversee the effectiveness of the risk management arrangements across the council. The continuity of service delivery during LGR, is a significant strategic risk and hence the audit committee/s should be able to obtain adequate assurance that this risk is being effectively managed. 
   
• Utilising internal audit and external audit capacity to support ‘assurance’ reviews where significant financial risks (revenue and capital) are identified, and to test planning for specific scenarios ahead of key decisions being taken by predecessor councils/shadow councils. 

Where there isn’t an agreed MoU or formal LGR governance in place it will be even more critical to understand the different decision making frameworks that are in place across the relevant councils. The individual council’s constitutions will establish those financial limits and decision-making limits through their budget and policy frameworks, financial regulations and schemes of delegation. These will determine the ways decisions are taken by full council, executive/relevant committees and officer delegations. 

As well as understanding where decisions will be taken it is important to map what ‘key’ decisions are expected to be taken by the predecessor councils prior to vesting day. These should be visible from the forward plans for the individual councils.

Having a clear understanding of the decisions being taken and the relevant timescales for decision making is an essential part of good LGR financial governance in the period prior to shadow council/s being established. It ensures that all involved are aware of any potential impact that these decisions may have on the future council/s financial sustainability.  

Once a shadow council is established

When a formal Structural Changes Order to establish the new unitary council/s is laid in parliament (initially in shadow form) a Section 24 direction will also likely be determined. The Section 24 direction clearly states the role that the shadow council will take in any decision making by predecessor councils. 

The areas covered in a section 24 direction will generally include a requirement that written consent from the successor shadow council/s is obtained for transactions above certain thresholds in relation to:

• disposal/transfer of land and assets
   
• capital contracts (value and time period)
   
• revenue contracts (value and time period, but potentially with exclusions for certain categories of spend, for example social care, pension fund and treasury activities).

Additionally, general consent for spend within certain parameters may be agreed by shadow councils to balance the need for robust financial governance with the requirement to continue to deliver business as usual.

The existing councils and the new shadow council/s may have the ability to negotiate with government on the content and thresholds included within the Section 24 direction but the decision on these ultimately sits with the Minister. 

Prior to vesting day there are some critical financial decisions that could significantly impact the potential for new unitary council/s to be financially sustainable and resilient. 

Examples of those decisions include (but are not limited to) the sale and purchase of significant assets, transfer of local assets, entering into new contracts for service delivery including IT procurement, major organisational restructures and changes to staff terms and conditions, establishing companies, undertaking job evaluation, permanent appointments to senior positions, changes to unplanned borrowing and the spending of reserves, and major changes to arrangements such as the local council tax support scheme and council tax exemption scheme 

If formal financial governance across the LGR programme is not established at an early stage, then ensuring that future finances of the unitary council/s are ‘protected’ will rely on the professional advice of officers to elected members who are making decisions and a common understanding of the responsibility of financial stewardship on behalf of residents into the future.

This may need to be emphasised in any formal advice that is being provided by the statutory officers if potential decisions/behaviours that contradict future financial sustainability arise. 

Some common areas which may impact future sustainability are:

• Using capital programmes (and funding) to commit to schemes that deliver ‘pet projects’ or ‘legacy wish lists’ which may not be in the long-term interests of the new council/s or their taxpayers.
   
• Transfer of assets to parish councils or other bodies in order to ensure local community ownership remains but where there are ongoing financial concerns/ risks around the sustainability of those assets.
   
• Using reserves to balance budgets rather than make difficult decisions to drive through savings and efficiencies to ensure future financial sustainability.
   
• Not fully recognising demand pressures for future years which ‘masks’ the true underlying financial position.
   
• Committing to long term contractual arrangements to protect a particular delivery model/operating decision.
   
• Establishment of new parish/town councils. There is a risk that the expectation of what these new councils can deliver is greater than the reality.

To counter these potential risks, it is important that all councils continue to adhere to their own internal control framework and local code of good governance, which will include a requirement to demonstrate value for money in all decisions and require robust business case development to support capital investment decisions. Councils should also adhere to existing policies and strategies covering areas such as community asset transfers, asset management, treasury management and procurement and commissioning.

The role of internal audit and the audit committee will be vital in assuring the evidence that this adherence is being maintained as well as external audit reporting on value for money. 

All predecessor council decisions will continue to require the statutory officers to give their professional and robust advice ensuring that decisions are taken based on full information. Ensuring that this advice is appropriately delivered and understood is critical throughout the LGR process. 

It is important that any decisions that are made don’t compromise the opportunity to develop new delivery models and deliver the change that will be important in ensuring successful successor unitary councils created through LGR. 

Support from professional bodies such as CIPFA can be drawn on if potential risks around predecessor council decisions fettering future financial sustainability of the new councils start to materialise. 

Feedback from councils that have already experienced LGR is that it is often the culture and behaviour of those involved that can determine the effectiveness of financial governance. LGR is one of the most significant change programmes that councils will have to deliver and recognising that there will be different appetites to change and an emotional impact on those involved is important. 

It is also important to recognise that continuing to deliver ‘business as usual’ is critical and that the staff delivering this are as essential as those involved in the LGR programme.  

Effective financial governance during LGR will require significant collaboration both within and across councils, and this means that establishing effective relationships early on is essential, including with those partners that my not all be directly or immediately affected by reorganisation including police and fire services.

It is recommended that:

• Localities set up cross-council professional working groups/workstreams as early as possible, for example Section 151 officers, Monitoring Officers, procurement and commissioning specialists, transformation teams etc to build these relationships and agree common objectives.
   
• For each LGR workstream, a lead officer from each type of predecessor council is included eg county council, district council, unitary council, so that all views can be represented and relationships developed
   
• Existing, experienced officers are used to support the LGR programme to provide the required capacity and knowledge, with these posts backfilled as required to cover ‘business as usual’ work. This approach builds buy-in and understanding of the LGR process across the current councils but also recognises the importance of the continuity of existing knowledge and experience into the future council/s. This approach will require prioritisation of LGR work for key staff, which may be resisted unless sufficient backfill of resource is provided. Sufficiency of capacity to deliver the programme should be seen as a key risk to programme success.
   
• As suggested above, an LGR Programme Board is established as early as possible, with clarity on its terms of reference, roles and responsibilities of those involved and a clear focus on building the future organisation/s and transitioning the existing councils into those new councils effectively. This will provide the ability for those involved (chief executives/leaders) to have the formal space and authority to discuss how the new councils will be developed and how the predecessor councils transition to those new councils can be effectively delivered. 
   
• The senior management team for the new council(s) is recruited as early as possible so that key officers are available to support the shadow council in its decision making.  

A successful LGR programme requires honesty and candour from all involved with transparency and openness around opportunities and risks, supported by effective due diligence and assurance from chief officers. Clear, confident, impartial and professionally grounded advice from senior officers is essential to ensure informed decision-making.

Alyn Jones
Executive Director Resources, Strategy & Transformation, Somerset Council

In Cumbria a cross-council Section 151 finance group was already in existence but its role was formalised within the LGR programme, with the appointment of a lead officer and clear overall objectives for the LGR programme agreed. These objectives were: 

1. To deliver two financially sustainable new unitary councils. 

2. To safely transition Cumbria Fire and Rescue Services to the Police and Fire Commissioner.

3. To ensure that the programme was delivered within the existing funding envelope for Cumbria.

The Section 151 group determined the principles that supported the development of an opening revenue budget, capital programme and balance sheet position. One of principles was to ensure that the financial programme would enable transformation in the future delivery of services, recognising that both of the two new organisations would have their own design vision and ambition to deliver post vesting day. 

Catherine Bell
Section 151 Officer, Cumberland Council 

The Secretary of State has been clear that a common data set and evidence base should be used to develop the LGR proposal/s for each area. Having Section 151 ‘sign off’ on the financial assumptions and data used will strengthen these proposals and add rigour to the process. 

As set out in the previous section, collaborative working across the predecessor councils is essential, particularly for the Section 151 group. Creating a formal ‘terms of reference’ and assigning clear roles and responsibilities within this group will enable it to have clear oversight of the quality and accuracy of the financial data sets being used to develop proposals and to deliver and implement the LGR outcomes. 

The LGR programme should agree a time period for which financial modelling will be undertaken. Three years should be considered the minimum, but to demonstrate potential transformational savings delivery, a five-to-ten-year period may be required. 

An honest and open assessment of the overall financial position of all councils involved in the LGR process is crucial. This is not just about understanding the respective budget and MTFP positions but also the status of each council’s financial accounts, any risks identified in the Annual Governance Statement, the corporate plan and the relevant financial and policy frameworks.

Some of the key information that each council should share as part of the LGR programme includes: 

• medium term financial plans and capital programmes (including the potential impact of Fair Funding 2.0)
   
• Annual Governance Statements
   
• accounting statements 
   
• external audit reports, including Value for Money opinions
   
• internal audit reports on key financial systems
   
• key financial risks– taken from Section 25 reports and strategic risk registers 
   
• background data in relation to existing savings programmes and budget pressures
   
• capital strategies – to understand different risk appetites and extent of commercial activities, including details of debt portfolio and Capital Financing Requirements
   
• grant and contract registers, particularly operationally significant contracts (based not just value or length of contract but risk to delivery of core services) 
   
• asset registers
   
• reserves forecasts
   
• Treasury Management Strategies including prudential indicators and investment and borrowing forecasts 
   
• details of commercial activities undertaken including any arm’s length companies
   
• council tax reduction schemes
   
• fees and charges policy/strategy 
   
• LGA peer challenge reports and external inspection reports 
   
• pension fund accounts and annual report.

Making this information available as early as possible will ensure that sufficient due diligence of the data can take place and also ensure that early visibility of key financial risks (and opportunities) are identified and understood by all involved. The CIPFA Financial Sustainability toolkit developed to support the assessment of proposed new councils’ financial viability may be also be helpful in this respect.

It is recommended that any LGR programme should include capacity for both due diligence and assurance activities across all financial data provided.  Accountability should sit with the Section 151 officer (and other relevant senior officers where appropriate) through formally signing off any data that is provided. 

Data sharing agreements will be required to enable councils to share data safely. Having those in place as early as possible is recommended, see the LGR data sharing checklist for more information.

Irrespective of any competing proposals being considered, it is helpful to establish the existing revenue budget gap across the whole locality area. Local authority funding can be challenging to model especially when there is uncertainty around individual council’s future funding, but understanding any expected funding gaps will ensure that everyone is aware of the existing financial challenges and the need to develop transformation and efficiencies programmes to give new unitary councils the best opportunity to achieve financial sustainability into the future. Modelling any potential future budget gaps is also essential as the pattern of need and demand may not correlate directly with funding allocations. 

It is not just the high level financial information that is required, there is a need to understand the assumptions and risks built into budget setting and the detail that makes up both the funding and spend side of the equation in order to give the new unitaries transparency and clarity on what they are inheriting so that they can set robust financial plans for the future. 

Nicola Hix
Director of Finance and Procurement, Somerset Council

Ultimately the shadow council will set the first annual budget and medium-term financial strategy for the new unitary council, and this will be based on the financial and non-financial information provided by the predecessor councils. The new Section 151 officer will need to provide the Section 25 statement giving a view on both the robustness of the estimates within the budget and the adequacy of the reserves when determining the budget and level of council tax. The statement will also refer to the financial risks facing the new council.  

In order to satisfy both their statutory and professional requirements the Section 151 officer will need to have confidence in the financial data that is being used to develop the budget position. Written assurances from the predecessor councils’ Section 151 officers about the robustness of the data being provided is an important element of governance to enable the shadow council to approve the budget. 

The government has allocated £7.6 million of funding to support the development of final LGR proposals. Each area will receive a flat rate of £135,000 plus 20p per person based on ONS population estimates.    

These contributions are welcomed but it is recognised that a significant element of the costs of both proposal development, local consultation and implementation of the final LGR proposal will need to be funded locally. 

The CIPFA publication ‘LGR – a practical guide to delivering a safe and legal programme’ recommends that resources are made available to each LGR programme in a timely way by all partner councils and that the costs of the programme is shared equally across all councils. 

The costs and wider resource requirements for each LGR area will depend on several factors. These include:

• what is planned to be delivered by vesting day (day one of the new council/s)
   
• the level and ambition of change programmes
   
• the complexity of the LGR changes ie disaggregation costs/aggregation costs 
   
• the available capacity and capability and level of external support required
   
• appetite for shared service models. 

The different types of costs can be broken down into the following categories:

Table 1: LGR costs

In respect of the wider resource requirements decisions will need to be taken on whether the cost of backfilling staff who are working on the LGR change programme are included as part of the implementation costs. Inevitably all councils will need to support the LGR programme using existing staff resource so how much of that is ‘chargeable’ to the LGR programme costs will need to be agreed. An early decision will be required around both the proposal development and the implementation funding including:

• How much funding is needed in total and when? 
   
• What will it cover? (Eg will it include backfilling of staff costs, redundancy costs?) 
   
• How will costs be shared across councils? (Eg equal shares or based on net budget positions? Population split? Council Tax bases split?)
   
• Who will be the ‘accountable body’ and how will spending be governed? (through the LGR Programme Board? MOU, delegations etc?)
   
• Who will be responsible for the monitoring and reporting of expenditure?  

Previous LGR programmes have generally established some form of LGR reserve/implementation budget with approvals for spend being made via the LGR Programme Board. This enables the programme itself to deliver in an agile way without having each decision having to be replicated across all predecessor councils. 

In Cumbria all six district councils and the county council agreed to establish an £18.9 million ‘Implementation Reserve’ which was hosted by the county council on behalf of the LGR Programme Board. This reserve was governed by an MoU that had been agreed by all the councils and was funded 50 per cent by the county council, with the other 50 per cent shared equally by the six district councils. The MoU included an agreement that if any element of the reserve was unspent after vesting day, then the balance would be shared 50/50 across the new unitary councils. 

Maintaining effective financial governance across all existing councils is essential during LGR: both members and officers are accountable for ensuring that this happens, and that appropriate assurance is undertaken. 

The council’s statutory officers (Chief Executive, Monitoring Officer and Section 151 officer) have critical responsibilities and have key leadership roles both collectively and individually to ensure high governance standards whilst supporting the LGR programme to deliver new unitary councils.

The internal control framework and local code of good governance are key tools in maintaining good governance and ensuring best value decision making is maintained. This should be actively supported by the audit committee, and internal and external audit as appropriate.

By maintaining effective financial governance during LGR, members and officers will together ensure the new unitary council/s have a better opportunity to deliver financial sustainability into the future and should therefore be better placed to invest in future transformation programmes to deliver the new council/’s ambitions.

Most importantly, councils will be able to demonstrate that value for money and financial stewardship of public funds was maintained throughout the LGR programme.