PublicSector
Councils in recovery
If a council can’t go bust, what happens after announcing huge debts? Councils that have issued s114 notices now have their sights set on recovery, reports Chris Smith
For decades, local government had a remarkable reputation for safely controlling budgets. Not any more.
A group of local authorities have in all but name gone bust. The most recent was Birmingham City Council which revealed the cost of equal pay settlements, a new IT system, the debt from its share of hosting the Commonwealth Games and increased service costs had left demands of up to £1bn. Previous high-profile failures include Woking Borough Council and Thurrock Council. Woking had accrued £1.9bn of debt despite having core spending of just £14m. Thurrock had borrowed £1.5bn to buy solar farms.
At least three local authorities are likely to start the s114 process by the end of the year. And, according to the Special Interest Group of Municipal Authorities, a further 26 are likely to do the same in the next two years.
There are three common issues in the councils that reveal budget stress:
• Investments or commercial decisions that have gone wrong;
• Low reserves;
• Poor financial controls.
What is a s114 notice and what happens?
A s114 notice is a statement from a local authority that it is stopping all but the essential spending needed to provide vital services, pay its staff and meet its legal duties.
S114 of the Local Government Finance Act 1988 requires the director of finance of a local authority to issue a notice where in-year expenditure “exceeds the resources available to it”.
At that point the Department for Levelling Up, Housing and Communities appoints commissioners and requires the council to put in place a recovery plan. For Thurrock, the plan included:
• Steps to achieve financial sustainability and to close any short-term and long-term budget gaps identified by the council across the period of its medium-term financial strategy
• Ensuring the council’s capital, investment and treasury management strategies are sustainable and affordable;
• A strict debt reduction plan, and an updated minimum revenue provision policy;
• Ensuring the council is complying with all relevant rules and guidelines relating to its financial management;
• A scheme of delegations for financial decision-making.
TOP TABLE OF DEBT
WOKING
CROYDON
THURROCK
BIRMINGHAM
NOTTINGHAM CITY COUNCIL
The keys to recovery
Correct accounts forecasts
Northamptonshire’s lessons learned report revealed that when CIPFA was called in to review accounts, it found “an in-year gap of £30m — as opposed to the £8m forecast by the council and an unfunded deficit for the previous year of £34m, increasing to £41m once misuse of grants and ring-fenced reserves were taken into account. A total gap of £64m.”
The commissioners imposed the application of good financial management that forms business as usual for most authorities. These included:
• Liquidation of arms-length services and return of assets to the council;
• Management of demand and contract monitoring in adult social care;
• Greater grip on spending in children’s services, including home to school transport;
• Renegotiation of highways contracts;
• Capitalisation of equipment
• Agency staff reductions and conversion to permanent;
• International social worker recruitment;
• More effective treasury management and other measures. Directors are accountable for their budgets.
New staff at the top
Bringing in new senior staff is critical: commissioners at Sandwell MBC handed over the organisation to chief executive Shokat Lal once they were confident that cultural change was embedded.
Transformation and performance improvement
The improvement team at Sandwell were also clear there had to be a between link the transformation programmes to the medium-term financial strategy. There is now “a ‘golden thread’ between improvement activity, performance and delivering outcomes”.
THE FUTURE
The outlook
Is the s114 process the end of problems for local government? Unfortunately not.
Just one driver, social care costs, will continue to rise because charging reforms have been delayed until 2025.
David Phillips, economist at the Institute for Fiscal Studies warns: “The next parliament looks set to be painful for councils across England, with difficult choices of which services to protect, which to cut back, and how far to push council tax.”
Birmingham City Council is unlikely to be the last council to succumb to financial strains. Councils across the UK are struggling with a litany of issues, including slashed budgets, loose lending and inadequate auditing, meaning further s114 notices could be issued in 2024 and beyond.
STATISTICS
Local government non-COVID funding increased: 7.8% in 2022, 9.4% in 2023, and is forecast to go up by 7.5% in 2024. But inflation has outstripped this and demands are rising: councils budget to increase spending 11.7% this year.
*Source IfS
