In the last few years, below the radar CIPFA has helped a number of authorities improve their financial resilience to avoid a s114 notice. This is when the CFO notifies the council that they are heading for a breach of the legal requirement to balance their revenue budget. These councils who have avoided such an outcome deserve credit for getting budgets back under control, and we hope there’s a similar outcome for the ones we are presently supporting.
Over the last decade herculean efforts by the local government sector in general have seen unfavourable fiscal treatment absorbed. The COVID period brought some respite with welcome additional government funding, but this funding is now a distant memory as reserves are again being depleted in many councils.
There is a huge range of causes for the s114s we have seen. While there were some technical issues on the HRA and illegal expenditure for Nottingham and Northumberland, generally the reasons for s114s have been for corporate budget failure in Northamptonshire, Croydon, Slough, Thurrock and Woking. In all cases, the notices could have been avoided through better, or at least less bad, decision-making.
Northamptonshire, the first council to issue a s114 in the modern era, was the nearest to what could be described as a ‘normal’ failure, where governance and leadership failed to make savings, raise taxes or see the risks in time. The authority was then reorganised into two new unitaries.
With the others we have seen quite abnormal events where authorities have been poleaxed by appalling commercial decisions backed by eye-watering debt.
A lot has been done in response to the slew of s114s, including:
The above actions are not yet fully implemented, especially the Redmond recommendations. Clearly ending the backlog of audits is something on which ministers will wish to take decisive action.
My judgement is that we may see more s114s from commercialism and excessive borrowing that were in the pipeline before the rules tightened. But generally, new local proposals with excessive risks that breach prudential guidance appear to have ceased, for now. Also, we may see particular technical issues or liabilities such as the HRA or single status give rise to specific potential s114 cases.
More likely, however, if we see more councils in close proximity to issuing a s114 it will be owing to difficulty covering significant pressures, such as adult and children’s social care. These may be more like Northamptonshire where over-optimism and poor governance causes them to lose control of their finances and need external help. To avoid this, the first step to recovery is recognising that change is needed. I’m afraid I see some councils that could avoid failure but are still not taking that critical first step. That said, sooner or later we will reach a point when a well managed authority, whose costs benchmark well and resources managed effectively, hits the buffers through a lack of funding to meet service demands.
There is a risk, of course, that many more s114 notices may normalise financial management failure. I think there is scope for a double moral hazard developing: government worries that if it ‘bails out’ councils that can’t manage their budgets or debt repayments then it creates an incentive to borrow and take imprudent risk. Meanwhile, rather than make cuts or reprioritise reserves to cover overspending, might some councils deem a s114 notice as a less unattractive option if others are doing the same? In how many councils can DLUHC intervene at any one time?
If this happens it’s a game of chicken that will end with some flattened and bloodied feathers. I am in no doubt that HMT and DLUHC will allow a council to go bust and default on its debts pour encourager les autres if there is any hint that serving a s114 notice becomes something of a fashion.
Beyond the considerable changes already outlined, I would like to see some further reforms:
But perhaps we should consider whether the sector wishes to go further than these arguably modest proposals? Does it want to collectively set the standard that on appointment new CEOs, CFOs, leaders or mayors must commission an independent resilience review of their finances and instigate a voluntary improvement board if problems are found?
Reviewing finances is a professional activity for professional bodies and audit firms alone. There has been some poor quality advice to councils that is to be avoided. Let’s remember that the more the sector sets high standards and holds itself to account, the less government will have scope to fill a vacuum.
This article originally appeared in the MJ on 31 July 2023.
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