Last week, local government received news of a second section 114 notice, this time from Croydon LBC. A s114 notice is an incredibly significant action for a council to take for several reasons. Not only is it a very public declaration that its budget cannot be balanced, it also results in a suspension of additional spending. As the public sector processes the news in the coming weeks and months, it's important to take note of the factors that have played their respective parts in the issuance of the s114. In the case of Croydon, these factors were clearly listed by the s151 officer Lisa Taylor in her recent report to the council.
Croydon's financial position was already weakened by its low level of reserves, which dwindled to a mere £7m at the end of 2019/20. We have long argued that a lack of reserves places authorities at risk. While we recognise that reserves are intended to be a counter-cyclical stabilising resource for councils to deal with economic shocks, Croydon had clearly drawn down on their financial reserves too heavily and too early. This left them vulnerable and exposed to a market that is seemingly now rife with risks.
Cost savings, or lack thereof, were also an issue for the council. Ms Taylor's report identifies two areas where opportunities to save through corporate action never materialised. First, in-year savings were not correctly identified. As a result, the forecast overspend was higher than originally thought.
Second, Croydon's internal budget development meetings, which were tasked with identifying savings over the medium term, ‘failed to deliver the amount of necessary savings proposals and reduce growth demand.' This on top of a failed spending control period certainly added to the financial pressures experienced by the council.
To make matters even worse, Croydon's commercial development company, Brick By Brick, failed to demonstrate the necessary willingness to pay dividend and interest payments owed to the council.
According to the s114 report, the CFO did not see ‘an organisation that is taking the necessary radical decisions to stop all but essential expenditure.' In situations like these, it's the legal duty of the s151 officer to take action - a brave stand must be taken. I have said publicly that when faced with this set of circumstances, issuing a s114 notice is the right thing to do. The Local Government Finance Act of 1988 places this statutory responsibility, among others, on a local authority's CFO:
‘The chief finance officer of a relevant authority shall make a report under this section if it appears to him that the expenditure of the authority incurred (including expenditure it proposes to incur) in a financial year is likely to exceed resources (including sums borrowed) available to it to meet that expenditure.'
Croydon Council's s151 officer makes clear in her notice that it has been issued in alignment with CIPFA's updated guidance. We at CIPFA agree with this. Croydon's issues were long standing and did not result directly from COVID-19.
However, the ongoing pandemic has certainly not improved the council's financial position, nor that of any other council in the UK. Revenue and income streams have taken a drastic hit in 2020. The picture is even more bleak when you pair that trend with the fact that local authorities have limited revenue-raising powers. Even more resilient councils are experiencing unprecedented financial pressures. Lisa Taylor made the right call, and before this is all over, other s151s may yet join her.
The alarm bells were sounded in Croydon multiple times before the council's books worsened to the point that they were unable to be balanced. Last week's action has its roots in a series of poor distant, past decisions. While the situation will no doubt be evaluated in greater detail in the days and weeks to come, one thing is immediately clear. Teams within local government must recognise and respect their collective responsibility for maintaining a council's financial health.
Rob Whiteman is chief executive of CIPFA
