With many councils reporting they are at risk of issuing a section 114 notice, and given the Birmingham situation, former section 151 officer Chris Buss asks whether the local government sector really is in perhaps its deepest ever crisis, or whether it is – as some commentators might see it – simply ‘crying wolf’ again.
One of the advantages of longevity is the ability to recall and learn from the past.
Throughout my career there have been the siren voices that have said that there is insufficient funding for either a particular council, sector, or group of councils, and that without government action the financial stability of local government – either in part or in full – is in jeopardy and will collapse without assistance.
Until recently, with the odd very rare exception, the financial edifice supporting local government has stood up and despite everything still functions.
The recent section 114 notices for the likes of Croydon, Slough, Thurrock, and Woking have shown some cracks in the edifice, but the issues in those four authorities were in part of a similar nature, with unsustainable borrowing playing a large element in all four councils’ financial issues. The more recent notice at Birmingham is again out of the ordinary as it relates to a large equal pay claim. However, are these incidents the tip of an iceberg and a symptom of something more widespread across local government, or are they isolated incidents?
Over the past few weeks there has been a significant increase in the number of councils reporting that they are at risk of issuing a 114 notice, with Sigoma indicating that the number is over 20. These are in the main councils with a more traditional borrowing profile and no abnormal factors, so the question is, is the wolf really at the door this time, or is local government, in the view of some, crying wolf again?
There is no doubt that today’s section 151 officers are facing a range of pressures on their budgets not seen in some 30 plus years, with an almost perfect storm of high inflation, rising borrowing costs and increased demand for key services all placing demands on budgets and the ability to raise income limited. However, the tools that existed in the past to alleviate those pressures are no longer available to today’s treasurers.
In the past there was much more flexibility available to a section 151 officer when setting and managing a budget but a combination of referendum limits, reduced grants and ringfencing means that often the only tool left in the toolbox other than cuts to services is reducing reserves – a tool that can only be used effectively whilst there are reserves available.
On the subject of reserves, there is currently a debate as to the actual level of what in accounting terms are called usable reserves can be used to support a budget gap. At one extreme there are those that say that only unearmarked reserves are available to support a budget gap whilst others say that all usable reserves could be used. The truth, as with all these things, rests somewhere between the two and will vary from council to council.
It is clearly irrational to say that funds set aside to cover known insurance risks or to cover PFI liabilities (just two examples of many) can be redesignated to balance the budget and it is being economical with the truth to say that all unearmarked reserves cannot be used to support budget pressures, particularly if they were set aside for that purpose and named as such!
In the end, the adequacy of reserves is left under statute to the section 151 officer to give an opinion on to elected members. The section 151 officer has to report on “the adequacy of the proposed financial reserves” at budget setting time and the council when setting its budget has to have regard to that opinion. In the past when reserves were healthy I suspect that there were some of us who were a bit blasé about giving this opinion, but in the current climate a great deal more thought and deliberation is needed before a view on adequacy of reserves is given.
Given the spending pressures referred to earlier, this judgement is now a much more difficult and nuanced opinion with the natural tendency leading to recommending an increase in reserves to cover the additional risk. This in itself creates a tension as any increase in reserves should mean a decrease in spending or greater savings. It is interesting to note that the government has powers, to my knowledge never used, to specify minimum levels of reserves. Is there a possibility that they will potentially use those powers at some time in the future?
What will happen?
Returning to the current steady number of mid-year budget reports where the section 151 officer is saying that there is a risk of a section 114 notice or where others are commenting, such as an LGA peer review, there is a no particular theme amongst them. They are a mix of unitaries, districts and counties; they are of different political complexions; and are in different parts of the country.
This would indicate that the risk of insufficient funding being available to fund services at even a basic statutory level is perhaps more common than DLUHC think it may be, or at least what they are publicly saying. It would also indicate that the threat of issuing a section 114 notice is perhaps not as career defining as it was in days gone by.
So, what will happen next February or March when budgets are set? I suspect that in order to avoid the possibility of government intervention, which follows a section 114 notice, that some of the councils at risk will find a way, albeit unpalatably politically, to balance the books in the hope that something will turn up later.
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If this does happen, some commentators in the media will see this as the sector ‘crying wolf’ – in their view yet again – when in reality it will be just the sector doing what it normally does very well: which is making the very best of a bad job. The wolf is still there but has been deferred from having his day. There will also be some that will not be able to do this despite all best efforts, which will lead to section 114 notices being issued, government intervention and a loss to some degree of local control.
Is there anything that can be done to remove the threat of the wolf appearing at the door of local government? To be honest, the only solution based on the range of statutory services that local government has to provide is a better funded settlement for the sector which has to include a review of council tax arrangements.
A settlement and review that just reallocates or reshuffles existing funding does not solve the problem but shifts it around as the problem is now systemic. However, the reality is that for any government after the election next year, regardless of political persuasion, that sorting this issue out will remain low down on the ‘in tray’ of future spending commitments.
That is, until the number of councils that issue 114 notices reaches semi-epidemic proportions. Then someone will say, ‘why were not warned about this?’.
Chris Buss is a former section 151 officer and director of Darenace ltd.
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