As Croydon grapples with a section 114 notice Richard Harbord looks at the issues underlying the council’s troubles.
The London Borough of Croydon has become the big news story in local government. This week the council was forced to issue a section 114 notice. In October the council’s auditors, Grant Thornton, took the relatively unusual step of issuing a public interest report under section 24 and schedule 7 of the Local Audit and Accountability Act 2014. It is well worth your time reading this report for lessons that could be applied to any council’s financial management.
Of course, in the current climate there are a number of local authorities struggling with their finances. Ten years of austerity followed by Covid-19 have intensified pressures throughout the sector. Councils were advised that if they felt they were nearing a position of issuing a section 114 notice they should speak to the secretary of state as early in the process as they could.
The Grant Thornton report says that in Croydon “financial resilience” had deteriorated over a number of years with pressures around children’s and adults social care and dwindling reserves. The situation became so severe Croydon approach MHLGC to seek approval to capitalise day-to-day expenditure as a solution to their immediate problems.
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Failures
Concerns were first raised by Grant Thornton during the firm’s 2017-18 audit, and in each of the subsequent years. However, by August 2020 the council had failed to produce a formal action plan or to respond to the audit recommendations.
The summary says that among all London Boroughs, Croydon had the lowest level of general fund, and earmarked general fund, reserves and the council had failed to address the issue.
In addition, over the past three years there have been reported overspends in children’s and adult care of £39.2m as well as little evidence that “transformation monies” (from capital receipts) of £73m over three achieved the objectives identified by the government objectives of “reducing demand, delivering savings or reducing costs”.
The auditor says that the council’s governance over budget setting and monitoring has not been good enough and reports have been accepted without appropriate challenge.
Other issues also emerged. Over the last three years the council has borrowed £545m to invest in companies it formed and in purchasing investment properties. Even here Grant Thornton notes “guillotine procedures” were used to pass investment decisions through full council leaving “insufficient time to discuss and challenge the strategy”. The first purchase was made two months before the strategy was approved.
The auditors accuse the council of “collective corporate blindness” to the seriousness of the position and the urgency of dealing with it.
A way forward
Grant Thornton includes some 20 recommendations. Many of these have universal application and are particularly worth noting.
They include one to address the underlying cause of social care overspends. I imagine there is no social care authority in the country not continually struggling in this area. Outturn figures for last year showed more 80% of authorities had overspends and while the difficulties in managing this area are growing. Indeed, most authorities struggle with demand and the “front-door” policy (the process in which councils decide how they will act on information about the health, well-being and safety of children) and history has made authorities risk adverse.
In the case of reserves, it is the role of members to challenge their adequacy before approving the budget.
Section 151 officers should report annually on using capital receipts for transformation as part of budget setting.
Councils need to show greater rigour in challenging budget assumptions, how savings are achieved and also the underlying affordability of the treasury management strategy.
Cabinets and councils need to review their arrangements to govern their interests in subsidiaries. This is a key issue more generally, particularly during difficult financial times.
Growth in the use of wholly and partly-owned companies has been considerable. There are obvious advantages, especially for raising finance from sources not available to council. Some councils have, however, encountered problems in achieving the correct routes and means to achieve governance of these entities.
Most of the other Recommendations are Croydon specific.
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Rigour
Without a generous settlement, there is a risk of more 114 notices. But most of Grant Thornton’s recommendations centre on a lack of rigour in preparing budgets and the lack of challenge to them. There is also criticism that the authority did not have sufficient expertise in the commercial market to make the two very large investments they made. I suspect this is an issue we will see repeated elsewhere.
The council having considered the public interest report and acknowledging the need to do things differently has succumbed to issuing a Section 114, only the second council, along with Northamptonshire, to move to this stage in recent years. Croydon continues to face a potential budget shortfall of £66m this year. The Section 151 officer is reported as saying that in her professional judgement forecast expenditure continues to significantly exceed resources and plans to rectify this are insufficient.
The council is reliant on a capitalisation directive to assist the process and if that is not agreed by February a further Section 114 notice will need to be issued.
It is a report that needs to be read and noted generally. Authorities across the country should consider whether improvements can be made in the way their own governance arrangements work.
The irony is, as we have seen elsewhere, that once public interest reports are written they tend to cover issues that might otherwise have been considered as uncontroversial.
Richard Harbord is former chief executive at Boston Borough Council.
Photo (cropped): osde8info, Flickr licence.
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