Nearly 90% of the councils in Room151’s annual treasury and finance survey think that inadequate funding is the reason why so many authorities have recently warned that they face issuing a section 114 notice.
The survey of more than 100 section 151 officers, treasury managers, finance directors and other senior finance professionals across Great Britain showed that 87.4% of respondents thought that inadequate funding levels was the main factor driving the recent spate of warnings.
In the last two months, Room151 has reported on the growing number of councils who have issued stark warnings that they are in s114 territory. These include Kent, Kirklees, Guildford, Hastings, Southampton and Bradford.
Respondents were able to choose up to three reasons for the recent alarms, with 58.3% and 46.5% of local authorities suggesting excessive risk-taking by councils and the wider economic environment respectively.
Kelly Watson, head of local government relationships at CCLA Investment Management, announced the results at Room151’s Local Authority Treasurers’ Investment Forum and FDs’ Summit today (19 September) and noted that the overall survey is more “pessimistic” than it has been in previous years.
“The sector is facing a storm of increasing magnitude, it feels a lot bigger than a perfect storm. All the things around it with increasing service demand, uncertainty over the funding system, economic uncertainty and political shifts.
“It is clear from the survey that not all authorities are taking excessive risk, but there is clear recognition that some authorities, and a number of them, are facing extreme and extraordinary situations with a variety of challenges,” Watson added.
Responses were received by 127 local authorities, which included a mix of district (33.9%), county (11%), city (3.2%), unitary (17.3%), London borough (11%), other borough (11%), metropolitan borough (7.1%), combined authority (0.8%) and police/fire/transport/other (4.7%).
The survey also identified that service demand presents the greatest risk to local government finances over the next five years. This was mentioned by 74% of respondents (participants were able to pick two options), followed by inflation (59.8%) and climate change (12.6%).
Watson added: “I have no doubt that it is not a surprise that the greatest risks are around service demand and inflation. The other area that did appear was climate change, so this issue seems to be bubbling around in the background.”
In addition, 96% of respondents felt that councils’ funding levels are either somewhat below (36.2%), significantly below (33.1%) or wholly inadequate (26.8%) to keep pace with service demand over the next five years.
Invest in meeting net zero
The survey also investigated where local authorities will be looking to invest and borrow their money from in the future. It revealed that 61% of respondents were “likely” and 18.1% “highly likely” to invest significantly in meeting decarbonisation or net zero pledges over the next five years.
Nearly three-quarters of councils stated that they are either “likely” or “highly likely” to significantly invest in improvements in IT and tech systems, with 66% suggesting housing development.
Watson said: “Decarbonisation, regeneration, technology and housing are key areas in terms of investment and the other one that does feature is climate change. However, it has come down in the agenda, which could be to do with the issues that local government is facing at the moment.”
In terms of borrowing, the survey found that just over 75% of authorities are either “not likely” or “definitely not” looking to borrow long-term loans from a different source to the Public Works Loan Board. Whilst 16.5% of participants stated that they were “quite likely” to look for alternative sources, followed by 5.5% voting “very likely” and only 2.4% suggesting “certain”.
Additionally, nearly 60% of councils stated in the survey that they still lend to other local authorities but are more selective about who they lend to. This is as a result of changes to the Bank of England’s base rate as well as the financial resilience of some councils.
Watson told delegates that local to local lending has become very prevalent over the past few years due to the low interest rate environment.
“It is clear from the survey that local authorities have not changed their views or approach when it comes to local to local lending, but there was some outliers. Some may have chosen to change their view based on the news and current events,” Watson stated.
Interestingly, the survey also revealed lots of support for the tightening of the prudential code, with 68.5% of respondents stating they are now better off and 3.2% suggesting that it has done an excellent job.
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