Southampton City Council has commenced “informal discussions” with the government over its challenging financial situation.
Some £11.38m was required to be drawn down from reserves to balance the authority’s year-end deficit for 2022/23, according to a newly published report which will be presented to a full council meeting on 19 July.
The council is attempting to achieve a sustainable financial footing, and avoid a section 114 notice, which it said was still a “risk”. As such, a separate new report – which provides an update on the council’s revised Medium Term Financial Strategy (MTFS) – has recommended the creation of an Improvement Board with external subject matter experts to “challenge and oversee the progress to a sustainable budget”.
This report will also be presented to the council meeting on 19 July. “The task of right sizing the council’s expenditure to match its resources and rebuilding reserves should not be underestimated,” the report said. “The council is in an uncertain financial position and will need the whole organisation to focus on cost control, at the same time as we are growing the city and the income streams of council tax, business rates, and fees and charges.”
Failure to take actions in-year and to apply a new financial strategy “would lead to a large forecast overspend which would mean the council being financially unsustainable and the issuing of a S114 notice,” the report underlined.
Asked by Room151 to comment on the overall situation, Mel Creighton, executive director corporate services and s151 officer (who was appointed to the role earlier this year), said: “The council recognises the financial difficulties we face, and we are dealing with them in an open and transparent way. The recently published MTFS sets out a robust and focused plan for addressing these challenges.
“We have proactively commissioned the Chartered Institute of Public Finance and Accountancy (CIPFA) to provide an expert review of our financial management and resilience and welcome their recommendations for improvement where required. We have also engaged with our external auditors and civil servants to ensure they are aware and supportive of our plans.
“We are taking decisive action to create a sustainable financial position for the city council, whilst ensuring we play an active role in supporting economic growth and prosperity for the city.”
‘Serious’ situation
Work on revising Southampton City Council’s MTFS began after its 2023/24 budget was agreed as it became “evident the council faced significant and serious budget challenges with a heavy reliance on reserves”, the update stated. The council also engaged CIPFA to review the financial management and the financial resilience of the organisation at this time.
The MTFS update report was authored by Steve Harrison, head of financial planning and management. It stated: “In the medium term the council remains ambitious to create economic prosperity through growth. But we recognise that the current position needs urgent and responsible attention alongside that focus on achieving this vision in the longer term.
“The financial situation is still serious with a great deal of local and national uncertainty impacting on forecasts. As a result, CIPFA will be reviewing the forecast to ensure external validation and informal discussions have commenced with government to appraise them of our financial situation, as would be expected of any authority with this level of financial challenge.”
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Harrison said Southampton would seek to learn from other councils who have faced a similar challenge “and have avoided financial failure by taking strong and early action”.
A particular focus will be on children’s and adult social cares, as these were cited as the main areas of pressure.
The report continued: “We are recommending that the council takes the type of urgent action and steps necessary, on a precautionary basis, as if the council were to fail to reach a balanced budget position. We must bring external challenge, best practice and a programme of measures and so it is recommended an Improvement Board be created with external subject matter experts to challenge and oversee the progress to a sustainable budget.”
The council has also implemented a cost control panel, following advice from CIPFA, which will put “strong controls” on the council’s expenditure.
As s151 officer, Creighton has worked with the executive management team to review the financial framework the council operates under, the report noted. Changes to improve budgetary control have been made and an approach to support identifying the major savings needed to ensure a balanced budget has been created.
“The full review of the financial position has projected that the in-year forecast may be significantly above the approved revenue budget and reserves available,” the report stated. The identified cost control measures will “help to reduce the forecast, but more will need to be done if the council is to achieve a balanced position in the current financial year”, the report stated.
Draining reserves
The revenue and capital outturn report for 2022/23 revealed that earmarked revenue reserves totalled £55.05m at the end of the financial year, having fallen from £87.76m at the end of 2019/20 and “thereby reducing the council’s financial resilience”.
Of these reserves, a high proportion have been allocated for use in the MTFS over the next 5-10 years, the report said. “Those that have not been allocated are addressing potential risks faced by the council to assist in providing financial resilience,” it added.
“Relying on reserves to balance the position cannot continue and it is imperative the council reduces the amount of expenditure in line with its resources.”
The council’s total general fund capital expenditure in 2022/23 was £62.94m compared to the agreed revised programme of £98.63m, giving a variance of £35.69m. This translates to £34.94m net slippage and £0.75m of underspend.
The total HRA capital expenditure in 2022/23 was £35.88m compared to the agreed revised programme of £38.25m, giving a variance of £2.37m (£1.54m net slippage and £0.83m of underspend).
The 2022/23 draft statement of accounts will be presented to the council’s Governance Committee on 24 July. The annual audit, to be carried out by Ernst & Young, is expected to commence in August 2023 and to be completed in October 2023.
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