What you need to know

Last year two BBC Panorama films from renowned filmmaker Roger Graef struck a nerve with a large number of viewers.

The films featured Somerset County Council and their struggle to provide care services for residents despite seeing their overall budget cut by two thirds since 2010.

While the films focus on the individual stories of the patients who require care for disability and other illnesses, they raise an increasingly important point – what happens if the universal provider of public services – your local council – runs out of money?

Now the question has become live again with news that at least five of the UK’s largest council’s have said that emergency spending controls would probably need to be implemented.

Covid-19 has exacerbated the situation greatly

The government granted local companies holidays for both business rates and council tax as well as issuing emergency payments to families whose income has disappeared during lockdown.
All of these have impacted negatively on local council’s balances while the costs of adults care and providing PPE for carers has also increased significantly.
Additionally, many council’s that rely on tourism for income and collect dividends from airports or hotels they own or have a stake in and parking fees from visitors will have seen them disappear overnight too.

Somerset isn’t at this point yet but along with Norfolk and Lancashire, they have been identified as being under significant financial distress.

Last year Northamptonshire County Council became the first local authority in the UK in nearly two decades to issue a section 114 notice which signals that finances are so precarious that it would be unlikely to balance incomings and outgoings and thus be unable to set a legal budget for the following financial year. It would effectively be insolvent.

The council ended up selling its headquarters for £60m and received special government dispensation to use the funds to continue to pay for day-to-day services. They also received permission to raise council tax by 5% (2% over the government’s national limit) to generate over £5m in additional funds.

Northamptonshire is not alone in facing potentially catastrophic financial consequences. Surrey County Council has a reported deficit of £100m and Redbridge Council reported as being £200m in debt.

Local authority insolvency is still a rare occurrence in most countries but is not totally unknown. One of the most famous examples in recent times is in the United States with Detroit filing for bankruptcy in 2013.

New year, new council

Although Councils cannot technically go bankrupt they are required by law to produce balanced budgets.

If they can’t find a way to finance their expenditure then a section 114 order is issued which bans all new expenditure with the exception of safeguarding vulnerable people and statutory services.

Once the order is issued then the council has a 21-day breathing space period where all current services continue as normal but an alternative budget has to be produced during that time which must meet the criteria.

This can be achieved by considering other measures including selling council assets, mass redundancies or renegotiating contracts and reductions in services, although most councils have more than a thousand statutory functions to fulfill leaving little leeway for additional cuts to non-essential services.

If the council still cannot put forward a balanced budget then external auditors are appointed who work on producing a viable budget. They’ll most likely be working with central government at this point to see if any temporary additional support could be forthcoming.

Cutting comments

The Institute for Fiscal Studies issued a report recently that found that between 2009/10 and 2017/2018 spending on local services by councils had reduced by 21%.

David Phillips, Associate Director at the IFS said: “Current plans for councils to rely on council tax and business rates for the vast bulk of their funding don’t look compatible with our expectations of what councils should provide.

He called for a national debate on how much citizens would be willing to pay for services: “Without it, we will default to a situation where the services councils can provide are gradually eroded without an explicit decision being taken.”

He referenced the current national 3% cap on annual council tax rises saying that adult social care would take up 60% of local tax revenues within 15 years, up from 38% at the moment.

Cllr Richard Watts, leader of Islington Council and chair of the Local Government Association’s resources board says that councils in England will face an overall funding gap of £8bn by 2025.

He said: “As the IFS report highlights, pressure continues to grow in children’s services, adult social care, and efforts to tackle homelessness. This is leaving increasingly less money for councils to fund other vital services, such as the maintenance of parks, certain bus services, cultural activities and council tax support for those in financial difficulty to try and plug growing funding gaps.”

Agile solutions

The future for Northamptonshire council is expected to be settled by the government shortly. Following an inspectors report, it was recommended that the county council be dissolved and replaced with two new unitary councils which, if approved by the Secretary of State, will come into existence on 1 April 2020. Additionally eight of Northamptonshire’s borough council’s will be subsumed by the new authorities that will provide services currently provided by them and the county council.

Regular businesses in financial distress don’t have the luxury of statutory protection or a government that could bail them out but what they do have various options available to them.

These vary depending on their situation but the sooner they contact us, generally, the more leeway they have to pursue different solutions to their financial issues.

We offer an initial consultation for any business which may be in financial difficulty to discuss what they can do and the best part is our counsel is free!