Insolvent councils: what ‘must’ they do?

There is a world of difference between ‘must’ and ‘may’. For while the former is mandatory, the latter is permissive. This becomes highly relevant for local authorities if they run out of money. Birmingham City Council (Birmingham) recently declared itself to be in this predicament when on 5 September the council’s interim director of finance issued a report under section 114(3) of the Local Government Finance Act 1988.

This was because the authority’s incurred and prospective expenditure was likely to exceed available resources. The notice followed the council’s announcement in June that it had potential equal pay claim liabilities of some £650m to £760m, with ongoing monthly debt accruing at £5m to £14m. Consequently, while the council had to fund the equal pay liabilities, it lacked the resources to do so. The section 114(3) notice therefore required cessation of all non-essential expenditure and immediate reduction of the council’s operational and service delivery costs.

There is therefore now a particular focus on the difference between mandatory and discretionary expenditure. For while the former must proceed, the latter must cease. Since many authorities are currently struggling to make ends meet, this process is likely to be of wider interest.

When looking at particular statutes, the difference between powers and duties should usually be readily apparent. For while a power authorises the proposed action, a duty mandates it. As Lord Nicholls said in R (G) v Barnet London Borough Council [2003] UKHL 57: ‘The financial resources of local authorities are finite... The ability of a local authority to decide how its limited resources are best spent in its area is displaced when the authority is discharging a statutory duty as distinct from exercising a power. A local authority is obliged to comply with a statutory duty regardless of whether, left to itself, it would prefer to spend its money on some other purpose.’

A discretionary or conditional power will use a formula such as ‘shall have the power’ (e.g. the incidental power in section 111 of the Local Government Act 1972) or use a formula such as ‘the authority may’. Mandatory provisions will use terms like ‘shall’, for example, in section 10(2) of the Acquisition of Land Act 1981: ‘The compulsory purchase order shall be in the prescribed form and shall describe by reference to a map the land to which it applies...’. However, when an authority must cease all non-essential spending, identifying all applicable statutory duties is much trickier. Local authority powers and duties have accumulated so luxuriantly over the years, like plants in a long-untended garden, that keeping them all readily to mind would be impossible. Back in 2011, central government consulted (among others) the former Association of Council Secretaries and Solicitors with a view to reviewing the local authority statutory duties. However, this must have ended up in the central government ‘too hard’ tray since I cannot recall any meaningful outcome.

So, faced with critical spending restrictions it is extremely challenging for senior local authority legal and other officers to identify the vast spectrum of statutory provisions involving real day-to-day spending decisions. And then to weed out discretionary spend from that mandated by law.

Some local authorities faced with this issue may tackle it by assembling a team of relevant chief officers and/or their deputies (including the monitoring officer and chief finance officer) to provide key advice and guidance to departments. But since local authorities as creatures of statute can do only those things which are expressly or impliedly authorised by statute, it should be possible for every manager involved in spending decisions (with advice as necessary) to identify the statutory authority allowing or requiring those decisions. And from there it should be readily determinable as to whether the enabling statute is empowering or mandating.

As for Birmingham’s situation, following levelling up secretary Michael Gove’s 19 September statement to parliament that he was minded to make statutory directions enabling the five-year appointment of commissioners at Birmingham to tackle its serious financial and governance problems, this was confirmed on 5 October. The commissioners, to be led by Max Caller CBE, an experienced local government professional and commissioner (along with new political advisers), will have powers concerning governance, finance and recruitment, and will also bring expertise in local government improvement, finance, HR, equal pay, housing, ICT and commercial projects. The government indicated that a local inquiry will be launched in due course (among other things) to examine fundamental questions as to how the issues facing Birmingham developed.

But how do local authorities avoid getting into a financial pickle in the first place? Caller, speaking in September to Adam Carey of Local Government Lawyer, indicated that well-functioning authorities have good reporting mechanisms, scrutiny and an environment where staff are ‘not afraid to say the emperor has no clothes’. Things go wrong when there is poor reporting and lack of communication between officers and members. Caller highlighted the essential role of statutory officers (monitoring officer, chief finance officer and head of paid service) to ‘save members from themselves’.

For if something the leadership want to do is unlawful or unaffordable, statutory officers must be able to say so very clearly. However, whether elected members heed such advice is another question entirely. But, at least at officer level, it is generally desirable for the corporate management team to include the monitoring officer. Unfortunately though, for authorities faced with financial strictures, as with lobster pots, it is always a lot easier to swim in than to swim out.

Nicholas Dobson writes on local government, public law and governance