When councils get into financial trouble

Spending other people’s money is very easy to do because it does not hurt. Until, of course, it does. For publicly funded authorities instituted to discharge local governmental functions are fuelled by the public’s money. That is cash from you, me, Uncle Tom Cobley and all. Local authority funding consists principally of council tax (enforced by civil and criminal sanctions), business rates (again compelled by criminal sanctions) and government grants (funded from central taxation with penalty enforcement).

If businesses are unable to please their customers, spend more than they can afford or have dysfunctional management, they risk takeover (with entire management blood transfusion) or going to the wall, with proprietors and investors potentially losing all money invested, and possibly their homes and other assets. However, failing or overspending local authorities can continue at public expense (albeit with some discomfort, as illustrated below). Also, from the consumer perspective, if someone does not like the services provided by a private business, they can simply stop using it. But local authority service users have no such option. These ‘customers’ must keep paying or face the consequences. The only resort is what can often be rather bureaucratic and delay-ridden complaints or ombudsman processes, with which many users do not bother since these are often regarded as being more trouble than they are worth.

However, that is not of course to say that many (if not most) local authorities are not conscientious, prudent and well-run with dedicated elected members served by skilled and experienced legal, finance and other officers. But, as recent reports indicate, things can sometimes go badly wrong.

For instance, two authorities have recently found themselves in the news for the wrong reasons. These are Thurrock Council in Essex (Thurrock) and Woking Borough Council in Surrey (Woking). In Thurrock’s case a Best Value Inspection Report (BVIR) submitted to the secretary of state on 19 May 2023 and published on 15 June highlighted a ‘pattern of failure… enabled by dereliction in political and managerial leadership, inadequate governance and serious weaknesses in internal control’. A ‘series of self-sustaining, systemic weaknesses’ enabling ‘repeated failure over many years’ led to ‘an in-year deficit of some £470m, and an estimated structural deficit in 2023/24 of £184m’.

In Woking’s case, on 25 May the Department for Levelling Up, Housing and Communities (DLUHC) made statutory directions (under section 15(5) and (6) of the Local Government Act 1999, following failure to comply with the best value duty). As the DLUHC indicated to Woking’s chief executive, the directions came in the light of ‘the exceptional level of financial and commercial risk to which your authority has exposed itself, as well as its approach to strategic financial decision making and debt management’ identified in the Governance, Financial and Commercial Review commissioned by the government in January 2023 and published on 25 May.

So what financial requirements govern local authorities? The General Duty of Best Value in section 3 of the 1999 act requires (among other bodies) an English local authority to ‘make arrangements to secure continuous improvement in the way in which its functions are exercised, having regard to a combination of economy, efficiency and effectiveness’. Section 151 of the Local Government Act 1972 requires every local authority to arrange for the proper administration of its financial affairs and secure that one of its officers has responsibility for the administration of those affairs. This is usually an authority’s chief finance officer ((CFO), the section 151 officer). Regulation 3 of the Accounts and Audit Regulations 2015 (SI 2015 No. 234) requires relevant authorities to ensure that they have a sound system of internal controls facilitating the effective exercise of functions and the achievement of aims and objectives, ensuring effective financial and operational management, and including effective risk management arrangements. Sections 114 and 114A of the Local Government Finance Act 1988 (concerning the functions of section 151 officers for authorities respectively without and with executive arrangements) require the section 151 officer to make a formal report to the authority or executive as applicable if it appears to the CFO (among other things) that the expenditure and proposed expenditure of the authority in a financial year is likely to exceed the resources available to it to meet that expenditure. And the audit regime in the Local Audit and Accountability Act 2014 (among other things) requires external auditors to be satisfied that ‘the authority has made proper arrangements for securing economy, efficiency and effectiveness in its use of resources’.

On 19 December 2022 Thurrock initiated the section 114 process, which imposed strict spending limits, given that the council will be unable to balance budgets for the financial years 2022/23 and 2023/24. On 7 June Woking’s Section 151 Office made a section 114 report ‘in response to the unprecedented financial challenges facing the authority’. On 20 June this was considered by the council, which agreed the actions needed to return Woking to a path of financial and operational sustainability.

So, while failing local authorities will not suffer the mortal fate of some unsuccessful private businesses, local authority financial and management failures are not consequence-free. For elected members financial failure is not a ‘good look’ at election time. For officers it can seriously affect professional reputation and (as with Croydon officers referred to the police for alleged misconduct in public office), it can also have graver implications. Local government lawyers will therefore wish to examine both the Thurrock and Woking reports carefully as a valuable management aid. For to adapt an old saying: ‘There but for the grace of God goes my authority.’

Nicholas Dobson writes on local government, public law and governance