17 November 2020: Croydon Council has gone into section 114 ‘bankruptcy’ following years of overspending, losses on commercial investments and the effects of the coronavirus pandemic. What went wrong?
Croydon Council issued a section 114 notice on Wednesday 11 November 2020, the first local authority to do so since Northamptonshire County Council went bust in 2018.
The move by Lisa Taylor, Croydon’s finance director and section 151 officer, followed pre-pandemic losses of £163m in 2019-20 and £221m in 2018-19 and the publication last month of a highly critical public interest report by external auditor Grant Thornton. A central government commissioned governance review is underway.
The public interest report was highly critical of how Croydon Council has run its finances over the last few years, with findings including the use of capital funding to cover operating losses, £545m borrowed over a three-year period – much of which was used to invest in commercial properties – and serious failings in governance in addressing the financial situation facing the council. Grant Thornton reported that General Fund and Earmarked General Fund reserves had reduced from £58.2m at 31 March 2016 to £16.6m at 31 March 2020, and conclude with the following statement:
“Had the Council implemented strong financial governance, responded promptly to our previous recommendations and built up reserves and addressed the overspends in children’s and adult social care, it would have been in a stronger position to withstand the financial pressures as a result of the COVID-19 pandemic. The Council needs to urgently address the underlying pressures on service spends and build a more resilient financial position whilst also addressing the long-term financial implications of the capital spending and financing strategy together with the oversight of the Council’s group companies.”
The section 114 notice places a stop on non-statutory expenditures, resulting in the potential closure of some local services, redundancies to save costs and increasingly strained calls to the Ministry for Housing, Communities & Local Government (MHCLG) asking for a bailout. It highlights a budget gap of at least £30m and additional risks of £37m or more.
Croydon is not alone in suffering from significant cuts in funding over the last decade and cost pressures in adult and child social care provision in particular. However, weak financial governance, a failure to address cost pressures, inadequate reserve levels and increased balance sheet risk from debt-financed commercial property investments have all made it more vulnerable to a crisis.
Although it is perhaps not surprising that Croydon has failed, given the issues highlighted by its external auditors, more section 114 notices are likely over the coming months as even well-run councils struggle to cover income shortfalls.
The government will also be concerned about the number of councils planning to cut local services and investment in their local economies over the next few years, just as it is hoping to rebuild the economy and deliver on its levelling up agenda.