COVID tips Croydon Council over the edge into bankruptcy

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.

This article was originally published on the ICAEW website.

ICAEW chart of the week: Local government in England

9 October 2020: The complex structure of regional and local authorities in England is just begging for reform, but will the rumoured plan to abolish county and district councils fix it for good?

Chart with three rings: regional tier, county or unitary tier and then district council tier, showing lots and lots of councils in England.

Local government in England, as illustrated by the #icaewchartoftheweek, is pretty complex with eight different types of regional or principal authority and a patchwork quilt of different tiers of government across the country.

This complex system comprises areas without a regional tier of government involving unitary authorities or county & district councils, and those with combined authorities atop unitary authorities or metropolitan boroughs (and one county and its districts) and the Greater London Authority atop 32 London boroughs and the City of London. (This excludes the 9,000 or so town, village and other forms of parish councils in England, mostly outside the major urban areas).

This complexity makes it very difficult for the Government to interact with local authorities in the absence of a consistent model of local government or a country-wide regional tier of government to act as intermediary. This contrasts (for example) with the federal system in Germany, where Chancellor Angela Merkel regularly speaks to the leaders of the 16 German states, who in turn deal with the local authorities in their areas. Similarly (although not formally federal), France has 13 mainland and 5 overseas regional administrations that President Emmanuel Macron and Prime Minister Jean Castex can talk to and who will deal with their constituent provinces.

The UK Government can and does communicate with London Mayor Sadiq Khan, Greater Manchester Mayor Andy Burnham, West Midlands Mayor Andy Street, West Yorkshire Chair Susan Hinchcliffe, Liverpool City Region Mayor Steve Rotherham, Sheffield City Region Mayor Dan Jarvis, North East Chair Iain Malcolm, West of England Mayor Tim Bowles, Cambridgeshire & Peterborough Mayor James Palmer, North of Tyne Mayor Jamie Driscoll and Tees Valley Mayor Ben Houchen, each of whom can represent their constituent local authorities. But, they only represent 44% of the English population, with a further 24 county council leaders and 46 unitary authority leaders to speak to cover the remaining 56%. That is a pretty big Zoom call, assuming borough and unitary leaders within the regional authority areas don’t also insist on joining in.

The delayed announcement of a plan to abolish the 25 county and 188 district councils and replace them with between 25 and 40 new unitary authorities (perhaps with some mergers with existing unitary authorities) will go some way to rationalising the existing system by going to a single tier of principal local authorities. This would bring local public services together under one roof and save money, albeit there are some concerns about whether some of the new authorities would be too remote from the local citizenry.

However, this is still likely to leave English local government reform unfinished with over half the country without a regional tier of government. Will the Government want to continue with its existing organic approach of combined authority formation or go for a more comprehensive programme to establish regional authorities across the whole country, similar to the French reforms of the 1980s?

This chart was originally published by ICAEW.