13 June 2023

Preventing future Section 114 notices

Preventing future Section 114 notices image
Image: bleakstar / Shutterstock.com.

The fraught state of Woking Borough Council’s financial position has now been made public. The chain of events started last week with the ministerial statement that included details on the size of the debt owed by the council. This was swiftly followed by the appointment of commissioners who will oversee the financial administration of the authority. The next inevitable step on Woking’s journey of financial misery was the issuance of a section 114 notice. It was never really a case of if this would happen, but when.

The council’s section 114 notice states: ‘The core funding of the council in financial year 2023/24 – comprising council tax, business rates and government grants is just £16m. The size of the debt portfolio acquired by the council (£1.8bn) is out of step with the funding.’

In very simple terms, the section 114 notice (named after its place in the Local Government Finance Act 1988) lets the world know officially that Woking is no longer in a financially sustainable position. It cannot afford to service the significant debt that it owes and the businesses that had been created to generate financial security have in effect done the complete opposite. Not only had the investments failed to deliver the expected returns, but Woking was borrowing money from PWLB (Public Works Loan Board) to support them.

The report from the CFO clearly identified how the councils’ investment strategy had resulted in unaffordable borrowing, inadequate repayment plans and high value irrecoverable loans. Adding further detail from an in depth financial review the report gave more information around these issues citing a weak understanding of accounting guidance, poor financial controls and insufficient capabilities to manage complex arrangements as contributing factors.

The eye-watering scale of the problem was something that resulted in a tweet from Robert Peston, ITV‘s political editor, who highlighted that Government funding for local authorities has been subject to significant cuts. Perhaps this is a good place to start to understand how Woking’s journey began.

In 2010 Eric Pickles allowed the Treasury to cut local authorities’ budgets which resulted in huge reductions in funding. Councils responded by looking at how they could manage this funding gap, and so began the sector’s problems. Some local authorities seemingly forgot their primary purpose along with the principles of the Prudential Code in favour of a search for money-generating schemes. While regeneration is key purpose for local authorities, property development is not.

Let’s not make excuses. The funding crisis has been acute for all of the sector, and while some have done well and coped through good decision making, effective leadership and strong financial management, others like Woking have experienced difficulty. Perhaps it was inevitable that with funding cuts of over 50% not all authorities have the capabilities, skills and capacity to survive.

The skills needed by local government leaders must match the challenges and expectations of the public. This is not just the skills and professional capabilities of the officers but also includes the skills of elected members to offer challenges and understand risk. As CIPFA points out in the Lessons Learned report on previous section 114 Notices:

‘If members are not informed enough to make decisions and challenge effectively, then they are more likely to take easy routes. They need to be engaged and financially literate to understand all aspects of the plans or issues that come before them. If there is no challenge, then they may not recognise how serious the situation is.’

Intelligent leadership and good governance are also important parts of the jigsaw if a local authority is to make effective decisions. This is not just academic intelligence. Emotional intelligence is also an essential skill for the whole of the leadership team. That includes being able to take advice that is difficult to listen to.

The Pickles’ legacy goes beyond the funding cuts. It was under his tenure that the Audit Commission was abolished. While it is impossible to speculate what might have happened with Woking had the commission not been scrapped, the commissioners will surely want a discussion on the role of audit, which will be highly topical given the current fragile state of the audit market and the challenges already being faced.

It is safe to say that we have not heard the end of the Woking story. As we have seen from previous commissioners’ work, unfortunately the figures tend to increase during the initial stage of investigation as more problems get unearthed.

As we move from discovery to recovery it is important the sector learns lessons using examples from the past to improve future delivery.

Joanne Pitt is Local Government Policy manager at CIPFA.

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