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Birmingham used reserves to 'mask' £75m annual deficit

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Reliance on reserves has “masked” the fact Birmingham City Council has been running at an annual deficit of £75m, according to auditors.

Grant Thornton said it was planning to issue a qualified ‘adverse’ value for money conclusion of Birmingham’s accounts for 2017-18 having identified “weaknesses” which meant the auditors were “unable to satisfy ourselves that the council has proper arrangements to secure [value for money].”

The report, which went before the city’s audit committee on 30 July, said: “It is of concern that the council has applied £116.9m of reserves in 2016-17 and 2017-18 to deliver a cumulative deficit of £35m. The use of reserves has therefore masked the council’s true position.

“If the council had not applied any reserves over the last two years, it would have had to deliver £150m more in aggregate savings to achieve balance. It has effectively been running an annual deficit of £75m.”

Grant Thornton said delivering savings had “proved an enduring problem” for the council and warned that 2018-19, in which Birmingham plans to make £52.9m savings after applying £30.5m reserves, “and beyond looks extremely challenging”.

The report said: “The need to re-establish a track-record of savings delivery is important, not least as the cumulative savings requirement over the next few years is very demanding, rising from £88m by 2019-20 to £108m by 2020-21 and £117m by 2021-22.

“In the last two years savings delivery on that scale has proved unachievable. But without delivery of these ambitious savings plans, reserves will rapidly erode, which would leave the council with insufficient financial resources to call upon, in the event of any budget contingencies arising.”

Grant Thornton said it had “now concluded that little progress has been made” by the council in acting on recommendations made by auditors in 2016-17.

However, the auditor noted that a new management team led by new chief executive Dawn Baxendale, along with a newly elected political administration, was starting to develop “more robust” financial plans which are less reliant on reserves.

Birmingham had £170.4m in unearmarked reserves, the 2017-18 statement of accounts showed.

Grant Thornton raised concerns about a lack of transparency, especially in the way reserves are applied and “not reporting governance failures effectively”. It also said “governance arrangements have not been adequate to enable” the council to adequately monitor its subsidiary companies.

While Grant Thornton’s value for money assessment did not include Birmingham’s delivery of the Commonwealth Games, the auditor said “we do recognise that a significant level of funding has not yet been received by the council and there is a risk that hosting the games will impact upon the council’s future financial sustainability if it is not adequately managed.”

Birmingham leader Ian Ward (Lab) said: “We always knew that this would be a challenging year financially. The early revenue monitoring reports bear this out. However, I have made clear that directorates must deliver their services within budget. The council must take the decisions necessary to live within its budget and not rely on reserves to do this.

“Birmingham is not alone is the financial pressures it faces, this is a local government wide issue that needs to be addressed.”

He said the government “cannot continue to watch” as children’s and adults services, across all councils generally, are “struggling to cope with pressures due to severe reductions in funding.”

This story was updated at 14.50 on 8 August to include Birmingham City Council leader Ian Ward’s comments.

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