An additional “half a dozen” councils are possibly only a year away from going ‘bust’ as they come under increasing financial stress while many more could subsequently follow, the chief executive of the Chartered Institute of Public Finance & Accountancy has warned.
Rob Whiteman told LGC a “large number of councils” could be in the same scenario as Northamptonshire CC in “two to three years” by burning through reserves.
Northamptonshire issued a section 114 notice on Friday – the first council to do so in almost two decades.
Mr Whiteman’s warning comes as new research, shared exclusively with LGC, shows the growing gulf in usable reserve levels between different types of council and the accelerating rate at which some councils are going through them. Counties had the overall lowest level of reserves, followed by metropolitan councils.
The analysis from Pixel Financial Management found a number of councils with “alarming” reductions in reserves since 2015. Of those, Medway Council and Somerset CC were judged by Pixel to most resemble Northamptonshire’s position with regards to the actual level of reserves as a percentage of net revenue expenditure and the changes to their usable reserves in the past two years. However, both insisted they are not about to issue a section 114 notice.
Finance experts say an authority will be under greater financial pressure where it has both relatively low, and rapidly falling, reserves levels.
The use of reserves during difficult periods should not be a concern though, said Mr Whiteman but he added councils need to be mindful of balancing the books in their medium-term financial plans.
Mr Whiteman, who was speaking to LGC separately from Pixel’s research, said: “What you see at the more alarming end of the spectrum is councils that have already used up their reserves and are not delivering savings to prevent the need in later years.”
He added: “There could be half a dozen councils in a similar position unless they deliver the savings that will stop them depleting their reserves further.”
Pixel consultant Dan Bates said “the level at which reserves are depleting across the sector suggests that more authorities might be closer to a section 114 declaration over the next three years”. He added: “Our research shows the level of reduction in reserves at some authorities is quite alarming and is due in no small part to increasing social care pressures.”
The research looked at the reserve balances from sets of accounts for all 152 top-tier authorities, including both general revenue reserves – which have very few spending restrictions attached – and capital reserves. While capital reserves are meant to be used for capital projects they have been increasingly used to pay for transformation projects. Housing and communities secretary Sajid Javid on Tuesday confirmed in the final finance settlement that he was “extending the capital receipts flexibility programme for a further three years”.
According to the research Northamptonshire drew down 55% of usable reserves over the past two years whereas Somerset and Medway’s decreased by 57% and 51% respectively.
Phil Watts, Medway’s chief finance officer, said: “Like many other local authorities, Medway Council’s reserves have not been maintained at historic levels due to reduced government funding over the years.
“The council will be presented with proposals for a balanced budget at its meeting on 22 February 2018 and I am confident that a section 114 notice will not be necessary in 2018-19 or the following year.”
A spokesman for Somerset told LGC the council’s financial resilience remained secure, as they sought to keep their general reserves at £20m.
They added: “Our general reserves, reserves which have not been earmarked for specific projects, have fallen by less than £1m and this is the measure of financial resilience. The figures relate to the financial year 2016-17 and we now have no overspends in adults and health.”
Wolverhampton City Council’s usable reserves have reduced by 30% since 2015 but the council said it has maintained a £10m balance in its general reserves budget.
A Local Government Association corporate peer review from the beginning of 2017 said Wolverhampton had made “major progress in achieving financial stability”, while a spokesman for the council said it “remained on course to balance its books” in the near future.
The last council to issue a section 114 notice covering its entire activities was Hackney LBC in 2000.