Agenda item

A joint report of the Director of Legal and Governance Services and Director of Finance was presented to outline the lessons learnt following the issue of a Section 114 Notice at Croydon London Borough Council.

The report and planned actions were intended to provide the Corporate Affairs and Audit Committee with sufficient information to ensure it was able to keep the Council’s arrangements for Corporate Governance under review, in line with the Committee’s terms of reference.

In October 2020 Croydon London Borough Council’s (CLBC) 151 officer issued a Section 114 Notice, meaning that in their opinion they were required to trigger section 114 of the Local Government Finance Act 1988 that stated: ‘the expenditure of the authority incurred (including expenditure it proposes to incur) in a financial year was likely to exceed the resources (including sums borrowed) available to it to meet that expenditure.’  The report outlined the key findings from CLBC’s auditors on the causes of that notice having to be issued.

On 23 October 2020, CLBC’s external auditor, Grant Thornton, issued a public interest report.  The Council had experienced deteriorating financial resilience for a number of years with spending pressures within both Children’s and Adult Social Care and low levels of reserves which created a significant financial challenge in 2020/21. The size of the financial gap in 2020/21 increased due to the additional financial pressures as a result of the Covid-19 pandemic.

The Public interest report outlined the key factors including:

• Significant investment over the last three years in housing and commercial property (£545m of which £200m was loaned to its housing development arm for which no dividend had been returned).

• Investments in a hotel and retail park both of which failed and were criticised for ‘not being grounded in sufficient understanding of the retail and leisure market’.

• A flawed strategy of attempting to invest its way out of financial challenges rather than controlling internal costs in children’s and adult social care which had significant overspends.

• Incorrect treatment of overspends as ‘one off’ corporate adjustments.

• Failure to report a significant identified budget gap to full Council by either scrutiny or CLBC’s Cabinet.

The Director of Finance outlined the position in Middlesbrough with regard to the key factors highlighted as follows:

• CLBC’s net budget was almost three times that of Middlesbrough Council’s with similar ranges of functions. If the equivalent borrowing figures were translated to Middlesbrough Council, there would have been borrowing of circa £182m in housing and commercial property, of which £67m would have been loaned for housing development over the last three years. In comparison, Middlesbrough Council has invested in £52m and loaned £7m for these type of investments to date.  Any application for borrowing to invest on a commercial basis must be accompanied by confirmation from the Section 151 officer that there is no intention to buy investment assets primarily for yield at any point in the next three years.  Any business case for investment in these type of projects has an extensive due diligence exercise undertaken by senior officers in both Finance and Regeneration, with input from specialist experts where required.

            Approval to proceed could only be given by the S151 Officer, in      consultation with the Executive Member for Finance and Governance, on a        case-by-case basis.

• Middlesbrough Council investments had always been based on regeneration of the town rather than the need to achieve a significant return in order to achieve a balanced budget. The Council took the prudent step of not assuming a profit will be achieved for the purpose of setting the budget to ensure that funding for services was protected, sustainable and realistic.

• Middlesbrough Council had never reported overspends as one off corporate adjustments.

• Budget monitoring was reported to Executive and Overview and Scrutiny Board on a quarterly basis. Middlesbrough Council also had year on year evidence of escalating potential future year funding gaps to Council for consideration to be addressed within the budget setting process, to ensure full Council were engaged and owned the decisions.

The Director of Finance gave a detailed explanation of the specific recommendations of Grant Thornton’s Public Interest Report and provided an assessment of their applicability to Middlesbrough Council, which was also included the submitted report.

In relation to the scrutiny process within the Council, the Director commented that the approach at Middlesbrough was to be as transparent as possible on the budget and on finance issues. 

Several Members commented that the financial information provided was clear and comprehensive.  The Chair suggested that any future financial training should be provided for all Members, not solely the Corporate Affairs and Audit Committee Members.

Responding to a question, the Director explained that with regard to the purchase of the Captain Cook Shopping Centre, the conservative assumption in the budget was that there would be sufficient income to cover the cost of borrowing.  In the short term, any surplus would go into a specific reserve fund.  Once the Future High Street funds had been deployed and the medium term position was that there was a surplus, a decision would be made whether to budget for that or re-invest in another project.

AGREED that the report and the planned actions to ensure lessons were learnt from events at Croydon London Borough Council (LCBC) were noted, and the following planned actions were endorsed:

• to further strengthen visibility it was proposed that the reserves risk assessment was shared with scrutiny during the budget setting process going forward.
• investment plans were reviewed to ensure the impact of Covid-19 was taken into consideration.
• the training programme for Corporate Affairs and Audit Committee would be expanded to include Treasury Management.