County Councils in Crisis: Three More Named As Showing Signs Of Distress

21st March 2018 / United Kingdom

By Gareth Davies and Media Partner – The Bureau of Investigative Journalism: Somerset, Norfolk and Lancashire county councils are showing similar signs of financial stress as crisis-hit Northamptonshire, research by The Bureau of Investigative Journalism has found.

These findings come as the National Audit Office (NAO) reveals that one in ten local authorities could run out of reserves within the next three years. In response, Meg Hillier, MP for Hackney South & Shoreditch and chair of the Public Accounts Committee, said many councils were relying on “rainy day funds” to pay for vital services.

While the NAO report does not identify individual councils, the Bureau found Somerset, Norfolk and Lancashire, which provide services to 2.6 million people, are exhibiting some of the warning signs that concerned auditors at Northamptonshire in the years leading up to its financial collapse in February. The Bureau previously reported that Surrey has even greater financial issues, thus identifying a total of four county councils showing crisis signs so far.

Rob Whiteman, chief executive of The Chartered Institute of Public Finance and Accountancy, said: “Through my own conversations with chief financial officers, I have heard a number of warnings that councils may soon face untenable budget positions.”

He added: “The warning signs have been plain to see for a number of years.”

The Bureau identified these county councils after applying stress tests – based on concerns auditors raised at Northamptonshire – to all English councils responsible for social care.

One of the key tests is a sharp fall in “rainy day funds” – the usable reserves that can be used to balance the council’s books. The Bureau also found that 22 councils had reduced these reserves by more than 50% in the last five years.

The county councils named by the Bureau

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Somerset’s usable reserves fell by 60% in five years. Like the other councils in our list revealed today, Somerset shows multiple indicators of financial worry. The authority also spent more than it budgeted for on children’s and adult social services in each of the last three financial years. Its overall budget this year is projected to be £7.7m in the red, including a £14.6m overspend on children’s services – the biggest such deficit in the country.

The council’s latest cost-cutting measures include closing two-thirds of the county’s children’s centres. “These are very challenging financial times for all local authorities,” a council spokesperson said.

Norfolk’s usable reserves halved during the same period and analysis of financial records published by the government show the authority spent more than it budgeted for in each of the last three financial years, and it is set to do so again this year. It is also slashing funding for children’s centres. The authority denied it had a history of overspending, adding that its budget strategy was “robust and prudent”.

Lancashire overspent on children’s and adult social services in each of the last three financial years. Furthermore, its effective funding gap – the difference between the money it expects to receive and what it needs – is £97m in the coming financial year, the equivalent of 11.9% of its current budget.

The council has approved the use of usable reserves to help it break even this coming year and plans to use further reserves in 2019/20, leaving it with just £5.9m to put towards its estimated £118.5m black hole in 2020/21.

Angie Ridgwell, Lancashire’s chief executive, said there “may be” sufficient reserves to support the budget gaps over the next two years but, “further savings will need to be made and fully implemented by 2020/21, at the latest, to deliver a sustainable position going forward”.

Last month we revealed Surrey to be the county council showing the most worrying signs of financial stress, following Northamptonshire. The council has to bridge a £105m budget gap over the next year, the equivalent of 12.8% of its current budget. Its usable reserves have halved in the last five years and the council is projecting an overspend of £11m this financial year.

Northamptonshire’s usable reserves fell dramatically, in part to manage significant departmental overspends. In February 2018 the council banned almost all expenditure after failing to balance its books.

While none of the councils featured in The Bureau’s research are at imminent risk of doing the same, Simon Edwards, director of the representative body, the County Councils Network, believes they and others could do so in the future, unless urgent help is given.

Edwards told The Bureau: “The government may want to dismiss Northamptonshire as unique but, as The Bureau’s work is showing, the pressures on much of local government are intolerable. This has to be a wake up call.”

Under pressure – county councils

While all councils have had their funding cut since 2010, counties have been hit particularly hard.

Their core government grant will fall faster than other types of councils and they also receive less money for key services such as adult social care. As a result, they have become more reliant on using reserves to balance their books.

Between 2013 and 2018 the total reserves of county councils fell by 31.9%, twice as much as any other type of council.

Edwards said: “A lot of counties are in trouble.

“Counties face a toxic cocktail of rising demand, which has not been taken into account in the funding formula, and some of the sharpest reductions in funding despite already being the lowest funded authorities.

“We have to hope [Northamptonshire] has been a wakeup call for everyone, or local government will only be able to provide the barest of bones and you can forget anything else.”

In January a report published by East Sussex County Council warned that, unless there were new resources from the government, the authority would be left with just a “minimum service offer” by 2021/22, and that it would no longer be able to fund early intervention or prevention services in adult or children’s social care.

County councils: the hardest hit

On average, counties receive £249 per head for key services; inner London authorities receive £550
Core government funding received by counties will decrease by 93% by 2020, faster than other types of councils (such as district or metropolitan)
The average county council tax bill is more than £1,600, compared to £1,141 in inner London
Counties receive £2,048 less per school pupil compared to inner London authorities

Source: County Councils Network

The wider problem

Counties are not the only type of council feeling the pinch. The Bureau found that 22 councils (of the 150 responsible for social care) had a 50% drop in their usable reserves in the past five years.

A National Audit Office (NAO) report from this week found an increase in the number of councils making unplanned use of reserves – suggesting they have struggled to implement savings or manage costs.

It said falling reserve levels can make councils financially vulnerable because it means issues such as unexpected costs or failing to meet savings targets “have a greater impact on their financial position”.

However, even planned use of this money “may indicate cases where authorities have failed to identify resources to meet known pressures when setting their budgets and instead have to rely on reserves”, the report said.

The NAO report said that while the precise cause of Northamptonshire’s problems were not yet clear, “it exhibits a range of characteristics that are becoming increasingly common across single-tier and county councils”.

Those characteristics include overspending on social care and using reserves to balance the books, it added.

In response to the NAO report, a spokesperson from the Ministry of Housing, Communities and Local Government (MHCLG) said:

“Last month, Parliament approved a funding settlement which strikes a balance between relieving growing pressure on local government and ensuring hard-pressed taxpayers do not face excessive bills. As part of this, we delivered a real terms increase in resources over the next 2 years, more freedom and fairness, and greater certainty to plan and secure value for money.”

The MHCLG is currently holding a consultation on the issue that ends Monday 8 March.

Andrew Gwynne, Labour’s shadow secretary for Communities and Local Government, MP for Denton and Reddish, said the Bureau’s research “suggests that unless we see urgent action from the government, more councils may follow Northamptonshire and will be at risk of bankruptcy”.

He added: “Not long ago, the government was attacking councils for ‘pleading poverty’ and urging them to spend their reserves – and the mess at Northamptonshire bears testament to how much of a mistake this was.”

How we crunched our numbers across England

The Bureau created a robust method of identifying local authorities in financial stress by analysing council financial records and comparing them to crisis-hit Northamptonshire.

When the government announced in January it was sending an inspector into Northamptonshire, it cited three reports as justification: an external audit 2015/16 accounts, a similar report into the 2016/17 accounts and a review by The Local Government Association.

The two auditors reports highlighted the following issues: the reliance on reserves to balance the budget, regular departmental overspends, potential for cuts not to be delivered, the low level of the council’s unallocated reserves and when usable reserves were smaller than the cuts proposed.

The Bureau went over Northamptonshire’s financial reports from the time, recorded the figures relevant to these factors and calculated thresholds that could be compared to other councils. We also added another factor – the 2017/18 projected final budget position – so the ‘formula’ contained the council’s current financial position.

After analysing historical data, draft budgets and financial monitoring reports, we identified Surrey, Somerset, Norfolk and Lancashire as the counties that exhibited the most of the following ‘symptoms’:

Fall in usable reserves between the 2013/14 and the 2017/18 budget of more than 50%
Overspends (either overall outturn, children’s services or adults services) in each of the last three years (14/15, 15/16 and 16/17)
Low level of unallocated reserves (below 3%)
Cuts planned for 2018/19 that exceed usable reserve levels
Predicted overspend in 2017/18

We looked at three types of reserves held by local authorities. Councils hold two types of ‘usable’ reserves that can be used to balance the budget: unallocated reserves that help protect budgets against financial uncertainty and earmarked reserves, which are held for a specific purpose or project. They also have ring-fenced reserves, such as the schools reserve, but these were not included in The Bureau’s research because they cannot be used to balance the council’s books.

The view from the councils

Lancashire

Angie Ridgwell, Chief Executive & Director of Resources (Interim) of Lancashire County Council, said: “The County Council’s revenue budget has been supported in recent years by the reserves that have been available to the County Council and their value has therefore reduced. The value of the Council’s uncommitted transitional reserve is forecast to be £130m (including the 2017/18 forecast underspend). Current forecasts indicate that there may be sufficient funds within the transitional reserve to support the identified budget gap in 2018/19 and 2019/20. However, further savings will need to be made and fully implemented by 2020/21, at the latest, to deliver a sustainable financial position going forward.”

Somerset

A spokesperson for Somerset County Council said: “The figures quoted overstate the position and don’t take account…[of] our considerable contingency funds or the plans we have in place make savings.

“These are very challenging financial times for all local authorities and the Government has to look at the fundamental issues that lie behind this. It’s fairer funding review has to help councils like ours meet the needs of vulnerable residents and a sustainable, nationwide approach to the funding of social care must be a top policy priority.

“Protecting vulnerable children is an absolute priority and our spending on Children’s Service has been vindicated by a recent improved Ofsted rating.”

Norfolk

A Norfolk County Council spokesman criticised what it called “scaremongering” from the Bureau, saying that it recently “set a balanced budget for 2018-19”. It added that it was making savings, along with investing in key services and that the “2018-19 Budget also sets out a lower reliance on the use of reserves compared to previous years”.

A spokesperson continued: “While all local authorities, and particularly those with social care responsibilities, are facing sustained and substantial funding pressures, our finance lead, Councillor Alison Thomas, has stated publicly that we do not face the same situation as Northamptonshire, as we have a robust and prudent strategy, with plans to transform services, cut costs, raise income and set aside additional 2018-19 funding in reserves.” The council questioned the Bureau’s methodology (shown in the box above) and our analysis of reserves. It added: “Nevertheless, it is essential that the Government urgently addresses local authority funding issues as part of the Fair Funding Review to ensure that the vital local services delivered by councils are put on to a secure footing to enable them to be delivered on a sustainable ongoing basis.”