Richard Harbord: Delayed “capital determinations” make section 25 opinions a new crunch point

The severe pressure on local government budgets now means section 151 officers confront a tricky call on  whether they can make a judgement on the robustness of estimates and the adequacy of reserves.

There surely can never have been a more challenging and stressful time to be a section 151 officer in a local authority. Nothing is exactly as it seems. Years of austerity mean that the room for manoeuvre in budgets is small. Add to that the unusual circumstances of what looks as if it will be the whole of the 2020-21 financial year, and the fact that the government has only been able to provide a one-year settlement, and longer term financial planning is nigh impossible.

But as budgets are strained to breaking point, a new issue is beginning to emerge. How will section 151 officers confront signing off on section 25 opinions

Section 114s

For the last few months the concentration on local government has been the possibility, or probability, of section 114 notices. We have also seen the Public Interest Report for Croydon and noted the various difficulties highlighted there.

One much talked about solution has been capital determinations—seeking permission to capitalise revenue expenditure. I am told that there have been a great many applications for these determinations to MHCLG, and you would expect that when you consider authorities were told to inform central government if they were considering a section 114 notice.
I understand though that because of the volume of these requests they are taking considerable time to be resolved and for section 151 officers the time is running out.

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Section 25

The next problem will be the opinion required to be given by section 151 officers under section 25 of the Local Government Act. The opinion is in two parts. The Act says that these are the robustness of the estimates made for the purposes of the budget calculation and, secondly, the adequacy of the proposed financial reserves.

There are a number of problems to be faced in writing the section 25 opinion this year (I note that in recent years these opinions have gone from being fairly brief paragraphs to statements of one or two pages carefully rehearsing the difficulties in giving such an opinion).

If an authority has been approaching section 114 territory, and has applied for a capital determination, then the opinion can be given on that basis. But there is a concern about delays in agreeing capital determinations. If the determination is not received then clearly the section 25 opinion cannot be satisfactorily made.

Definitions

There remains other complications, among them the fact that terms like “balanced budget” and “reasonable level of reserves” are not properly defined and have not been tested in the courts.

Existing examples in legislation are not terribly helpful. A budget is unbalanced when budget overspends mean reserves fall to an unacceptable level and where an authority shows the characteristics of an insolvent organisation, such as inability to pay creditors.

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The Local Government Finance Act 1992 stipulates that there must be a balanced budget. The most difficult part of the balanced budget provision is the section 151 officer being certain that any savings used in reaching gross expenditure are robust, achievable and achievable in the necessary timescales.

At times such as these where it is necessary to make savings there is an understandable desire to be optimistic about the achievement of savings and unless the savings plans are robust there is a question over whether it can be a balanced budget.

The adequacy of reserves has been argued about for as many years as I can remember. At one time it was defined by the Audit Commission as 15% of net revenue expenditure though, with great argument, 10% could be adequate in certain circumstances.

At the heart of all this is simply the failure of the quantum. Fair Funding has now been postponed for another year and the demand led statutory services of adult and children’s care is a problem now far worse than ever contemplated. The current pandemic has increased demand in these areas and it was inadequately financed to start with.

Richard Harbord is former chief executive at Boston Borough Council.