Richard Harbord: Concern grows over local authority bankruptcy

Richard Harbord is chief executive of Boston Borough Council

Life has been very difficult for local authorities over the last five years but the latest pronouncements indicate that it is not likely to be any better over the next five. The forecasts show that we are likely to have to find at least the same amount in savings as has already be made. There is a big question about the sustainability of some authorities. The Local Government Association has worried about this for some time and things have not improved.

The signs of difficulties are all around us. The problem of demography and caring for an increasingly elderly population are well known, as are the increasing costs of pensions. Then there is the additional announcements from all parties about more finance to be put toward the National Health Service, the difficulties about making further savings in defence and the commitment to international development all mean that the bulk of the savings have to come from local authorities.

The problem is as well that we have been far to good at meeting targets set without apparent difficulty that central government has come to believe we can continue to do the same.

Once upon a time an authority in difficulty would be quite apparent to the Audit Commission. The Comprehensive Performance Assessment and its financial component would have flagged up an authority with possible future difficulties and the Department of Communities and Local Government would have the option of intervention if improvement was not achieved.

The whole system has changed since then and it is quite possible that difficulties could come almost without warning.

More than one authority in the Province of Ottawa went effectively bankrupt when very large businesses were successful in their appeals against the equivalent of business rates. This left the authorities with the burden of sudden refunds of several millions pounds. That is one of the difficulties we face currently. Even with the co-operation of the Valuation Office Agency the quality of information about the likely outcome of business rate appeals is clearly not good. Indeed, the outcome of appeals cannot be known with reliability and the need to backdate these to the appeal date leaves authorities exposed to considerable uncertainty.

The built-in risk with the new financing regime is that medium-term forecasts on which a balanced budget is made will need downward revision at anytime.

Obviously, the revisions possibly necessary would be caught by the normal system and statutory framework. That is to say the Section 151 and Monitoring Officer and Head of Paid Service would need to do a Section 114 report to council and they would need to agree revisions to bring it all back in balance.

Taking an extreme view, what would happen if the gap could not be covered? At a recent conference there was a general view that by 2020 local authorities would only be providing statutory services. This then increases the possibility of some sort of challengeable default.

There is nothing to go on at all about how a default might be managed. There is little history that could help for the future. In my time (extending back to Victorian England) there has not been a reported default on loan repayments.

I recall one incident in which several local authorities had money in a bank that went down, including one with £23m invested which meant just about all its cash reserves. Central government agreed to help council tax payers, spreading the pain over a number of years with supportive loans. But the interest rate saga I led for the authorities saw the Treasury make clear to us that central government was not the lender of last resort and would not help others in difficulty. In the end most of the authorities came out of the episode without too much financial loss, just stress and trauma.

Lets hope the worry about bankruptcy is just theoretical and will not come about, but there is a distinct change of attitude and generally a heightened concern. I may return to this theme in my next article.

Photo (cropped): “cruel irony” by Robert Couse-Baker is licensed under CC BY 2.0