I will start this piece with a note that issuing a Section 114 is not the same as bankruptcy. Further to that, the framework of issuing a Section 114 actually is a credit positive for the sector. Let me explain; a section 114 notice is part of the Local Government Finance Act 1988 which dictates the chief finance officer makes the report if it appears to them that the expenditure of the authority incurred in a financial year is likely to exceed resources available to meet expenditure. This results in the suspension of spending for such time that the Council does not have a balanced budget.
Strictly speaking, a section 114 suggests an authority is on a path to bankruptcy and this is a rather abrupt remedy to the situation. That being said, issuing a section 114 is headline grabbing and continues to be so.
Section 114 issuance thus far have been for a number of reasons, which can be grouped into five broad categories (so far). The first, and most obvious, is mismanagement. In some cases, local authorities have gone too far, outside of scope and beyond what the Council can reasonably afford. This can be remedied by a section 114 to bring spending back in line with the Council’s affordability.
The second is macroeconomic factors, a significant shock to the system like Brexit and the Pandemic, or local authority funding from central government. Central government funding has declined over the past decade constraining local authorities’ ability to fund itself. From the pandemic, many local authorities were left with significant investment balances throughout the pandemic, postponing the need to borrow and now they have repaid these buffer balances, it now happens to be significantly more expensive to borrow.
Thirdly, local authority structures. It is clear that the funding requirements of various local authorities differ depending on the provision of services within each area. Unitary authorities are the prime victim here, due to the significant service provision all in one place. With the increase trend of reorganisation into unitary authorities, this is something to be aware of.
Fourth, a technical section 114 notice, like that of Nottingham. This came under section 114(2), from a misallocation of accounts. Whilst not ideal, this section 114 was simple to understand how and why this happened, and the correction that was to occur.
Lastly are historical factors. This is where Birmingham City Council sits, and is arguably the best situation to be in. A one off, albeit significant, cost that does not suggest a persistent mismanagement of public resources, but rather a remedy to historic issues, that should certainly not persist in the future.
So, who will be next to go? There are numerous ways of looking at this situation, easy access to public data from DLUHC and the PWLB. The most debt burdened Councils is the starting point, but not necessarily the most revealing. A very large Council can justifiably have significant debt for a variety of reasons. Therefore, ratios such as debt-to-core-spending-power is the most helpful.
Arlingclose conducts regular analysis and monitoring of local authorities’ credit worthiness, identifying the current and potential issues these Councils face. This analysis can identify how and why issues have occurred, and in some cases how this can be rectified. For more information on how Arlingclose can assist Councils and other stakeholders, please contact treasury@arlingclose.com
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