A section 114 notice is a clear sign that a local authority is under financial pressure. However, the existence and operation of the process itself highlights the resilience of the local government financial framework rather than its weakness.
A notice issued under section 114(3) of the Local Government Finance Act 1988 indicates that an authority expects its expenditure to exceed available resources within the financial year. Once issued, restrictions apply which limit most new spending commitments until the Chief Finance Officer’s report has been considered by Council. This mechanism effectively applies the brakes early, creating space for corrective action and, where necessary, central government intervention. In practice, this significantly reduces the risk of a deteriorating position being allowed to spiral further.
This leads to a more nuanced question around credit quality. On the surface, a section 114 notice signals financial distress. In reality, the combination of statutory spending controls, strong governance, access to central government support and the wider local authority funding framework means that the risk of loss to lenders remains very low.
Loans advanced prior to a section 114 notice are expected to be repaid in full and on time. There is no precedent for historic local authority debt not being honoured. Even where a notice is in place, new borrowing can still be approved where it demonstrably supports financial stability or prevents the position from worsening, subject to section 151 officer approval.
Despite this, some authorities remain cautious. Reputational risk, rather than credit risk, is often the primary concern when considering lending to an authority that has issued, or may be close to issuing, a section 114 notice. This has led to a greater focus on evidencing robust and well-documented due diligence.
Maintaining a clear audit trail for investment decisions is increasingly important. Authorities need to be able to demonstrate that decisions are prudent, informed and compliant with CIPFA’s Treasury Management Code of Practice, particularly in a more challenging financial environment.
In practice, this means moving beyond headline indicators and considering a range of balance sheet metrics. Ratio analysis that assesses debt, interest costs and reserves in proportion to an authority’s scale and service responsibilities is generally more meaningful.
iDealTrade, Arlingclose’s local authority matching platform, provides discrete and regularly updated Financial Strength Scores for authorities bidding for loans. These scores assess a range of balance sheet indicators to provide a clear, consistent view of relative financial strength across the sector. Used alongside internal analysis, they support a more structured and auditable approach to due diligence, strengthening decision making without replacing professional judgement.
23/12/2025
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