By Jamie Waller, Local Democracy Reporter
Nottingham City Council took the extraordinary step of effectively declaring itself bankrupt on Wednesday (November 29).
All spending, other than on the essential services the council must provide by law, will now stop.
Drastic financial decisions are now expected to be made in order to close the budget gap and balance the council’s books.
Is the council actually bankrupt?
Local councils can’t actually go bankrupt or insolvent in the sense a person or company can. Although they handle vast budgets and must make sure they do not spend more than they earn, councils are essentially not corporate entities but organisations run for public service.
‘Bankruptcy’ is actually a legal status which can be attributed to a person when they are unable to pay debts. Companies which do not have the cash to cover their payments or debts would be called insolvent.
Council also have assets which can be sold to prevent running out of money; Nottingham City Council has 3600 assets worth over £1billion.
In issuing the section 114 notice, Nottingham City Council has declared it expects it won’t have enough money in the current financial year to cover its collective costs.
However, the authority has also made clear it does have funding to continue to pay existing employees, run essential services and continue to function, which may not happen once a company becomes insolvent.
So why are media organisations describing it as ‘effective bankruptcy’ or using ‘bankruptcy’ with quotation marks?
Because the declaring of a section 114 in these circumstances is the closest a council can get to being bankrupt in the traditional sense. The notice is an official declaration it expects to not have the funds to cover all its expected spending in the current financial year, which runs to April 2024.
Local government body the Local Government Information Unit says while describing a council as outright bankrupt is not accurate, to describe it as ‘effective bankruptcy’ is an acceptable summary of the situation.
What is a Section 114 notice?
A Section 114 notice is issued when the chief financial officer of a council believes in their professional opinion that the annual budget won’t be balanced. In other words, the council is on a path which will likely see it spend more money than it receives inside 12 months.
Ross Brown, who fills this position at the Labour-run authority, took this step yesterday. Mr Brown is not an elected councillor, but a senior official whose job is to advise the authority on its finances.
Issuing means that no new spending can be made, but the council will continue to honour its legal obligations, such as safeguarding vulnerable people and running essential services.
In Nottingham, essential services the city council is directly responsible for include the social care of thousands of adults and children, schooling, council housing, maintaining city roads and waste collection. These are kinds of vital ‘statutory’ services which will continue to run.
The council will also fulfil existing contracts and agreements, which means staff and suppliers will be paid.
Why is Nottingham City Council in such a bad position?
All authorities across the country are facing rising pay, energy and care costs in particular.
Nottingham has also been receiving around £100m less each year from central government due to funding cuts – down from £123m in 2013 to £27m today.
However, the city council has also made several costly decisions in the past decade which have drained its reserves of cash, which it could otherwise have used to balance its budget, at least temporarily.
Robin Hood Energy, the council-run energy company, collapsed in 2020 leaving the council with a bill of up to £38m.
The council was also found to have illegally misspent large sums of Housing Revenue Account money, instead ploughing this into its General Fund. The ongoing cost of correcting this is £51m.
These problems have dramatically slashed the amount of money it has in the bank. Using these reserves to cover budget gaps is considered financially unsustainable long-term.
Using reserves is wisely seen as a bad strategy as its likely to fail sooner or later when they eventually run dry -unless a council somehow finds ways to continually top them up. But if Nottingham’s reserves had not been depleted in part by the consequences of past decisions, the council would have had more time to correct its path.
The council has been able to chip away at its £1.3bn of debt by selling surplus assets, which reduces costly repayments. These are around £1m a week.
However, several high-profile sales have fallen through including the Guildhall and the former Angel Row library building.
Nottingham also has a very low council tax base, with over 80% of properties in Band A and B, which pay the least.
Why has the notice been issued now?
It has been known for months that the council was in a very precarious financial position.
A report published by the council revealed it has so far managed to bring an in-year deficit of £26m down to just over £23m.
It had previously stood at £57m before a “whole host” of corrective actions and the use of reserves totalling around £9m.
While efforts to close the gap were having an impact, it was becoming difficult to see how it would get there in time before the end of the financial year.
Finance officers may have been waiting to see whether there was any last minute assistance in the Chancellors’ Autumn Statement last week, but that passed without any good news. Ultimately the decision rests with Mr Brown’s own financial judgement.
What will happen now?
Councils are required to hold an emergency meeting within 21 days to discuss how to bring spending down.
This could include more spending cuts and reallocating budgets for the next year.
The cap on council tax rises – 5 per cent for local authorities who are responsible for social care – has also been raised for authorities who have issued S114 notices to up to 15 per cent in the past.
The Government can also step in if it fears the council isn’t meeting its “best value duty”.
This could be direct instructions or using commissioners – officials appointed by the Government – who could take over some or all of the council’s operations. In effect this removes power from the elected councillors. In such circumstances, the cost of the commissioners is put back on the local authority.
Technically, a bailout is an option, but the Government is unlikely to do this as it could be seen as encouraging risky financial practices in councils.
Which other councils have issued Section 114 notices?
S114 notices used to be an extremely rare measure, but have become more common as the financial waters have grown increasingly stormy for local councillors.
Nottingham City Council previously issued one for a different reason in 2021 after the misspent Housing Revenue Account money was discovered, which led to an Improvement and Assurance Board being appointed.
Six other councils have also taken the measure since 2020.
Birmingham City Council announced a record £87m black hole in its budget in earlier this year, partly due to a failed IT project and a historic equal pay settlement.
Woking, Thurrock and Slough also ran into trouble due to over-borrowing to fund property investments.
Nottingham is unlikely to be the last council to take this measure, with the Special Interest Group of Municipal Authorities warning that as many as one in ten of its members may follow suit in the near future.