Council's use of rainy day funds a 'warning sign'

The extent of the financial stress Lancashire County Council is under to balance its books has been laid bare by new research.

Lancashire County Council
Lancashire County Council

The cash-strapped local authority plans to prop up its budget by piling more than £110m from its reserves to plug gaps over the next two years.

But with vast amounts of savings required beyond 2020, concerns have been voiced that Lancashire - along with counterparts across the country - could face “untenable budget positions.”

Analysis by The Bureau of Investigative Journalism (TBIJ) claims several county councils are showing similar signs of financial strain as crisis-hit Northamptonshire, which has effectively run out of cash.

It comes as a new report from the National Audit Office (NAO) has revealed one in 10 local authorities could run out of reserves within the next three years.

Angie Ridgwell, the recently installed chief executive of LCC, said “further savings will need to be made” by 2020/21 with the authority facing a predicted budget deficit of £144m in 2021/22.

At last month’s 2018/19 budget setting meeting, council leader Geoff Driver told members: “It is the county council’s most challenging time in its 130-year history.”

Northamptonshire County Council saw its reserves fall dramatically in recent years and recently issued a ‘114 notice’ - banning all non-statutory funding - after running out of cash. It's the first council in 20 years to reach such dire straits.

The TBIJ analysis identified five “warning signs” that flagged up concerns by auditors leading up to Northants’ collapse in February.

Lancashire currently meets just one of these criteria; overspending on children’s and adult social care service in each of the last three years.

But its projected use of “transitional reserves” may place it at risk in the near future if further savings are not found, the research suggests. By 2020/21, there will be only £5.9m left in the transitional reserve fund to put toward a predicted budget gap of £118.5m.

Chief executive Ms Ridgwell said: “The county council’s revenue budget has been supported in recent years by the reserves that have been available to the county council and their value has therefore reduced.

“The value of the council’s uncommitted transitional reserve is forecast to be £130.620m (including the 2017/18 forecast underspend).

“Current forecasts indicate that there may be sufficient funds within the transitional reserve to support the identified budget gap in 2018/19 and 2019/20.

“However, further savings will need to be made and fully implemented by 2020/21, at the latest, to deliver a sustainable financial position going forward.”

County Hall said the figures used by TBIJ focused only on the transitional reserve fund, something they had “clearly identified an element of these reserves as being used to support the down-sizing of the revenue budget.”

They added that overall reserves - including the county fund, earmarked reserves, capital receipts and capital grants - have not seen a reduction “at the scale set out” by the analysis.

While none of the councils featured in TBIJ research (County Halls in Somerset, Norfolk and Lancashire) are at imminent risk of having to apply crisis measures like Northamptonshire, Simon Edwards, director of the County Councils Network, believes they and others could do so in the future unless urgent help is given.

Mr Edwards said: “The government may want to dismiss Northamptonshire as unique but, as this research shows, the pressures on much of local government are intolerable. This has to be a wake up call.”

While all councils have had their funding cut since 2010, counties have been hit particularly hard, the TBIJ research has highlighted.

Their core government grant will fall faster than other types of council and they also receive less money for key services such as adult social care. As a result they have become more reliant on using reserves to balance their books.

Between 2013 and 2018 their total reserves of county councils fell by 31.9 per cent, twice as much as any other type of council.

The Government has said a review of councils’ needs and resources is taking place leading to a new funding system.

LCC has approved a 5.99 per cent council tax increase for next year - including three per cent ring-fenced for adult social care - meaning a basic Band D payer will be charged £1,294 for 2018/19.

The financial plan included further cuts totalling £11m, bringing the total savings and cuts made since the Conservative group regained control of County Hall last year to £81m.

Mr Edwards added: “A lot of counties are in trouble.

“Counties face a toxic cocktail of rising demand, which has not been taken to account in the funding formula, and some of the sharpest reductions in funding despite already being the lowest funded authorities.

“We have to hope (Northamptonshire) has been a wake-up call for everyone, or local government will only be able to provide the barest of bones and you can forget anything else.”

Rob Whiteman, chief executive of The Chartered Institute of Public Finance and Accountancy, said: “Through my own conversations with chief financial officers, I have heard a number of warnings that councils may soon face untenable budget positions. The warning signs have been plain to see for a number of years.”

Cash-strapped councils are “raiding their rainy day funds” to cope with growing demand on social services, the public spending watchdog has said.

Government funding for local authorities has fallen by an estimated 50 per cent since April 2011, heaping added pressure on strained finances and forcing councils in England to cut back on repairing roads, refuse collections and libraries, according to the National Audit Office (NAO) root-and-branch examination of town hall accounts.

It found authorities’ financial positions have “worsened markedly”, particularly for those councils which have social services departments, with several authorities struggling to balance their books and diving into their reserve funds - with 66.2 per cent of local authorities with social care responsibilities dipping into their financial reserves in 2016-17.

NAO head Amyas Morse said: “Current funding for local authorities is characterised by one-off and short-term fixes, many of which come with centrally driven conditions.

“This restricts the capacity of local authorities and yet the weight of responsibility to respond to increased demand and maintain services remains very much on their shoulders.

“The Government risks sleepwalking into a centralised local authority financial system where the scope for local discretion is being slowly eroded.”

Responding to the NAO report, a Government spokesman said: “Last month, Parliament approved a funding settlement which strikes a balance between relieving growing pressure on local government and ensuring hard-pressed taxpayers do not face excessive bills.

“As part of this, we delivered a real terms increase in resources over the next two years, more freedom and fairness, and greater certainty to plan and secure value for money.

“We are currently working with councils to undertake a review of their needs and resources. Our consultation on this closes on Monday, and all responses will be considered as we look to devise a new funding system.”