Section 114s: where are we headed next?

By Rob Whiteman, CIPFA CEO

In the last few years, below the radar CIPFA has helped a number of authorities improve their financial resilience to avoid a s114 notice. This is when the CFO notifies the council that they are heading for a breach of the legal requirement to balance their revenue budget. These councils who have avoided such an outcome deserve credit for getting budgets back under control, and we hope there’s a similar outcome for the ones we are presently supporting.

Over the last decade herculean efforts by the local government sector in general have seen unfavourable fiscal treatment absorbed. The COVID period brought some respite with welcome additional government funding, but this funding is now a distant memory as reserves are again being depleted in many councils.

There is a huge range of causes for the s114s we have seen. While there were some technical issues on the HRA and illegal expenditure for Nottingham and Northumberland, generally the reasons for s114s have been for corporate budget failure in Northamptonshire, Croydon, Slough, Thurrock and Woking. In all cases, the notices could have been avoided through better, or at least less bad, decision-making.

Northamptonshire, the first council to issue a s114 in the modern era, was the nearest to what could be described as a ‘normal’ failure, where governance and leadership failed to make savings, raise taxes or see the risks in time. The authority was then reorganised into two new unitaries.

With the others we have seen quite abnormal events where authorities have been poleaxed by appalling commercial decisions backed by eye-watering debt.

What has been done so far?

A lot has been done in response to the slew of s114s, including:

1. Following the Pickles’ ‘reforms’ the Redmond Review recommended government restores strong local public audit through higher fees, specialist public sector skills and closing the backlog of unaudited accounts. The backlog is disastrous because the possibility of mass qualification on technical valuation issues has masked the (far fewer) councils where unaudited accounts are the result of poor accounting and decision making.
2. CIPFA, DLUHC and HMT have strengthened borrowing and prudential rules.
3. CIPFA has strengthened the CPD framework for CFOs, introduced the Resilience Index and the Financial Management Code. We also formed the Practice Oversight Panel to raise alarms on bad accounting practice, but also refer cases to institutes’ disciplinary schemes. In the interests of the high standards of the many, we will take quicker and more decisive action to remove some underachieving CFOs from the profession. Although most finance directors are CIPFA members, it is noteworthy that mostly the authorities that failed had non-CIPFA members as their CFOs as they sought to commercialise. 
4. DLUHC is strengthening the Best Value framework as evidenced by their recent consultation. OFLOG will provide data in advance of failure and government will take earlier action via warning notices.
5. DLUHC has agreed capitalisation requests to avoid further s114 notices and introduced monitoring of these as well as highly leveraged councils.

The above actions are not yet fully implemented, especially the Redmond recommendations. Clearly ending the backlog of audits is something on which ministers will wish to take decisive action.

Will more s114s occur?

My judgement is that we may see more s114s from commercialism and excessive borrowing that were in the pipeline before the rules tightened. But generally, new local proposals with excessive risks that breach prudential guidance appear to have ceased, for now. Also, we may see particular technical issues or liabilities such as the HRA or single status give rise to specific potential s114 cases.

More likely, however, if we see more councils in close proximity to issuing a s114 it will be owing to difficulty covering significant pressures, such as adult and children’s social care. These may be more like Northamptonshire where over-optimism and poor governance causes them to lose control of their finances and need external help. To avoid this, the first step to recovery is recognising that change is needed. I’m afraid I see some councils that could avoid failure but are still not taking that critical first step. That said, sooner or later we will reach a point when a well managed authority, whose costs benchmark well and resources managed effectively, hits the buffers through a lack of funding to meet service demands.

There is a risk, of course, that many more s114 notices may normalise financial management failure. I think there is scope for a double moral hazard developing: government worries that if it ‘bails out’ councils that can’t manage their budgets or debt repayments then it creates an incentive to borrow and take imprudent risk. Meanwhile, rather than make cuts or reprioritise reserves to cover overspending, might some councils deem a s114 notice as a less unattractive option if others are doing the same? In how many councils can DLUHC intervene at any one time?

If this happens it’s a game of chicken that will end with some flattened and bloodied feathers. I am in no doubt that HMT and DLUHC will allow a council to go bust and default on its debts pour encourager les autres if there is any hint that serving a s114 notice becomes something of a fashion.

What should the sector do?

Beyond the considerable changes already outlined, I would like to see some further reforms:

1. The good practice we see around managing company structures, regeneration schemes and investment portfolios should be made mandatory. We need to see our towns and cities renewed, infrastructure modernised and vibrant economic and cultural hubs developed or enhanced; but bold or innovative schemes must be sound and wash their face in terms of business cases and benefits realisation too.
2. Legislation is needed to equip the sector with professional audit committees that have a clear line of sight to decision-making. How do we create something akin to the independent ‘Audit NED’ who sits on cabinet or the corporate management team and chairs the audit and risk committee?
3. S151s/CFOs and auditors must have some additional public accreditation if they are not CIPFA trained. All CFOs should welcome developing further commercial acumen through CPD to manage complex company structures.
4. CIPFA, SOLACE and LLG should set some collective expectations, standards and training for the effective operation of the three corporate statutory officers working together. In CIPFA’s view the monitoring officer should be mandated as the council’s head of legal services.
5. We begin work now on what ‘good’ looks like on the other side of an election, whatever the outcome, for a sustainable, resilient, empowered and accountable system of council finances. With greater freedom should come greater transparency and quicker intervention where needed. Transparency and rebuilding trust in public services through effective governance and assurance is essential. 

But perhaps we should consider whether the sector wishes to go further than these arguably modest proposals? Does it want to collectively set the standard that on appointment new CEOs, CFOs, leaders or mayors must commission an independent resilience review of their finances and instigate a voluntary improvement board if problems are found?

Reviewing finances is a professional activity for professional bodies and audit firms alone. There has been some poor quality advice to councils that is to be avoided. Let’s remember that the more the sector sets high standards and holds itself to account, the less government will have scope to fill a vacuum.

This article originally appeared in the MJ on 31 July 2023.