Croydon London Borough Council goes into the red - how governance is at the heart of good financial management and budget setting

Croydon London Borough Council has recently issued a notice under section 114 of the Local Government Finance Act 1988 meaning that, in the opinion of its s151 Officer, "the expenditure of the authority incurred (including expenditure it proposes to incur) in a financial year is likely to exceed the resources (including sums borrowed) available to it to meet that expenditure".

While the issuing of a s114 Notice is a rare occurrence among local authorities, Croydon's was foreshadowed by the public interest report issued by Grant Thornton, on 23 October 2020 (under section 24 and Schedule 7 of the Local Audit and Accountability Act 2014). This article considers the key lessons to be learnt from this report which all councils should heed in order to avoid the same fate as Croydon.

Auditor's Report

The report was issued following the auditor's longstanding concerns relating to the council's financial sustainability criteria of the value for money conclusion, which started as long ago as 2017-18. However, previous audit recommendations had not been implemented, resulting in a continued deterioration in the council's financial position and an adverse qualification on value for money in the following years. 

Grant Thornton's report stated the council had "an unsustainably low level of reserves for some time…the lowest level of all London Boroughs”, which "has continued to decrease in each of the previous three years", and had further been "ruthlessly exposed by the impact of the Covid-19 pandemic". The report concluded that the council had prioritised delivering service improvements over reigning in budget overspends.

The report accused the council of “collective corporate blindness” and fostering a governance culture in which poor spending decisions were not robustly challenged or scrutinised by councillors. The report, which makes 20 recommendations, highlights the serious concerns of governance failure, and the impact of not acting urgently to financial concerns.  

The report’s findings included:

• Croydon borrowed £545m during the past three years to invest in housing and commercial property. This included a £200m loan to its own housing development arm Brick By Brick, which has yet to return a dividend;
• In 2018-19 the council invested £30m in the local Croydon Park Hotel, and £46m on a retail park (The Colonnades). The hotel fell into administration, and the retail park was closed in June. The report states that these investments "were not grounded in sufficient understanding of the retail and leisure market" and again demonstrate the council’s strategy to "invest its way out of financial challenge rather than pay attention to controlling expenditure on core services" which was “inherently flawed";
• In the past three years, it allowed a £39.2m overspend on adult and children’s social care that has failed to have an impact on demand, savings or costs in this area;
• Errors in budget monitoring reports during the 2019-20 forecasted a mere £0.2m overspend, after having made a "one-off corporate adjustments" of £17.7m, an explanation, which was accepted at Cabinet “without challenge;
• In response to this problem, the council appointed a financial consultant who identified a budget gap for 2020-21 of £65m together with £21m of in-year savings needed, which the auditors concluded exceeded the reserves, but neither the cabinet nor scrutiny and overview committee referred this to full council. Grant Thornton stated that “this was a failure of governance and showed a lack of understanding of the urgency of the financial position.”

This of course is not the first report of this kind in recent times, as Grant Thornton published another public interest report on Nottingham City Council in August 2020. Similarly, the August report identified an "institutional blindness" due to Nottingham City Council's determination for its energy project arrangement to work, which led it to ignore the escalating risk involved in the project. However, with Croydon London Borough Council, the auditor's main concern was that repeated signs of financial mismanagement were ignored. This not only demonstrates a significant failure of governance, but it also goes to the heart of any council's fiduciary duty to its council tax and rate payers.

Amongst the 20 different recommendations, the Croydon report outlined the following, more general, recommendations. As with the Nottingham City Council's audit report, there is nothing ground breaking or remotely challenging in any of those recommendations. They merely advocate the practice of good governance. 

1. The Council (including Cabinet and Scrutiny and Overview Committee) should challenge the adequacy of the reserves assessment which should include a risk assessment before approving the budget.
2.  The Chief Executive should oversee a review of the outcomes achieved from the use of transformation funding to demonstrate that the funding has been applied in accordance with the aim of the scheme.
3. The s151 officer should set out the strategy for applying capital receipts for transformation annually as part of the budget setting process.
4. The Cabinet reports on the financial position need to improve the transparency of reporting of any remedial action taken to address in-year overspends.
5. The Council (including Cabinet and Scrutiny and Overview Committee) need to show greater rigor in challenging underlying assumptions before approving the budget including understanding the track record of savings delivery.
6. The General Purposes and Audit Committee must challenge officers on the progress in implementing the Financial Consultant’s recommendations to improve the budget setting, monitoring and reporting process and actions to address the Head of Internal Audit’s concerns on internal controls.
7. The s151 officer needs to revisit the Growth Zone assumptions following the pandemic and make recommendations to Cabinet and Council for the continued investment in the scheme.
8. The s151 officer should review the financial rationale and associated risks and make recommendations to Cabinet and Council on whether the Revolving Investment Fund should continue.
9. The Cabinet and Council needs to re-consider the Treasury Management Strategy for ongoing affordability of the borrowing strategy, the associated risks and identify whether alternative options can reduce the financial burden.
10. The Chief Executive should arrange detailed Treasury Management training to assist Members to better understand and challenge the long-term financial implications of matters reported within the Treasury Management Strategy.
11. The s151 officer should revisit the Minimum Revenue Provision policy to demonstrate that a prudent approach is being taken.
12. The Cabinet and Council should review its arrangements to govern its interest in subsidiaries, how the subsidiaries are linked, the long-term impact of the subsidiaries on the Council’s financial position and how the Council’s and taxpayers interest is safeguarded.

Now more than ever, it is important for councils to scrutinise their financial positions and governance practices, as the already fragile state their finances have only been made more perilous because of the pandemic. Nevertheless these public interest reports point to a solution – that good governance practices (with appropriate challenge if necessary) sit at the heart of budget setting, financial oversight and well-run subsidiary undertakings and that action (if needed) should be taken early and urgently.