A Section 114 notice: What does it mean for Local Authorities?
Earlier this month, Birmingham City Council issued a notice under section 114 of the Local Government Finance Act 1988 (s114 notice) and, according to a recent survey by the Special Interest Group of Municipal Authorities (SIGOMA), one in ten of its councils are considering issuing a s114 notice this year; But what does the s114 notice actually mean?
The s114 notice: what does it mean in practice and when does it come about?
The Chief Finance Officer of a local authority is under a statutory duty to issue a formal report if they believe that a council is unable to set or maintain a balanced budget, this is known as a s114 notice.
A s114 notice simply indicates that a council's forecast income is insufficient to meet its forecasted expenditure for that year. Although media reports may describe the issue of s114 notice as indicating bankruptcy, there is no procedure in law for a UK local authority to become bankrupt.
A briefing paper issued by the House of Commons Library in January 2023 shows that since 2018, nine councils have issued s114 notices and have then gone on to pass an amended budget reducing spending on services. This is what happened after the severe problems faced in Northamptonshire in 2018 and Croydon in 2020.
What happens after a s114 notice is issued?
A s114 notice puts spending controls in place and prohibits all new expenditure by a council, other than that required to provide statutory services such as education services, children's safeguarding and social care, waste collection, planning and housing services, road maintenance and library services. New expenditure may only be authorised by the Chief Financial Officer where it will prevent the situation that led to the s114 notice from getting worse, improve the situation, or prevent its reoccurrence.
Once a s114 notice is issued, a council has 21 days from the date of the notice to hold a meeting to consider the s114 report, decide if it agrees with the views contained in the report, and what action to take in consequence of it.
There is no legal provision regarding what action the council must then take.
Alternative budget: increasing income & making savings
As shown from previous s114 cases, councils have responded by issuing alternative budgets which reduce a council's spending. It is important a council can show a budget that, at least in the short term, is able to fund essential or statutory services. This is likely to mean difficult financial decisions are made by addressing which services or jobs should be cut, and which should remain.
In terms of increasing income, councils in the UK have relatively few options:
- Councils needing additional income can raise their council tax. This cannot be done mid-year and therefore any additional income from this source would take some time to appear. Although in the past cases of Croydon, Slough and Thurrock, all were permitted additional headroom (15%, 10% and 10% respectively) for 2023/24 in the light of their financial difficulties.
- Councils can retain a proportion of new business rates revenue. This could provide some extra income, but business rate revenue has been volatile in the aftermath of the Covid-19.
- In the last few years, the Government has provided small additional grants to councils out of the Local Government Finance Settlement.
Capitalisation directions may also be applied for and these directions allow councils facing financial difficulties to use capital funds, for example by selling assets or property, to top up service spending. This requires a special permission from the government and has sometimes mistakenly been regarded as a government bailout.
The Government can intervene on how services are run by a council following the service of a s114 notice. This does not automatically happen, but many councils that have issued s114 notices in the past have been subject to such intervention. Commissioners or members of an intervention board are usually experts with lengthy experience in local government. Ultimately, they have the power to direct a council over budgetary and other decisions.
The Government can also legislate to reduce a council's statutory duties and thereby the services they are required by law to provide.
For councils facing the prospect of not being able to deliver a balanced budget, the issuing of a s114 notice is a necessary step to ensure that essential services are protected. Through putting spending controls in place and requiring an amended budget to be considered, the s114 notice helps to ensure that vital services can continue to be provided.