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Councils warn of s114 notices amid extensive budget shortfalls due to COVID-19 expenditure

29 June 2020

The COVID-19 pandemic has caused significant financial strain on local authorities. As a result, finance directors are increasingly considering issuing s114 notices amid extensive budget shortfalls.

On 11 June 2020, the Chartered Institute of Public Finance and Accounting announced that its s114 guidance to Chief Financial Officers has been temporarily modified, allowing councils more time to consider alternative options, in attempt to avoid disruptive action during the COVID-19 crisis. 

In light of the significant financial pressure that the COVID-19 outbreak has imposed on local authorities, with increased demand in social care, reduced income from fees and charges, and reduced taxable income, finance directors are increasingly considering issuing s114 notices amid extensive budget shortfalls. The Local Government Association estimates nationally that councils will face a reduction in income and increases in spending amounting to over £9bn in 2020–21 due to the COVID-19 crisis. 

When the COVID-19 pandemic first hit, the UK government indicated that local authorities would be reimbursed for all COVID-related expenditure. However, compensation to this extent has yet to be formally confirmed. Council concerns intensified in April when Robert Jenrick MP told the sector that councils would have to “share the burden” of coronavirus-related costs, which many authorities lack the reserves to cover despite the government funding for COVID-19 already allocated

According to theBusinessDesk.com, the COVID-19 pandemic has added "more than £400m to the budget deficits of Yorkshire councils".  In particular, Leeds City Council has disclosed an overspend of close to £200m, with leader Judith Blake announcing that the COVID-19 outbreak has left the council “facing a financial challenge of unprecedented proportions." Blake also warned “without urgent government support, there is a very real threat of big cuts to council services that many people take for granted."

On 30 April 2020, Liverpool Mayor Joe Anderson warned that the city council could be declared bankrupt due to being “on the verge of not being able to pay for services”. On Wednesday the authority said it was planning to set a revised budget in September to address a £58.6m shortfall. Manchester City Council has also reported a financial shortfall of £133.2m, leaving it at risk of issuing a section 114 notice by this autumn. 

Further authorities including Wiltshire Council, Cumbria County Council and Windsor & Maidenhead RBC have also expressed concerns that they may have to issue a section 114 notice. A recent BBC investigation has found that nearly 150 authorities have forecast a combined budget shortfall of at least £3.2bn.

Section 114 notices

A section 114 notice stops any new expenditure by the council, other than that required to safeguard vulnerable people, statutory services or existing legal agreements.

The Local Government Finance Act 1988, Section 114 (3) says that:

“The chief finance officer of a relevant authority shall make a report under this section if it appears to him that 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”.

Under the act, local authorities have a statutory duty to balance their budgets. Local authorities' Chief Finance Officer or Section 151 officer has the power and responsibility to legally suspend spending for a period of time, if they consider that the Council does not have a balanced budget or the imminent prospect of one.

When a s114 notice is issued, no new expenditure is permitted, other than as stated above. Council officers must therefore carry out their duties in line with contractual obligations and to acceptable standards, while being aware of the financial situation. Spending will be monitored, and non-essential spending curtailed.

Councillors usually have 21 days from the issue of a s114 notice to discuss the implications at a Full Council meeting.

COVID-19: updated s114 guidance

On 11 June 2020, the Chartered Institute of Public Finance and Accounting (CIPFA) issued a statement that its guidance to Chief Financial Officers (CFOs) has been modified. It was recognised that any freezes on spending in any local area could be highly disruptive, and the changes were intended to allow local authorities under COVID-19-related budgetary pressure time to explore alternatives to issuing a section 114 notice.

CIPFA's CEO Rob Whiteman said, "The challenges posed to local government finance by COVID-19 are likely to deepen as the year progresses. It is essential that local government and its partners in central government respond jointly to this crisis."

CIPFA proposed two specific modifications: 

  • At the earliest possible stage a CFO should make informal confidential contact with the Ministry of Housing, Communities and Local Government (MHCLG) to advise of financial concerns and a possible forthcoming section 114 requirement.
  • The CFO should communicate the potential unbalanced budget position due to COVID-19 to MHCLG at the same time as providing a potential section 114 scenario report to the council executive and the external auditor.

In practice, this will mean it will not normally be necessary for a section 114 report to be issued while discussions with MHCLG are in progress. 

CIPFA has also published a list of COVID-19 FAQs, which can be viewed here.

Conclusion

While councils across the UK face a significant reduction in income and increase in expenditure due to the added pressure of COVID-19 on local government finances, CIPFA warns that issuing a s114 notice could be highly disruptive and counter-productive during this time. CIPFA's new guidance intends to provide councils with more time to explore alternative options that may be available, while also allowing finance directors to meet their statutory responsibilities.


DWF Law LLP has exceptional expertise in public funding matters.  Our team has experience of working within Central and Local Government on high profile grant, loans and equity investments.  Please get in touch if we can be of assistance to you.

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