Government interventions in local authorities

In June 2021, in an acknowledgement of the perilous financial position that many local authorities found themselves in after the worst of the pandemic, the government appointed independent reviewers to undertake assurance reviews into eight councils: Bexley, Copeland, Eastbourne, Luton, Peterborough, Redcar and Cleveland, Slough and Wirral. This followed on from the provision of exceptional financial support to these authorities earlier in the year.

An ‘assurance review’ is not a statutory intervention, but the government’s announcement confirmed that the reviews would 'provide a detailed assessment of each councils’ financial position and management, making recommendations where necessary of how each council can take action to improve’ and would inform any ‘decisions on exceptional financial support’, and, rather ominously, decisions on ‘any other matters of concern at the authorities.'

Those ‘matters of concern’, for Slough at least, resulted in the exercise of statutory invention powers. Over a five-year period Slough increased its property investment from £180 million to and enormous £760 million without any capital investment plan and without regard to its financial reserves. At the same time it embarked on a ‘transformation’ programme which saw significant numbers of employees leave and required a heavy reliance on expensive agency staff. In July 2021, in a signal that the council had run out of money, it’s finance director issued a section 114 notice which in turn triggered the government announcement referred to above, and two external reviews in the autumn of 2021. Government commissioners were appointed in January 2022 and in March 2022 the chief executive was summarily dismissed for gross misconduct. The commissioners' most recent report indicates that Slough will require ‘unprecedented levels’ of financial assistance from the government, including £670 million by way of capitalisation support and increases in council tax from anywhere between 12% and 20%, with an inevitable reduction of services to the residents.

Whilst the reasons for intervention can be many and various, the secretary of state’s legal powers are largely contained in section 15 of the Local Government Act 1999. In 2017 a House of Commons research paper noted that this was a ‘broad and flexible’ power used as a last resort where there was evidence of ‘high profile service failure or scandals’. Well-publicised interventions have taken place in Tower Hamlets following allegations of electoral fraud and financial mismanagement, and Rotherham with the child sexual exploitation scandal. Since 2017 the power to intervene has been exercised in relation to Northamptonshire County Council (now amalgamated into a unitary council), Liverpool City Council, Slough and Sandwell Metropolitan Borough Council, with a ‘minded to’ decision to appoint commissioners made in relation to Nottingham City Council.

Section 15(6) enables intervention in the running of a local authority by giving a power to issue directions for the transfer of responsibility of functions to the secretary of state or their appointees (i.e. commissioners). The test is whether the secretary of state is satisfied that the local authority is failing in its best value duty. That general duty is defined in section 3 of the 1999 Act and requires a local authority to ‘make arrangements to secure continuous improvement in the way in which its functions are exercised, having regard to a combination of economy, efficiency and effectiveness’.

Evidence that will satisfy the secretary of state is usually gleaned from a number of sources. In recent interventions, the trigger event is the issuing of a section 114 notice. Section 114 of the Local Government Finance Act 1988 is a ‘Micawberesque’ provision which requires the director of finance of a local authority to issue a notice where the authority’s expenditure in a given year is ‘likely to exceed the resources (including sums borrowed) available to it to meet that expenditure.’ Such a notice is usually a sign of acute financial distress requiring government support and its effect is to prevent any further expenditure by the authority unless authorised under strict criteria. (Prior to 2018, no authority had issued a s114 Notice since 2000 (Hackney). In 2018, Northamptonshire issued a s114 Notice, followed by Croydon in 2020 and Slough in 2021.)

But other evidence can be relied on to justify an intervention. As already mentioned, in 2013 Rotherham commissioned an independent inquiry in child sex abuse. That report triggered the then secretary of state – Eric Pickles MP – to carry out an inspection of Rotherham in 2014 and in 2015 he appointed commissioners to intervene. In 2021 Sandwell’s external auditors, Grant Thornton, raised a number of governance concerns which persuaded Kemi Badenoch MP, as the then minister for local government, faith and communities, to exercise her section 15 powers.

As an alternative to full intervention, the government has taken lesser measures. With the Grenfell Fire tragedy, the government’s response was to appoint a task force to assist The Royal Borough of Kensington and Chelsea in the recovery in the aftermath of the fire, and to provide assurance to the government that the council was up to the task. In Croydon, although a section 114 notice was issued, an ‘Improvement and Assurance Board’ was set up which, to date, has seen off any further intervention as the council seeks to address its earlier financial mismanagement.

Further government involvement, as opposed to full intervention, is provided for in Clause 71 of the new Levelling-up and Regeneration Bill which amends the Local Government Act 2003 by enabling the secretary of state to issue ‘risk-mitigation’ directions to English local authorities ‘for the purpose of reducing or mitigating the financial risk to the authority’. The ‘trigger event’ for the issuing of a direction can be the issuing of a section 114 notice, or more generally, as an appropriate or proportionate response to financial risk, or where a ‘capital risk threshold’ has been breached - determined by a set of prescribed ‘capital risk metrics’. In addition, the secretary of state may appoint an independent expert to review an authority’s level of financial risk and the Bill mandates the local authority to cooperate with such an expert. The Local Government Association has said it is ‘deeply concerned’ about this wide-ranging power which could see directions requiring local authorities to limit their borrowing and to divest themselves of specific assets.

Stepping in to run an organisation comprised of democratically elected councillors still remains a rare occurrence and the use of statutory powers have to date only been exercised as a last resort and where there is evidence of serious failings. It remains to be seen whether the next secretary of state under the new prime minister will be busy with local authorities if they do not fare well in the difficult economic times ahead.

Nick Graham is the director for legal & democratic services at Buckinghamshire Council