Planning for the Apocalypse

A couple of weeks ago, I wrote about the case of West Somerset, England’s smallest District Council which, an LGA report says, will inevitably become financially unviable within a few years.  

The problem for West Somerset is that its capacity to raise additional cash in the teeth of further funding cuts is not sufficient to meet the growing costs of services.  No doubt there are people at CLG who would call this ‘apocalyptic’ but every time one picks up a paper these days, the end of austerity seems to be another year away. In those circumstances, sooner or later an authority is going to run out of wriggle room.

It begs an interesting question that we may need to broach more than once over the coming years; what happens if a local authority goes bust?

This is my view – and the disclaimer is that I am not a lawyer, and neither have I had the time to research the law at length, just to confirm one or two things I thought I already knew.   This is what I think.

The most likely way for a Council to get into financial hot water is to be unable to set a balanced budget.   Unless an unforeseen disaster occurs which leaves a local authority with unaffordable additional costs (in which case the emergency funding arrangements called the Bellwin scheme may well kick in),  local authorities are unlikely to become insolvent in the way businesses do.

There is no such thing as bankruptcy or administration for local authorities but if authorities get to the stage where they start to run out of cash and are sued by their creditors,  things will have gone seriously wrong with the alarm system. It’s much more likely that officers of the Council or its auditors will see the situation coming and warn that the Council is unable to set a legal budget. The threat should  normally be visible at least a year or two ahead.

If that happens, the chief finance officer is duty bound to issue a warning notice to the Council and for a period, until that warning notice is dealt with, all major spending decisions are on hold.

Imagining a situation in which the authority is unable to solve the problem itself, the threat of the commissioners is a sanction that gets mentioned from time to time. As far as I can see, Eric Pickles has no power to take over an authority just because it is in financial difficulties.  Indeed, this is a sensible way for the law to be framed because it could become an easy way out for local authorities to spend all the money and then throw the problem at Minsters to sort out.

The Secretary of State does have powers, on the other hand, to take over the running of services if the Council is failing to perform.    But is it sensible to wait for the impact of financial ruin to bite before intervening? 

If there is nothing the Council can do within the law to correct the financial position, which would be the case if the authority is financially unviable, then it probably won’t be long before everybody ends up in a room at the Department for Communities and Local Government, and the solution will come down to good old realpolitik- the English constitution at its best. 

But even this would be a failure in relation to authorities like West Somerset, whose problems have been highlighted several years in advance of impending doom, with plenty of time for Government – and it does come down to Government - to address the problem.

If the past is anything to go by, perhaps the answer for authorities like West Somerset lies in the local government finance system, with its seemingly endless capacity for tweaking, to produce the desired outcome.  The Isles of Scilly and the Corporation of London already have special grant arrangements because of their challenging size.  One possible solution is that small Councils will be given extra funding in some way, and that could likely be linked to some strings, such as a requirement to share certain costs with neighbouring authorities.

Of course, this interesting thought experiment leaves out several important groups of stakeholders, the authority’s staff, its contractors, and last but far from least, its residents and service users. The potential impact on these largely innocent bystanders underlines the importance of forward planning and West Somerset should be praised for doing its job in that respect.