Ripples, eddies and cross currents – Local Authorities facing turbulent financial waters

Anyone following media reports last autumn will not have missed Birmingham City Council's plight and the commentary as to why its finances became so stressed that it filed a Section 114 Notice. It is possible to put forward a narrative that a combination of exceptional events caused the problems: the equal pay exposure as a result of the 2012 Supreme Court judgement, COVID and the impact of the war in Ukraine on energy prices. A competing narrative is that the fundamental problem is factors affecting all local authorities: increasing demand for services they are required by statute to provide, such as certain social care and support for children with special educational needs coupled with increasing costs thanks to the inflationary environment, whilst income, in terms of central government support, is not keeping up.

At a time when local authorities are finding that delivering statutory services has become more expensive due to factors outside their control, they might hope to get additional support from central government. That, however, cannot be relied upon. The period leading up to a general election can create a febrile atmosphere, with some taking the view that short-term electoral success colours decisions on central government spending. Also, uncertainty as to which party will form the next government can leave local authorities guessing as to what level of support might come down the track.

So how might a local authority seek to successfully navigate such ripples, eddies and cross currents? The headline answers are obvious – know how much money is coming in, what spending is required and what of the current spending is discretionary and then either increase income or decrease outgoings. Drilling down further, a local authority could consider the following:

• What systems does it have for spotting its own financial distress at the earliest opportunity? When were these last reviewed to assess fitness for purpose?
• How often is spending and progress against budgets for different projects reviewed? The more financial pressure being felt, the more frequently this should be reviewed.
• Reviewing and ranking services provided, particularly discretionary services. Whilst no authority will want to cut services, where income is static and the cost of provision of statutory services is increasing, it is helpful to understand where the impact of a cut will be felt least.
• Reviewing existing contractual obligations – can anything be renegotiated on a more favourable basis for the local authority?
• Keeping control of the external narrative. Once rumours begin that an organisation is suffering from financial distress, those rumours can accelerate the impacts of distress, for example, leading to suppliers tightening contractual terms and negatively impacting the authority's liquidity. In extreme cases, rumours that a financially robust organisation is suffering financial distress can tip it into a distressed state.
• Can the private sector be encouraged to see opportunities in replacing a local authority's delivery of discretionary services?

Increasing income is not necessarily quick or easy. Before plunging into any commercial income generating ventures, a local authority might consider:

• Does it have the appropriate expertise to successfully deliver that venture?
• Is it an appropriate use of authority resources, both human and financial, given competing demands?
• Can the authority share the financial risks of the venture with private sector partners?
• How will undertaking income generating activities be perceived by the electorate?

"Knowledge is power" is often ascribed to Francis Bacon, writing in the 16^th century, and that advice is still relevant for local authorities in the 21^st century. Knowledge of income, statutory outgoings, discretionary spend and contractual legal rights can all help to navigate the choppy waters of local authority finances.

DAC Beachcroft has a top-ranked Government and Public Sector team well-placed to support local authorities, given our understanding of the needs and challenges they face. As well as public law experts, the team includes knowledgeable finance lawyers with a wealth of experience advising organisations facing financial stress and skilled commercial lawyers experienced in contract review and negotiation. If you are preparing to face financial challenges or need commercial advice, please get in touch.