Kent County Council and Hampshire County Council in a joint letter letter to the Prime Minister – Rishi Sunak and the Chancellor of the Exchequeur – Jeremy Hunt, have warned they will be forced to declare bankruptcy within the next few months because of the unprecedented financial crisis enveloping their councils.
As reported in The Guardian and elsewhere, both KCC and HCC face budget deficits over the next few years “of a scale that has never been seen before”, they said, and unless ministers stepped in with emergency help and a long-term funding plan, they would be “likely to be considering section 114 [effective bankruptcy] notices in the next year or so”.
What is strange about these comments is that it is known KCC have overcharged those in receipt of Domicilary Care in Jan 2021. Meaning there has been an excess of money into KCC coffers, yet they still find themselves with a financial shortfall of £51m in the first quarter of 2022/23.
But KCC knew overcharging of domicilary care was happening as early as 2018, according to an interal audit report.
In a review of a single company providing domicialry care for KCC it highlighted:
“a large number of exceptions where calls had not been delivered as commissioned and that potential overpayments could total £200,000 per annum on that contract alone.”
In 2018, KCC had in excess of 30 providers for domicilary care, and if this amount was replicated on every domicilary care contract they would have overcharged in the region of £6m plus in that year alone. Take that across all four years since then, close to £24m in overcharging would have entered KCC coffers. If this were to be refunded, it would mean that KCCs current deficit would be much larger than £51m.
As we know, overcharging continued until at least 2021, and probably beyond, meaning KCC coffers have been swelled by money which is not their’s. If this money were to be refunded, this would mean that KCC deficit would be much higher than the £51m reported in the first quarter of 2022/23.
We also note that in Grant Thornton’s external auditor’s report under Value for Money, they state:
In July 2022 we issued our Audit Plan for the 2021/22 audit. This Audit Plan included the outcome of our risk assessment of the Authority’s arrangements to secure value for money (VfM). At this stage, we identified 1 risk of significant weakness as detailed below:
1. the risk that the Council’s arrangements in relation to SEND and EHCP services are not effective to ensure financial sustainability
Following the Audit Plan, we have continued to carry out risk assessment procedures taking into account events and circumstances both internal and external to the Authority. This work has identified a new risk of significant weakness in relation to financial sustainability as detailed below:
2. the risk that the Council’s arrangements in relation to identifying and delivering savings are not effective to ensure financial sustainability
It is this final comment by the external audit which has led KCC to state they would be “likely to be considering section 114 [effective bankruptcy] notices in the next year or so”.
Back in August 2020, we predicted that KCC would be threatening to issue a section 114 notice by 2022/23. This has come to pass and is no surprise.
What is a section 114 notice:
Within the Local Government Finance Act 1988, Section 114 (3) dictates 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”.
In general terms this means it’s the Chief Finance Officer, or Section 151 officer who has the role under law of being the most senior financial advisor to the wider Council’s leadership on its financial plans. Uniquely across the public sector however, the CFO also has the power and responsibility to legally suspend spending for a period of time if they judge the Council does not have a balanced budget or the imminent prospect of one.
What Happens when a S114 Notice is Issued?
It means that no new expenditure is permitted, with the exception of that funding statutory services, including safeguarding vulnerable people, however existing commitments and contracts must continue to be honoured. Council officers must therefore carry out their duties in line with contractual obligations and to acceptable standards, while being aware of the financial situation. Any spending that is not essential, or which can be postponed should not take place and essential spend will be monitored.
The only allowable expenditure permitted under an emergency protocol would include the following categories:
existing staff payroll and pension costs
expenditure on goods and services which have already been received
expenditure required to deliver the council’s provision of statutory services at a minimum possible level
urgent expenditure required to safeguard vulnerable citizens
expenditure required through existing legal agreements and contracts
expenditure funded through ring-fenced grants
expenditure necessary to achieve value for money and / or mitigate additional in year costs
Councillors have 21 days from the issue of a Section 114 notice to discuss the
implications at a Full Council meeting.
Finally, the problem with local government at all tiers, be it parish, town, district or county, is officers weild power by making decisions, but lack accountability for them. This is why incomptent officers are allowed to leave these organisations with non-disclosure agreements (read settlement agreements) and in many instance pay offs, for their failures. This has to change, without it failures will continue to happen and officers will be allowed to move on and be allowed to repeat those failures elsewhere. This must be addressed as it is one of the most significant elephants in the room.
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Failure of contractual responsibility, misaligned with common commercial and industrial practice laws, is archaic, unnecessarily expensive, offensive and unacceptable. A matter for which executive is both responsible and answerable.