How can cash-strapped councils facing Section 114 still invest in place?

Birmingham City Council’s issuing of a Section 114 Notice in August 2023 underlined a growing challenge for councils – balancing the books.

Currently local authorities spend the majority of their budget on providing schools, social care and maintaining roads. A rise in these commitments, and a squeeze on budgets available, has had real consequences for councils.

Since the creation of the Local Government Finance Act and its accompanying Section 114 notice in 2018 – a standardised protocol for councils to flag financial distress to central government - 14 councils have declared effective bankruptcy, five of which were in the last two years.

Fears of more defaults are real. In fact 51% of councils have warned they’re likely to issue a section 114 notice in the next five years, with 9% saying they’ll likely issue in this financial year. As it stands, just 4% of councils are confident in the viability of their finances in their present state.

There are plenty of challenges that don't help; the impact of inflation has seen council’s real spending power drop 12% lower than it was a decade ago. National Living Wage contributions, particularly prevalent in the adult care sector, will cost councils £1.1bn in additional overheads in 2024.

The original problems for recent and possibly impending series of council defaults go back as far as the original austerity cuts. However these challenges do not mean important local authority regeneration, development and housing need to be put on pause. By working in different ways with the private sector, there are innovative solutions to deliver an agenda for place for cash strapped local councils.

How has this happened?

Councils typically receive funding via three streams – council tax, business rates and commercial income. Austerity cuts, generally agreed to have started in the aftermath of the financial crisis in 2010, cut central government funding and grants significantly.

As a counter to this, government legislation was modified, freeing up councils to take on bigger, more speculative investments for commercial income. For some councils, this was a major success – purchasing office blocks and similar forms of real estate provided and continues to provide additional income. For others however, it was the opposite. Hindsight is easy, however at the time many investments in retail, considered traditionally a safe bet, were flattened in terms of revenue by the economic recession.

Councils rode out these bruising events by making cuts as necessary. As the need to cut became deeper, so the scope and impact of those cuts became more and more profound. Compounded with increases in costs, many councils now see either no or limited room for manoeuvre.

What can be done?

By thinking creatively and working collaboratively with the private sector, there are ways in which a council can continue to deliver its strategic regeneration, housing and development priorities. Willmott Dixon’s Development Solutions team engage with councils with little to zero funding and bring complex regeneration programmes to fruition. This can be through helping reduce early stage feasibility / development cashflow, completing the work ordinarily done by officers where they lack the capacity, and bringing in private finance where appropriate to reduce the public sector burden.

One area in which our team can assist is strategic business planning for development, housing and regeneration priorities. Councils have their own regeneration and development teams, however in our experience capacity in those teams remains a challenge. Our Development Solutions team is made up of experts in local government (many of whom have experience working directly as council regeneration, development and housing officers). Alongside our relationships with developers and investors we can work collaboratively with local government to develop viable, market facing plans to ensure even authorities with financial constraints have the support to be able to deliver major projects.

One example of this is our work for Westminster City Council. The council had no capital to develop a new leisure centre, however by using an innovative cross-subsidy method, the council was able to create Moberly Leisure Centre – a mixed use leisure and residential facility, with rights to the accompany residential lots as exchange for payment – at no cost to the public purse. The centre is now a net contributor to council revenue as the leading fitness centre in the area.

Another tactic councils can use is asset sales. This is often a knee-jerk go-to in times of financial constraint and it can often see authorities being forced to dispose of assets at sub-optimal rates. It’s also worth remembering that land sales are a one-time deal – council’s don’t want to be seen to be ‘giving away the family silver’.

It is easy and understandable for councils facing financial duress and local pressure to be stuck. Willmott Dixon Development Solutions’ goal is to foster long term business relationships with the public sector, and as such we offer free deep dive consultations with our customers, with a view of becoming the delivery partner and long time partner of choice to your council.

Interested in learning more? Drop me a line..