CROYDON IN CRISIS: After a fortnight of unconvincing denials from the Fisher’s Folly propaganda bunker and the local Labour Party, official reports released ahead of budget-setting meetings confirm that Croydon could indeed have to issue a second S114 notice. By STEVEN DOWNES
Nearly two weeks after Inside Croydon broke the news of the £73million of funds that had been misused outside the ring-fenced Housing Revenue Account, the Town Hall has finally admitted that, yes, the council is indeed once again on the brink of going bust.
There can be no disguising the desperate seriousness of the situation for Croydon’s cash-strapped and crisis-riddled council.
Detailed financial reports ahead of the council’s budget-setting meetings were withheld for more than a week. Almost all council meetings were cancelled or postponed for a fortnight. The budget-setting meetings of the cabinet and the full council, which had originally been set to take place today, have been delayed until next Monday.
In the report for the borough’s councillors, Richard Ennis, the council’s senior finance official, has written of the £73million hole in the accounts, “The council is at risk of a further [Section 114] notice being served due to the revenue charge of £73million needing to be met in year”.
Section 114 notices are issued by local authorities when they are unable to deliver a balanced budget. They used to be exceedingly rare: when Croydon issued its S114 notice in November 2020, when covid had seen it go £67million over budget, it was only the second council to do so this century.
Now, even the council’s most senior officials are warning that Croydon is about to tip over the edge of bankruptcy for a second time in less than 18 months. And this, it is worth pointing out, comes barely a year since the council received a £120million bail-out from government – the biggest such rescue package in the history of local government.
The latest scandal to break at Croydon’s clusterfuck of a council stretches back five years and revolves around the often convoluted efforts by Simon Hall, then Labour’s cabinet member for finance, and Alison Butler, the then cabinet member for housing, backed by senior council finance director Richard Simpson, and all done to circumvent borrowing limits and spending rules relating to the Tory government’s Right to Buy legislation.
The arrangements set up surrounded a complicated nexus of companies centred around Croydon Affordable Tenures and Croydon Affordable Homes, and has seen public money potentially misappropriated on other areas.
Auditors Grant Thornton found that a total of £112million meant for property purchases was used to supplement the creaking budgets of other departments. Grant Thornton’s beancounters are not satisfied that council officials were acting within their legal authority when using the money for adult social care, children’s services and the IT department.
Consultants PwC have been hired to take a look at the corporate arrangements, CIPFA, the public finance organisation, is lending a hand, and a Queen’s Counsel is providing legal advice.
The warnings for the budget-setting meetings come in a report entitled General Fund and Housing Revenue Account Budget 2022-2023 to 2024-2025, though even that would appear to be wildly optimistic. At the core of the issue here is that Grant Thornton are still refusing to sign-off on the council’s accounts from pre-covid year 2019-2020 as well as 2020-2021.
And in all likelihood, Ennis won’t even be around next Monday to answer any questions arising.
Such has been the merry-go-round of temporary appointments to key positions, Ennis was the third person to hold the Section 151 officer position during 2021, and he is now being replaced, too, after he declined to seek the job permanently. His final day in post as the interim finance director is today (although Inside Croydon missed out on an invitation to his leaving drinks).
But what a farewell report he has managed to author.
“The council continues to face challenges,” the report states, with subterranean understatement, “the most significant of these issues appear to be: The unaudited 2019/20 and 2020/21 accounts – specifically in relation to Croydon Affordable Homes/Croydon Affordable Tenures…
“… The most significant of these is Croydon affordable Homes and Croydon Affordable Tenures which could either be resolved subject to agreement with our external auditors or require a revenue charge to the council’s General Fund significantly close to £73million.
“This is an issue about the accounting treatment of a lease, it is not about any monies gong [sic] missing,” it continues.
“The S151 Officer cannot form a judgement on the outcome of this accounting issue until work has concluded with Grant Thornton (our external auditors). Therefore provision has not been made for this risk in the reserves proposals.” Our italics.
“If the final outcome is that this is an operating lease then the council is at risk of a further S114 notice being served due to the revenue charge of £73million needing to be met in-year.
“The view of the council’s S151 officer in addition to the council’s legal advice, is that it is essential that the material and not inconsequential nature of this risk is flagged, particularly given the inability to form a judgement at this point and should be included in this [Section 25] statement for clarity and openness.”
The next bit will send a shiver down the spine of Richard Simpson, Croydon’s former finance director (now trying to juggle the financial arrangements in Sutton over their dodgy heating network company): “It is possible the council will now need to speak to those officers and advisors involved at the time the accounting arrangements for this were determined.”
Elsewhere in the report, which is co-authored by the council chief exec, Katherine Kerswell, as well as David Padfield, the exec director of housing (like Ennis, another short-stay interim), it states, “There remains a significant legacy accounting issue regarding the CroydonAffordable Homes and Croydon Affordable Tenures leases to resolve.
“It is the main reason the accounts for 2019-2020 and 2020-2021 remain to be completed.”
Note that: “the main reason”, but not the only one.
“This report shows the options the council is discussing with its external auditors. The council has to set a budget and this report recommends proceeding to set a budget based on the best estimates the council has at this present time, notwithstanding the risk and the potential accounting treatments, which shall be considered further in the new financial year.” There is a concerted attempt to kick this into the longer grass of April, May, or even July.
“The risk is that this will be resolved and that adjustments will be required in the new financial year which could be significant.” What a legacy to inherit for any new executive Mayor.
And they explain, “The council has taken advice from a leading QC in respect of this matter…”.
The QC is identified in the council papers as eminent veteran silk James Goudie, who has in the past himself been a council leader, in Brent.
“The QC has confirmed the council may set its budget with this key risk unresolved by proceeding with the best estimates available at the current time.”
The council admits that it will probably need another bail-out from government, “a further capitalisation direction”, as well as a “reconsideration of its reserves position, reserves strategy and timing in addition to other options”.
They say that the matter has been referred to the government-appointed improvement panel and to the Department for Levelling Up.
They list three options for action to deal with the troublesome £73million…
There’s the “Get Out of Jail Free” card: “Determine the previous accounting treatment met the finance lease criteria and thus no changes are required”, at which point everyone is allowed a massive sigh of relief.
Then there’s “Componentise the lease arrangements splitting the land and building elements – this has the potential to still generate enough capital receipts to finance the transformation costs”.
And finally, there’s, “Review the accounting treatment of the original capital loan to CAH/CAT which in itself may have the potential to generate corresponding capital receipts”. In other words, another assets disposal.
- Click here for the council finance report to the cabinet
- Click here for the council’s explanatory notes on the financial disaster
Read more: Council faces new storm over ‘missing’ £73m housing money
Read more: Met Police confirm fraud review into £67.5m Fairfield fiasco
Read more: Kakistocracy: Butler forced into £6m bail-out of Brick by Brick
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