CROYDON IN CRISIS: Council chief exec relying on advice from veteran lawyer to overcome auditors’ objections to misuse of housing money.
By STEVEN DOWNES
Katherine Kerswell, Croydon’s £192,000 per year chief executive, and Hamida Ali, the council leader, can be expected to emphasise the authority coming in £1.8million under-budget this year when the duo address this afternoon’s cabinet meeting and the budget-setting meeting of full council in the Town Hall chamber tonight.
Kerswell described the underspend as “incredible considering where we’ve come from” in an interview with the Local Government Chronicle.
It is also “incredible” because the £1.8million underspend is dwarfed by the £73million from the supposedly ring-fenced Housing Revenue Account which the council’s auditors, Grant Thornton, say has been misappropriated on general spending. As a result, Grant Thornton have refused to sign off on the borough accounts for 2019-2020 and 2020-2021.
Official reports from the council’s finance chief say that if, as seems likely, the £73million has to be refunded to the HRA, then cash-strapped Croydon will need to issue its second Section 114 notice in less than 18 months.
Not that Kerswell appears too fussed by the situation.
“The auditor says this is taxing their technical geeks. It is a really complex accounting problem,” Kerswell told the trade magazine.
The controversy stems from what the LGC describes as “Croydon’s complicated web of housing companies, which it used to circumvent rules related to the treatment of right to buy receipts”. The “complicated web” was woven by Simon Hall, the Labour-run council’s cabinet member for finance, together with Richard Simpson, the then senior finance official. Both Hall and Simpson have since left the council.
Between 2017 and 2019, Croydon disposed of 344 properties on 80-year lease arrangements to its companies Croydon Affordable Tenures and Croydon Affordable Homes. The council provided £79million in loans to these companies and £33million in right to buy receipts, which the companies then used to fully pay their liability to the council.
The £112million was then treated as a capital receipt by the council, which used £38million in its capital programme and the other £73million as spending on adult social services, children’s services and IT.
The auditors have questioned whether the council treated the £73million correctly as a finance lease and should instead have treated it as an operating lease.
“If Grant Thornton rule that the money should be treated an operating lease, we could only have 1/40th of it available to spend every year for the next 40 years, with the rest kept in reserves,” Kerswell told the LGC.
“So that £73million crystalises not as a capital receipt but as a hit on our revenue budget, and we can only use 1/40th each year.”
Kerswell is relying on legal advice from a QC to contradict the ruling of the auditors. James Goudie QC found that the council’s treatment of the money was “not a ruse”, she says.
Kerswell said, “We have clear legal advice that it’s safe to proceed with our budget, by one of the country’s top barristers.
“Although the company structure we set up is uncommon among councils, we are not the only ones to have found proper legal mechanisms to ensure right to buy money is spent and not lost.
“I am so sad it’s come out like this because we’re trying very hard to demonstrate good governance by putting this risk in the public domain.”
The Local Government Chronicle reports that Kerswell “said the council was continuing to try to prove the arrangement could be classed as a finance lease but at the same time was ‘putting in place measures to find that £73million’ if necessary”.
Kerswell said, “As a last resort we could apply for capitalisation loan.” Meaning even more borrowing from the government by the council that had built up debts of £1.5billion.
Kerswell and the council have been able to go ahead with today’s budget-setting meetings, postponed from last Monday, because the government has signed off on the latest £50million tranche of bail-out money, and is “minded to agree” to a further £25million for next year.
Kerswell told the magazine that staff morale was being hit by “local media reports” about the misspent housing revenue account money. By which she presumably means the BBC… More than 600 jobs have been axed at Croydon Council since 2019.
Unmentioned in the Local Government Chronicle’s interview was that, late last year, another local authority was forced to issue a Section 114 notice after a much smaller amount, £15.8million, accumulated over seven years, was discovered to have been incorrectly credited from its Housing Revenue Account and used on general expenditure. As with Croydon, local authority finance experts CIPFA and other external experts were called in to mop up the mess.
The local authority in question is Nottingham City Council.
- Click here for the council finance report to the cabinet
- Click here for the council’s explanatory notes on its latest financial disaster
Read more: ‘We’re not teetering on the brink of bankruptcy’ claims Kerswell
Read more: Council admits: We’re on the brink of bankruptcy. Again
Read more: Council faces new storm over ‘missing’ £73m housing money
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