Croydon council goes bust and freezes spending as Covid costs bite
Croydon council has become the first London borough to buckle under the weight of the pandemic, as it today filed a notice declaring it virtually “bankrupt”.
In a letter to councillors seen by City A.M, Croydon’s finance director Lisa Taylor outlined “serious issues” facing the borough, including a potential budget shortfall of around £66m this year.
Taylor today filed a section 114 notice for the council, meaning all non-essential spending is immediately frozen and expenditure limited to core services.
It comes after Croydon council was last month placed under government review after a damning report by auditors Grant Thornton found there had been “collective corporate blindness to both the seriousness of the financial position and the urgency with which actions needed to be taken”.
The budget shortfall included £36m in “undeliverable” income from the council’s in-house property developer, Brick by Brick.
Croydon South MP Chris Philp told Morning Wire that “the Labour council has led Croydon into bankruptcy”.
“This long predates coronavirus. They’ve run up £1.5bn of debt, which is by far the highest of any London borough, and that’s costing £43m a year to service. It’s astonishing,” he said.
The council has previously acknowledged its worsening financial situation, and said in a statement today it has “set in train a number of improvement and savings programmes to help put it back on a stable financial footing”.
Council leaders said they are in talks with ministers about securing financial support to balance its budget.
Croydon council leader Hamida Ali, who took up the role last month, said: “We need to be honest about the fact that, for a number of reasons, the council is on track to spend more than we have.
“The Covid-19 crisis and a decade of austerity have had a major impact on our finances but it’s clear the council has also made mistakes, and I am committed to fixing that.”
The Labour councillor added: “While we continue to work hard to find savings, we must focus our spending on essential services and protecting our vulnerable residents.
“We’re not going to fix these problems overnight and there will be difficult decisions ahead.”
Philp added that London mayor Sadiq Khan was “as usual hiding when it comes to difficult questions about problems created by the Labour party”.
“If you actually if you look at the section 114 notice it actually says explicitly that these financial problems are nothing to do with coronavirus. The mission now is to try to figure out how to solve the mess that Labour has created.”
A spokesperson for the London mayor told City A.M: “Croydon council recently elected a new Leader and senior team to tackle the council’s financial problems head on.
“The council have now issued a section 114 notice, in part because of the impact of Covid-19 on its finances, and is asking the government for additional financial support. The mayor hopes a settlement can be achieved as quickly as possible that serves the best interests of Croydon residents.”
Section 114
The move makes Croydon the first local authority in England to file for bankruptcy since Northamptonshire did so in 2018.
Local authorities file section 114 notices if it appears to their financial officers “that the expenditure of the authority incurred in a financial year is likely to exceed the resources available to it to meet that expenditure”.
All non-essential council spending is frozen under the act, with an emergency protocol only allowing spending for a select few reasons, including paying existing staff.
For at least the next 21 days, Croydon council must not spend any money without authorisation from the chief finance officer.
The Taxpayer’s Alliance today said that “news of Croydon Council going bust will sadly be of little surprise to those familiar with the local authorities”.
The campaign last month warned in a blog post that the council was at serious risk of filing for bankruptcy.
“Whilst Covid has no doubt hindered Croydon council, it’s clear the financial challenges predate the crisis. Too much money has been squandered on schemes that have not paid off,” the group said.
Warning lights
In June, the Chartered Institute of Public Finance and Accounting (CIPFA) announced that its bankruptcy guidance for local authorities had been temporarily modified.
The move was part of plans to allow councils more time to consider alternative options in attempt to avoid disruption to local communities during the Covid-19 crisis.
The CIPFA instead urged councils’ financial officers to contact the ministry of housing at the earliest convenience.
But the changes failed to sway cash-strapped local authorities from warning that they were poised to file section 114 notices.
In April, Liverpool mayor Joe Anderson warned that the city council “could be declared bankrupt” due to being “on the verge of not being able to pay for services”, projecting a £58m budget shortfall for the year.
Responding to emergency demands during the coronavirus crisis has weighed heavily on councils’ budgets this year.
Croydon is currently the sixth-worst affected London borough from coronavirus, having reported 4,481 confirmed cases since the start of the pandemic.
Commenting on Croydon councils announcement today, CIPFA chief executive Rob Whiteman said: “Croydon’s [financial] officer has done entirely the right thing because it’s better to bring these issues out to be dealt with. We fully support the decision.
“There are some councils which would be resilient but for Covid-19, but that’s not the case for Croydon. The public interest report shows there are far more fundamental underlying problems at Croydon and therefore the section 114 notice is now being issued.”
A spokesman for the Ministry of Housing, Communities and Local Government said it was “right Croydon Council takes the necessary decisions to manage its own finances”.
“We’re aware of serious concerns around the council’s governance and risk management and the recent Public Interest Report was damning about the governance within Croydon Council, which has been entirely irresponsible with their spending and investments,” he said. “That is why we have begun a rapid non-statutory review into the council to get the situation under control.
“The council has decided to issue a section 114 notice and we will consider the findings of the review which concludes later this month.”