CROYDON IN CRISIS: After a fortnight of flimsy denials from the propaganda bunker at Fisher’s Folly and the local Labor Party, official reports released ahead of budget-setting meetings confirm that Croydon may indeed have to issue a second S114 opinion. By STEVEN DOWNES
Almost two weeks later Inside Croydon announced the news of £73m of funds that had been misused outside the housing income account, the town hall has finally admitted that, yes, the council is indeed once again about to going bankrupt.
It is impossible to conceal the desperate gravity of the situation for the cash-strapped and crisis-stricken Croydon Council.
Detailed financial reports prior to board budgeting meetings were withheld for over a week. Almost all council meetings have been canceled or postponed for fifteen days. The cabinet and full council budget-setting meetings, originally scheduled to take place today, have been postponed until next Monday.
In the report to borough councillors, Richard Ennis, the council’s senior finance official, wrote of the £73million hole in the accounts: “The council risks being [Section 114] notice has been given due to the revenue charge of £73m to be met during the year”.
Section 114 opinions are issued by local authorities when they are unable to present a balanced budget. Previously they were extremely rare: when Croydon published its S114 advisory in November 2020, when covid saw it overrun its £67m budget, it was only the second council to do so this century.
Now even the council’s top officials are warning that Croydon is on the brink of bankruptcy for the second time in less than 18 months. And that, it’s worth stressing, comes barely a year since the council received a £120m bailout from the government – the biggest such bailout in local government history.
The latest scandal to break out at a Croydon council’s clusterfuck dates back five years and revolves around the often convoluted efforts of Simon Hall, then a Labor finance cabinet member, and Alison Butler, then a housing cabinet member , supported by the chief financial officer of the council. Richard Simpson, and all to circumvent borrowing limits and spending rules tied to the Conservative government’s right to buy legislation.
The arrangements put in place surrounded a complex nexus of businesses centered on Croydon Affordable Tenures and Croydon Affordable Homes, and saw public money potentially diverted into other areas.
Auditors Grant Thornton found that a total of £112million earmarked for buying properties was used to top up creaky budgets from other departments. Grant Thornton beancounters are not convinced council officials acted within their legal authority when they used the money for adult social care, children’s services and the IT department.
PwC consultants have been hired to review the company’s arrangements, CIPFA, the public finance body, is helping out and a Queen’s Counsel is providing legal advice.
Warnings for budgeting meetings come in a report titled General Fund and Housing Income Account Budget 2022-2023 to 2024-2025, although even that seems to be extremely optimistic. At the heart of the problem here is that Grant Thornton is still refusing to sign the council accounts for the pre-covid year 2019-2020 as well as 2020-2021.
And in all likelihood, Ennis won’t even be here next Monday to answer any questions that arise.
Such was the merry-go-round of temporary appointments to key positions, Ennis was the the third no one to fill the position of Section 151 officer in 2021, and he is now being replaced as well, after refusing to seek employment permanently. His last day as interim CFO is today (although Inside Croydon missed an invitation to his leaving drink).
But what a farewell report he managed to write.
“The council continues to face challenges,” the report states, with a subterranean understatement, “the most significant of these issues appear to be: The unaudited 2019/20 and 2020/21 accounts – particularly in relation to Croydon Affordable Homes / Croydon Affordable Tenures …
“…The most significant of these are Croydon Affordable Homes and Croydon Affordable Tenures which could either be resolved subject to agreement with our external auditors or require a charge of income to the council’s general fund of nearly £73 million.
“This is a problem with the accounting treatment of a lease, it is not about money [sic] gone,” he continues.
“Officer S151 cannot comment on the outcome of this accounting issue until work is completed with Grant Thornton (our external auditors). Consequently, this risk has not been provisioned in the reserve proposals.“Our italics.
“If the end result is that it is an operating lease, the council is at risk of receiving another S114 notice due to the £73m revenue charge to be paid over the course of the year.
“Council Officer S151’s view, in addition to counsel’s legal opinion, is that it is essential that the material and not inconsequential nature of this risk be reported, particularly given the inability to make a judgment at this stage and should be included in this [Section 25] declaration of clarity and openness.
The following bit will send shivers down the spine of Richard Simpson, the former finance director of Croydon (now trying to juggle financial arrangements at Sutton over their dodgy heating network company): ‘It is possible that the council will now have to speak to these officers and the advisors involved at the time the accounting provisions in this regard were determined. »
Elsewhere in the report, which is co-authored by the council’s chief executive, Katherine Kerswell, as well as David Padfield, the executive director of housing (like Ennis, another short-lived interim), it says: ‘There remains a legacy significant accounting issue regarding the Croydon Affordable Homes and Croydon Affordable Tenures leases to be resolved.
“This is the main reason why the 2019-2020 and 2020-2021 accounts have yet to be completed.”
Note that: “the main reason”, but not the only a.
“This report shows the options the board is discussing with its external auditors. The board should establish a budget and this report recommends proceeding with the establishment of a budget based on the best estimates currently available to the board, notwithstanding risk and potential accounting treatments, which will be discussed further in during the new fiscal year. There is a concerted attempt to run this in the longer grass of April, May or even July.
“The risk is that this will be resolved and adjustments will be needed in the new financial year, which could be significant.” What a legacy to inherit for any new executive mayor.
And they explain: ‘Council has taken advice from a leading QC in respect of this matter…’.
The QC is identified in council papers as prominent silk veteran James Goudie, who himself was a council leader in Brent in the past.
“The QC has confirmed that the board can budget with this key unresolved risk by making the best estimates available at this time.”
The board admits it will likely need another bailout from the government, “a new capitalization direction”, as well as a “review of its reserves position, reserves strategy and timing in addition to other options”.
They say the matter has been referred to the government-appointed Improvement Commission and the Upgrading Department.
They list three options for action to deal with the troublesome £73million…
There’s the “Get Out of Jail Free” card: “Determine that previous accounting treatment meets finance lease criteria and therefore no changes are necessary”, at which point anyone can push a huge sigh of relief.
Then there is “Compose lease agreements by dividing land and building components – this has the potential to still generate enough capital revenue to fund transformation costs”.
And finally, there is “Review the accounting treatment of the initial capital loan to
CAH/CAT which, in itself, may have the potential to generate corresponding capital inflows”. In other words, another disposal of assets.
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