Havering Council drifting towards bankruptcy

Havering Council has warned it is only “six to twelve months” away from declaring itself effectively bankrupt.

The council has a budget “gap” of about £31million to close this financial year, which ends in April 2024, and has dwindling reserve funds to fall back on.

Council leader Ray Morgon said Havering now needs to make “extremely difficult choices” as it is facing “rapidly rising costs and diminishing resources” following 13 years of government funding cuts.

About £20m of the shortfall is coming from increased demand to provide social care for adults and children.

Inflation is also “driving up” the cost of providing that care and causing more households to ask the council for help with housing.

Havering’s most senior finance officer is legally required to issue a Section 114 notice – effectively declaring itself bankrupt – if they believe the council cannot cover its day-to-day costs or set a balanced annual budget by March each year.

Strategic director of resources Kathy Freeman, who oversees the council’s finances, said: “It’s got to the point now that we are very close to issuing a section 114 notice, and we could be as close as six to twelve months away.”

She added: “We’re going to do everything we can to not get there.”

After issuing a 114 notice, no new spending can be approved unless it is for a legally-required service such as social care.

The government is unlikely to bail Havering Council out financially, but it could appoint commissioners to take control of its day-to-day running or force the council to sell its property in order to fund services.

The council has now frozen all non-essential spending and further announcements on proposed cuts to services are expected to be announced next month.

Speaking at a media briefing on September 27, Cllr Morgon said the council is likely to face “some really tough decisions” on cuts to its services.

He added: “We had the same last year, but the choices this year are going to be even more difficult but they are choices we will certainly make, albeit that they may not always be popular with residents.”

A breakdown of Havering’s finances published on Tuesday predicts a shortfall of £23m needed for day-to-day services.

Next year (2024/25), it is facing an even larger gap of about £31m, rising to £77m by 2028.

Plans to save £17m through cuts and “savings” alongside £7m in staff redundancies, agreed earlier this year, have only been partially delivered.

Reserves which the council can fall back on are at about £48m, less than the council needs to cover the budget gap this year and next year.

Chief executive Andrew Blake-Herbert, said the council is “very efficient” but has been forced into a budget crisis by the need to look after London’s second oldest population and the rapidly growing population of children.

He criticised the government for using a funding formula that has been “frozen” since 2013, arguing that this no longer reflects the needs of Havering’s residents.

Ms Freeman, who joined the council in August, argued that Havering has not taken financial risks in the same way as Croydon, Thurrock or Woking, which have all issued Section 114 notices in recent years.

She said: “We haven’t actually done anything wrong – we’ve not taken excessive commercial risks, we haven’t got historical backdated pay claims that we haven’t dealt with – we’ve taken all the difficult decisions that we’ve had to take to date.

“We’re in this position because of our long-standing underfunding position from central government – and it’s really unfortunate.”

The council leader and senior officers are understood to have raised their concerns with ministers and civil servants at the Department for Levelling Up, Housing and Communities (DLUCH), which is responsible for funding councils.

However, Ms Freeman said DLUCH remains in “listening mode” about what Havering is doing to manage its budget but has not given a “formal response”.

A DLUHC spokesperson refused to respond when asked about its funding formula for councils being “frozen” since 2013.

However, they argued that local authorities saw their core spending power – which includes council tax increases and government funding – increase by 9.4% in 2022/23.

They added: “For Havering Council, this represents an increase in Core Spending Power of up to £18.5 million (9.2%) – making available a total of up to £218.7 million in 2023-24.

“We stand ready to speak to any council that has concerns about its ability to manage its finances or faces pressures it has not planned for.”

Josh Mellor

Local Democracy Reporter