What can be done to stop the rise of the Super-Debt Councils?

Paul Feild analyses recent high-profile local authority governance failures, and sets out ways in which they might be prevented in future.

High-profile governance and massive debt failures at Croydon LBC, Thurrock BC and Woking BC. Inconceivable debt has plunged those boroughs into the fiscal abyss including in one case forcing their citizens to pay three times more than the national council tax ceiling of 4.99%. Are there some common factors?

Firstly, it appears that in each of those authorities the elected politicians did not really understand the predicament their council was in because the senior salaried officer cadre were not communicating in a meaningful way what risks proposed financial strategies carried or what would be the consequences of default. Did those officers know what was going on and were silent or did they not know themselves what the financial picture looked like?

In Woking, the Chief Executive had previously been the Finance Director and thus had the superficial gravitas to command on matters financial with many of the debt decisions under delegated authority. Having said that, it appears a Local Government Association corporate challenge review did give warning in 2019 to Woking as to the size of their debt.

Secondly, the collapse of the Local Audit mechanism does not help. After the various reports we still don’t know who knew what when, as the various investigators involved had trouble in getting candour from the key players, if they would speak at all. Example:

135. The inspection team interviewed the former Chief Executive at an early stage of this inspection, but unfortunately, part way through the interview the Chief Executive advised us that she was unable to continue that day. Despite attempts to do so, we were unable to secure an appointment for the interview to continue, and the interview could not be concluded. Best Value Report June 2025

In the case of Thurrock, the Finance Director was found by any measure to be acting outside any supposed delegated authority. Getting to the truth of the matter for the Commissioners must have been challenging because they say there was little documentation, stating much went on by e-mails or oral briefings rather than reports to Cabinet.

But I struggle with the Thurrock timeline when it was said people realised that something was terribly wrong with the finances. The finance management must have known. It was obvious years before. I will explain.

The Chartered Institute for Public Finance (CIPFA) is the recognised accountancy professional body for public finance. Their guidance on local authority accounting practice goes beyond suggested best practice it effectively takes the form of being obligatory. CIPFA have produced a practice guidance being the Prudential Code for Capital Finance in Local Authorities (the Prudential Code) 2021.

Back in December 2021 Local Government Lawyer published my commentary as to why the Prudential Code should matter for Monitoring Officers.

To recap the Prudential Code matters because local authorities are required by Regulations to have regard to the Prudential Code when carrying out their duties in England and Wales under Part 1 of the Local Government Act 2003 (2003 Act) and by Regulations 2 and 24 of the Local Authorities (Capital Finance and Accounting) (England) Regulations 2003 No 3146 (as amended).

We also need to take note of section 15(1) of the 2003 Act. This provides that the Secretary of State for Levelling up, Housing and Communities regarding capital finance may issue guidance which the Local Authority shall have regard to. Guidance has been issued and the key document is the 2018 Statutory Guidance on Local Government Investments (3rd Edition) and is effective for financial years commencing on or after 1 April 2018. It is also worth noting that the section 12(b) power to Invest in the 2003 Act refers to the ‘prudent management’ of its financial affairs.

There is an established framework set out in legislation backed by Regulations and guidance which inter alia requires the local government financial administration to have regard to their accountancy professional body. In addition, what the professional accounting guidance says about prudential capital finance is clearly part of defining what would be a prudent management of local authority financial affairs.

The dire finance situation of a number of councils was well-known in public finance circles with the respected Public Finance web magazine highlighting debt of Thurrock of over a billion pounds in July 2020[i]. Two finance practices were going on in the councils mentioned above. Firstly, borrowing for yield and making margins on borrowing to local authority-controlled companies from discount loan rates from other local authorities or the Public Works and Loan Board.

‘Borrowing for yield’ means borrowing at lower rate funds and using them to acquire a higher income producing asset which is used to cover the cost of borrowing. Now it is a truth, universally well-known, the iron law of financial investments, that the higher the income or growth potential of a financial adventure then the greater the risk. So, convention has it the only way that an investment was going deliver to a council a greater return to cover their borrowing to pay back the loan and a margin profit was by it being of higher risk. So, it proved.

The second arrangement (‘lending on’ mark-up) involves a secondary loan. A particular example being Woking. Again, it involved discounted to the public sector loans from the Public Works and Loan Board[ii], which were then lent to a council company at commercial rates, the justification being that if they were to pass on the discount the Council got that would be state aid / subsidy. But these companies would often not able to pay the loan interest so the interest would be wrapped up in the debt of the company as a future capital repayment sum. Here there can be two perverse incentives in that the bigger the loan the greater the interest profit, and secondly a reluctance to liquidate a company when it proves not to be a going concern because of the interest profit. Of course, there is in reality no interest profit because the company is not and never will be viable.

Local government finance practice is that borrowing for assets is to be covered by minimum revenue provision. This means a local authority should account for the loan and provide funds for repayment. Some councils simply did not make adequate accounting to it. One supposes they thought the underlying asset such as the investment or the shares provided the security.

The Thurrock internal narrative has been that the 2021 Prudential Code put a stop to their borrowing for yield. But plain reading of the previous 2017 Prudential Code is that it did not permit it either. The 2017 Prudential Code says (Para 45):

Authorities must not borrow more than or in advance of their needs purely in order to profit from the investment of the extra sums borrowed. Authorities should also consider carefully whether they can demonstrate value for money in borrowing in advance of need and can ensure the security of such funds.

So, one is left with the inevitable conclusion that the precarious and imprudent risk management of its affairs was easy to see some time before June 2022 which is the date given in the Best Value Report.

There is more. Let’s look at the decision of the First-tier Tribunal General Regulatory Chamber Information Rights[iii] .

Gareth Davies a journalist for the Bureau of Investigative Journalists made a Freedom of Information Request on 2 October 2019 and 2 December 2019 to Thurrock Council. He said inter alia:

I am emailing to request the following information under the Freedom of Information Act 2000. The authority's 2018/19 accounts state: "The Council holds long term debtors of £740m as at 31 March 2019. £702m of the balance relates to long term capital investment in the renewable energy sector secured by the associated assets."  Judgment Para 4

Thurrock resisted the FOI request and bizarrely the Information Commissioner (IC) supported their position and in due course was joined as a party[iv].

Merits aside, it is clear in late 2019 the massive debt was already known. Unfortunately for both the residents of Thurrock and Mr Davies the first time his matter went before the Tribunal in December 2021, he won on all his points. Sadly, it turned out the Tribunal was incorrectly constituted, and its decision was void so it had to be re-heard in summer 2022.

Now the First Tier is a court of record. Thurrock was represented by a King's Counsel. Evidence was produced by both the Section 151 Officer and the deputy Monitoring Officer as to why the information should not be disclosed. The cost of the two hearings will have been many thousands of pounds and involved senior officer evidence and attendance at court.

It is inconceivable that nobody at senior management team mentioned it to each other – do senior managers not have supervision or one to ones? Of course, they do.

A further unhealthy arrangement was the reporting line of the day-to-day management of the Monitoring Officer by the said Section 151 Officer. What a difficult position to be in. Since the retirement of the Assistant Director and Head of Legal Services in 2019 there have been five holders of the Monitoring Officer office, indeed the interim Monitoring Officer met by the Best Value Commissioners during their investigation has left.

A common factor of the councils identified appears to be an officer culture that simply was out of the practice of explaining to the political leadership what the risks were of the course of conduct the officers were taking supposedly in the pursuit of the Council objectives. In the case of Thurrock, it was specifically warned by ‘Arlingclose’ (the Council's financial consultants) in writing to the Director of Finance in March 2018 of the risk the Council was taking on. The Thurrock Best Value Report (published on 15 June 2023) says:

…67 Perhaps the first significant ‘red flag’ came in March 2018. Arlingclose, who were then the Council’s Treasury Management advisers, wrote to the s151 Officer to express concerns about the way in which the Council was managing its investment programme. In the letter, Arlingclose set out that ‘the Council’s higher risk appetite and adopted strategy is what we would classify as extreme,’ and that it had ‘moved the Council well beyond the bounds of what we consider to be prudential risk management boundaries.’ The letter raised concerns about investment in unrated bonds, the risks of refinancing investments and the overall debt levels being taken on by the Council.

68. The s151 Officer did not heed these warnings. It is not clear who if anyone other than the s151 Officer saw the correspondence with Arlingclose although it appears that the full contents were not shared with the Cabinet Member for Finance, the Leader or the Chief Executive… Para 67 & 68

The massive debt and the risk had been flagged up over five years ago and guidance from CIPFA on prudential financial administration was not being observed.

Summing-Up

There are re-occurring themes and common factors. Firstly, the political leadership needs to be properly informed as to the risk of proposed actions. It is not too hard on chief officers to say to them, ‘you need to ensure our politicians know what is going on in their name’. A delegated authority should carry with it proper accountability.

In these Super-Debt Councils, is it fair to say - if it were spelt out what the risks were then would the members ever have agreed to the activities? The probable answer is ‘no’. Equally when it starts to go wrong, members need to be told and given the options including pulling the plug. Big risk projects need objective external oversight. It is simply too higher risk taking to leave it to the internal workings. This means if a scheme or project is failing scrapping it should a contemplatable option.

Secondly, the role of the Monitoring Officer. As I mentioned in previous features there is a tendency for the Monitoring Officer to be caught in the gravitational pull of the black hole debt. But where is their agency? They should not be line managed by Chief Finance Officers. Period. There is inevitable leverage on the Monitoring Officer to ‘toe the line’. All the dotted lines in the world to the Chief Executive will be of little assistance if your line manager the s.151 is taking on dangerous risk. The current Monitoring Officer role in many councils is too vague and needs redefining to that of a ‘Corporate Governance Officer’ (see my paper on this in Local Government Lawyer 12 May 2023)[v]. It’s a full-time position in its own right but is often bolted on to the head of legal services job description. But that head may have risen through the ranks from housing or safeguarding and have little actual practitioner experience of corporate governance or local government finance.

Thirdly, the Local Authorities (Functions and Responsibilities) Regulations needs to reserve 'major financial decisions’ to full council. This was contemplated in draft around 2015 for land transactions. I would suggest that the Secretary of State determines what constitutes a ‘major financial decision’ which would relate to a formula that would take into account aspects of Prudential Finance and any existing debt, security, gearing and risk (well you get the idea).

Fourthly, before any borrowing is authorised the major financial decision must have an independent financial evaluation commissioned to ‘stress test’ the viability of these proposals with a sufficient margin of safety such that if things go wrong there is the collateral to pay off the debt in a reasonable time. We use viability models all the time in regeneration so it would be adaptable.

Fifthly, what about the culture which contributed so much to failures? This merits a further consideration, but for now I would venture the view that this is an inherent downside of localism. Culture is what we do around here = localism. But bad cultures which inhibit raising concerns can create a toxic environment where professionals can see disaster but do not flag it up as they do not feel safe to do so. On the other hand, whistleblowing rarely comes out well for the blower. Who can an officer concerned about the s.151 officer go to now the failure of local audit means that the local auditor is so bogged down with 2- or 3-years backlog of audits that the true picture (super indebtedness?) may not be known by anyone? Maybe CIPFA could recommend culture being a specific element of the Annual Governance Statement, I do know going on from 2023 the LGA are planning to consider devoting more attention to governance in the peer review challenge process. Very sensible too.

While the issue of governance is much wider than just finance, poor management has lasting long-term repercussions. It undermines faith in local democracy and hits the Council Taxpayer in the purse and wallet. Croydon Council Taxpayers had to pay 14.99 % Council tax for 2023 /24. What will they pay for 2024/25? Somehow, I doubt that the 10% mark-up is going to be a one off.

This raises some of the most difficult existential questions of all. Why should the residents of a borough be penalised for maybe decades into the future with higher Council tax due to the negligence and mistakes of its political and officer leadership made over a relatively short period of time? Should central government bail them out? But why should the UK taxpayer pick up the cost?

I would suggest as an option, a review of whether the Super-Debt Councils should be joined up with other authorities or revert from unitary to district status. But what prudent neighbour (or their council taxpayers) would want to be merged with them unless there was a grant for doing so? Nevertheless, it is likely to be the only way to save a Super Debt Authority and provide the officer competence and capability as it will not have the money to recruit the best across the board while the inevitable section 114 reins.

Dr Paul Feild is the Principal Standards & Governance Solicitor working in Barking & Dagenham Legal Services. His 2015 Doctor of Business Administration Thesis was ‘How does Localism for Standards Work in Practice? The Practitioner’s View of Local Standards Post Localism Act 2011’. He researches and writes on finance and governance issues and can be contacted This email address is being protected from spambots. You need JavaScript enabled to view it..

^[i] Council rejects criticism of investment strategy | Public Finance

^[ii] According to the Report to the Secretary of State - Governance, Financial and Commercial Review of Woking Borough Council, May 2023 para 110 Woking owes the PWLB £1.8 Billion pounds this was at 1.62%.

^[iii] Appeal References: EA/2020/0241 EA/2020/0242 Neutral Citation Number: [2022] UKFTT 00375 (GRC)

^[iv] Though earlier this year the IC has taken a volte face and issued a statement policy supporting openness.

^[v] The Monitoring Officer as Chief Governance Officer (localgovernmentlawyer.co.uk)