Facing financial failure

Adam Carey looks at the difficulties a monitoring officer may experience following the issuance of a section 114 notice, and how they can navigate the process.

With the growing number of local authorities warning that they are in dire financial straits, more and more monitoring officers will be confronted with the unique challenges that issuing a section 114 notice brings.

In September, leading risk assessment firm Moody’s warned that more local authorities look set to issue section 114 notices in the near term and said an audit backlog is likely to be hiding more failures as just 12% of fiscal audits in 2022 were completed on time.

The news from Moody’s was followed up in October by a warning from UNISON that councils “are teetering on the brink” in the face of a combined funding gap of £3.5 billion, which it predicted will surge to £7 billion by 2025.

Just a week later, London Councils reported that in-house analysis showed nine in ten London boroughs expect to overspend on their budget this year and that an extra £500 million would be needed next year for the authorities to keep a balanced budget.

This cohort of monitoring officers will have the lonely job of navigating politically fraught situations and facilitating lawful spending cuts, all while juggling their other responsibilities. So, how can they prepare for such an eventuality?

What are the pressures?

Even at the best of times, the monitoring officer's role is complex. But under a section 114 notice, the workload and the pressures increase dramatically.

Paul Turner, the monitoring officer at Essex County Council, says the moment a section 114 notice has been issued, the monitoring officer needs to consider whether they should issue a section 5 report under the Local Government and Housing Act 1989.

Turner, who also helped carry out the Best Value Inspection into Thurrock Council following the issuance of its section 114 notice in December last year, says: "I think, generally, for the sort of 'we've run out of money’ section 114 reports that we're seeing at the moment you don't need to issue a section 5 report. But you have to obviously consider that."

Once that has been squared, the next thing to handle is spending controls.

"The legal section 114 controls end after the council meeting, but in reality, people expect them to go on for a lot longer than that," Turner explains.

"Ideally, you should have a new financial governance system – which the monitoring officer should have an involvement in – to make sure that those controls are maintained after the expiry of the section 114 restrictions.

"So how are you going to make sure the intervention is brought under control? Clearly, the monitoring officer has a key role in advising," he notes.

Turner says councils usually set up a panel to improve financial governance and decide on spending post-section 114, but councils should also consider amending the constitution to reduce individual officers' spending thresholds because panels are not necessarily legally binding.

Whichever approach a council takes to manage spending decisions, the monitoring officer will be occupied with making sure such decisions are lawful.

Under a section 114 notice, councils are prohibited from all new expenditures other than spending required for statutory services. But taking stock of all statutory duties a council must fund is an enormous task for a monitoring officer.

Geoff Wild, who lead Kent County Council's alternative business structure, Invicta Law, and who has held monitoring officer roles at eight different local authorities across his career, points out that the Ministry of Housing, Communities and Local Government set out a list of the more than 2,000 statutory duties in 2011, which can be found here. Wild adds that he and his team at Kent compiled an even more comprehensive list for the LGA, which can be found here.

"So defining what is statutory is not difficult," he says, "it is huge, but is not difficult.

"What other authorities are saying is 'we're going to restrict our spend to what we regard as essential'.

"Now that's something completely different. It all depends on what they define as essential and how they go about determining that."

All of these procedural strains have been spotlighted at Birmingham City Council, which issued a section 114 notice in September over equal pay liabilities of around £760 million and due to costs of implementing a delayed IT system ballooning to £100 million.

Within three days of Birmingham's section 114 notice, its city solicitor and monitoring officer, Janie Berry, said in a committee meeting that it was "extraordinarily difficult to define council statutory functions" and that she had been fielding questions from council officers about what can be considered statutory spend, with one officer asking if sending a letter could be considered statutory.

On defining essential spend, Berry said she and the section 151 officer were asking directorates what they deemed to be a priority for them to deliver. As part of this, the directorates were carrying out their own risk analysis for the legal team to then scrutinise, Berry said.

One month later, it came to light that Berry was also under investigation for her legal advice at the request of "some senior politicians," demonstrating the interpersonal strains that a section 114 notice can create for a monitoring officer. This was despite Birmingham's external auditors at Grant Thornton noting that, as far as they were aware, "the Council had not […] commissioned or received legal advice that indicated that the Monitoring Officer had provided incorrect legal advice".

"That's typical in situations under stress," Wild says, commenting on the investigation into Berry.  

Wild notes: "Divisions do appear, whether within member-member ranks – even the ruling administration can break into factions – or between members and officers, which is a really difficult one to solve because once the trust and confidence between members and officers goes, then the authority is in a very difficult situation."

In such politically fraught circumstances, the monitoring officer – rightly or wrongly – can become a target, and under directions, commissioners often have the power to fire them.

Rachel McKoy, the president of Lawyers in Local Government and Director of Law and monitoring officer at the London Borough of Hounslow, says being on the firing line would add to the stress.

She mentions that the directions at Birmingham allow commissioners to hire and fire senior officers.

"So they could just go 'right, clean sweep'," she says.

"That must be really difficult as well because you're just thinking 'is my role even safe?'. I think it must be incredibly stressful and exhausting."

How can the pressures be alleviated?

While the issues facing monitoring officers following a section 114 notice might be intimidating, there is no shortage of ideas in the sector on how the stresses can be alleviated.

According to Turner and McKoy, fundamental changes to legislation could go a long way in improving the monitoring officer's stature in an organisation and their understanding of their responsibilities.

"Monitoring officers need to be better supported – I think that's absolutely key," Turner says.

"And I think one of the things that we found in the best value inspection report [of Thurrock] was that the role of the monitoring officer is not actually very well defined. The minimum reporting duty is there, but the prevention duty, which most people say they have, isn't actually enshrined anywhere.

"So some sort of guidance would be a really good thing that says, 'this is what you're supposed to do – this is a sensible way of interpreting section 5'."

This lack of guidance is something that LLG is attempting to fix by helping develop a risk and assurance framework alongside the Local Government Association and Solace, according to McKoy.

The framework will set out best practice guidance and look at the role of the monitoring officer and all three key statutory officers and their relationship.

"If we can get our role acknowledged a bit more and respected a bit more and elevated in terms of structures – and people really understand what the role is – that's got to be positive for everyone," McKoy says.

LLG has also commissioned work from the Local Government Information Unit (LGiU) and law firm Browne Jacobson on the role of the monitoring officer within previous governance failures, with a view to publishing the findings in the new year.

On handling the interpersonal side of things, Dr Andrew Walker of the LGiU says that research he recently conducted – which involved interviewing 20 monitoring officers – showed that monitoring officers want greater scope to sanction bad behaviour.

"I think almost everyone we interviewed raised the issue of the standards and sanctions regime, which was abolished after the Localism Act in 2011 and that removed lots of the powers that local authorities have to sanction bad behaviour within a council,” Dr Walker says.

"Monitoring officers said to us that this often leaves them with no recourse. Often, they can call out bad behaviour, but they're often left with nowhere further to go after calling it out."

He says this can reduce the respect and status that monitoring officers have as they are powerless to respond to complaints.

"People just sort of lose their trust in the process and the position," he says, "and often people said to us that you have people who behave badly who see it as a badge of honour to have gotten away with nothing more than a slap on the wrist."

Beyond legislative changes, McKoy believes that soft skills also play an important role in helping a monitoring officer navigate the pressures.

But these soft skills – things like resilience, confidence and robustness – come with training, she says.

LLG currently offers a free well-being week, which is scheduled for next January and will involve webinars on how local government lawyers can navigate the stresses of the sector.

The membership body has also launched its Inspire programme, a 12-month long course costing £2,500, which is aimed at training future monitoring officers.

"Our new course for inspiring MOs – that's what this is all about. It is all about the resilience piece, leadership, political navigation, all of this stuff, and then obviously finance and all the bits and bobs that you need," Mckoy says.

Modules on the 60-hour course set to take its first students in November include leadership and strategy skills, which include classes on conflict resolution and on how to stand your ground “politely but effectively,” according to the course notes.

But even in a situation in which a monitoring officer is well trained, the guidance they follow is clear, and the legislation supports them, a monitoring officer could still be fighting a losing battle.

In the most dire circumstances, parachuting a new monitoring officer into the council following a section 114 notice could be the best approach.

On this point, Turner says: "I think if you're parachuted in as an experienced monitoring officer to be a troubleshooter … then I think that's in some ways easier because you don't need to build the relationships in the same way."

He adds that a fresh monitoring officer would not be accountable for what's happened before, making the process of reforming governance at the council easier.

For an incumbent monitoring officer, Turner says that stepping back and moving to a new authority could be the best option, although he emphasises that he would never personally advise a monitoring officer to step down.

"What I learnt from the best value inspection is that if you see things going wrong and you try to stop them, but you can't, then you have to really consider whether you can continue to be associated with that organisation – I'm not saying I learnt that from any of the monitoring officers we interviewed – I just thought 'what would I have done in that situation? Could I have stayed?'

"My view was that you get to a point where you just have to go for your own peace of mind.

"For me, that was an important piece of learning," he says.

The trend of councils in financial crisis is worrying for everyone, and its impact is felt uniquely by all involved, from councillors to residents - and is certainly acutely felt at the highest level of the officer structure.

Hopefully, the character traits it takes to make the “leap of faith” – as Geoff Wild describes it – to become a monitoring officer in the first place create a strong foundation for handling the unpredictable challenges that a section 114 notice brings.

Adam Carey is a reporter at Local Government Lawyer.