Section 114 notice
A section 114 notice is a report issued by the chief financial officer of a British public body to prevent certain types of expenditure. It takes its name from section 114 of the Local Government Finance Act 1988.
The most common type of notice is made under section 114 which restricts all spending except for that which funds statutory services. Despite the fact that local authorities in the United Kingdom cannot go bankrupt, issuing a section 114 notice is often described in the media as a council effectively declaring bankruptcy. Most councils under a section 114 notice will then pass a new budget to introduce cuts and reduce spending.
Amongst other instances, section 114 notices have been issued by Hackney Council in 2000, Northamptonshire Council twice in 2018, Croydon Council in 2020 and 2022, Slough Council in 2021, Thurrock Council in 2022, and Woking Borough Council and Birmingham City Council in 2023.
Legal basis
Notices can be made under several parts of section 114 of the Local Government Finance Act 1988, with the different types of notice having different effects:- Section 114: A notice must be made when the council or someone acting on its behalf has incurred unlawful expenditure.
- Section 114A: A notice must be made when the council's cabinet or someone acting on its behalf has incurred unlawful expenditure.
- Section 114: A notice must be made when the predicted expenditure of the council during a financial year is likely to exceed its available funds.
The third type of notice, made under section 114, is the most commonly issued and can be made by the chief finance officer without consulting other council leaders. Once a notice has been issued, no new expenditure is permitted except to fund statutory services although existing commitments and contracts are honoured and staff wages are paid. Councillors must then meet within 21 days to discuss the situation and consider what action to take; once the notice has been considered, spending controls end.< Although the original notice may end, if the council does not address the problem another notice may be issued, such as in Croydon in 2020.
Instances of use
Hackney London Borough Council, 2000
issued a section 114 notice on 17 October 2000, predicting that it would have a £15.5m hole in its finances by the end of the financial year. Budget cuts of around £4.5m were needed for the 2000-2001 financial year and £18m for the 2001-2002 year.The council's managing director Max Caller, who had started the job that June, blamed the financial situation on previous mismanagement by council officers. A 1997 policy called 'Transforming Hackney' had removed centralised financial management in favour of budgets being set by individual council officials which, according to Jay Rayner, left the council "at the mercy of legions of incompetent council officials". Caller also said that previous cost-cutting measures, such as a resolution that no more permanent staff should be employed, had been "not understood, ignored or subverted" by council workers. In September 1999, the council had had to implement an internal spending moratorium in order to manage that year's budget deficit.
The council's revenue and benefits department and its waste management service were both running deficits of £3m and transport services were £600,000 over budget. Almost half of the council's overall deficit was also caused by the fact that the it had passed its budget on the assumption that 96% of council tax would be collected; instead the collection rate was around 65%.
Urgent budget cuts were approved on 6 November 2000 and involved cutting back on temporary staff and overtime and car allowances. In December 2000, the council agreed on a three-year proposal to improve its finances. The plan led to £4m of cuts for the 2000-2001 financial year and £16m of cuts for 2001–2002. Further cuts were projected at £9m for 2001–2002, £10m for 2002-2003 and £11m for 2003–2004.
Northamptonshire County Council, 2018
First notice
issued a section 114 notice on 2 February 2018, saying that there was a "significant risk" that the council would not be able to balance its budget for the 2017/18 financial year and could end up with a £10m deficit. Expected savings of £27m that had been forecast for the year did not appear, exacerbating the situation. Sajid Javid, the then-Secretary of State for Housing, Communities and Local Government, had opened an independent investigation into the council's finances in January 2018 after the council had announced the previous month that it would seek to increase council tax by 5% and pursue £34.3m of cuts.The Chartered Institute of Public Finance and Accountancy said that the notice was "not surprising" due to general financial strain upon local government, budget pressures from Northamptonshire's education sector and its growing elderly population, and the county's 'transformation programme' which depleted savings reserves.
Second notice
In July 2018, the council issued a second section 114 notice after a projected budget deficit of between £60m and £70m for the 2018/19 financial year was uncovered. Mark McLaughlin, the council's outgoing finance officer, said that the council had "no financial resilience".The council announced that it was set to lift the section 114 notice in March 2019, with council leader Matt Golby saying that they had "built stability back into the council's finances".
Croydon London Borough Council, 2020 and 2022
First notice
issued a section 114 notice on 11 November 2020. It was reported that the council looked like it would overspend by £60m by the end of the year and that it had debts of £1.5bn. The notice had been drafted in early September 2020 but had not been formally issued due to ongoing conversations with the Ministry for Housing, Communities, and Local Government over a possible solution.Croydon's finance director Lisa Taylor had warned in August 2020 that it could not be guaranteed that the council would avoid bankruptcy. In October 2020, Secretary of State Robert Jenrick had launched a review into the council's finances, saying the situation was "deeply concerning". The council's CEO Jo Negrini had resigned in August and the council's leader Tony Newman, deputy leader Alison Butler and its cabinet member for finance Simon Hall had all resigned in October.
Croydon's external auditors Grant Thornton had highlighted the council's "deteriorating financial resilience" due to increased costs of adult and children's social care and low levels of reserves. Risky investments were also blamed as a cause of the council's financial problems. The council had borrowed £545m to invest in property, including £30m in the Croydon Park Hotel and £46m on the Colonnades retail park. Both the hotel and the retail park were forced to close due to COVID-19 pandemic restrictions which reduced the income the council received from them and the Croydon Park Hotel fell into administration in June 2020.
The council prepared to reduce services to the bare legal minimum, focusing on providing social care and waste collection services. Cuts were expected for the borough's 13 libraries and nine children's centres and 35 buildings owned by the council were to be shut or sold off. It also announced it had asked the government for a £134m loan to stabilise its finances as it produced a three-year plan towards budget sustainability.
Second notice
A second section 114 notice was issued on 2 December 2020 after councillors met the day before but failed to agree a suitably balanced budget. Taylor stated that "without external support... it will now be impossible for a balanced budget to be delivered" in the 2020/21 financial year and predicted an overspend of £66m.Third notice
After the 2022 council election, the council moved to no overall control being led by new Mayor of Croydon Jason Perry. The council issued a third notice on 22 November 2022 due to a projected £130m budget deficit.In February 2023, Croydon was given permission by central government to increase council tax by 15%, 10 percentage points over the normal raise cap of 5%. In March 2023, it was announced that the Department for Levelling Up, Housing and Communities was proposing intervention to put the council into special measures. The intervention did not mean that government commissioners would take over the day-to-day running of the council; instead, management decisions would be subject to strict oversight from a government appointed panel. The proposals were put into place on 20 July 2023 when Secretary of State Michael Gove used powers under the Local Government Act 1999 to give Croydon's Improvement and Assurance Panel a statutory footing, allowing the panel to direct rather than guide the council's activities if needed. The Written Statement accompanying the directions cited the discovery of significant additional historic issues as the reason for moving the intervention to a statutory footing.
Woking Borough Council, 2023
In May 2023, a government review revealed that the Woking Borough Council would have debts of £2.4 billion by 2026, 100 times the size of its annual £24 million budget, including investments in hotels and residential skyscrapers, and a £6.4 million loan to a local private school. Risky property deals were attempts to offset the impact of UK Government funding cuts. The Minister for Local Government Lee Rowley announced that the council was to be overseen by a team of expert commissioners until the council could "address their commercial and financial challenges, and make transformative change across its entire operations."On 7 June 2023, Woking Council issued a section 114 notice after forecasting a deficit of £1.2 billion for the year ending 31 March 2024 due to losses on risky investments involving hotels and skyscrapers instigated by a former Conservative administration.
In February 2024, the government permitted the council to raise its council tax by up to 10%, above the normal 5% limit.