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Birmingham council must slash debt and take tough decisions on services to remain a ‘going concern’, auditors warn

Birmingham council must slash debt and take tough decisions on services to remain a ‘going concern’, auditors warn

🕔20.Nov 2013

Birmingham City Council has been issued with a formal warning that it must make tough choices about cutting or even scrapping services if it is to remain financially stable and continue as “a going concern”.

Grant Thornton, the local authority’s auditors, highlighted fears about growing debt levels at the council, soaring staff sickness levels, a huge equal pay compensation bill, the inadequacy of children’s social services and a large pension fund deficit.

In an annual audit letter on the 2012-13 accounts, District Auditor Mark Stocks expresses concern about “comparatively high” debt levels.

Total council borrowing is forecast to hit a record high of £3.65 billion by March 2016.

Debt repayment will rise to £325 million a year – swallowing up almost one-third of the net revenue budget.

The debt issue is made worse by huge cuts in Government grant and growing demand for services, particularly adult social care.

The auditors are confident the council has “adequate arrangements” in place for securing financial resilience, but have highlighted areas of concern:

Delivering the savings target of £492m between 2013/14 and 2016/17. This is a significant challenge and will impact heavily on services. The council is aware of this and has put in place strategic service reviews and public consultations to support its future budget plans.
Equal Pay liabilities continue to have a significant impact on the council’s general fund and housing revenue account. The provision for the period ending 31 March 2013 is £690 million. The volume and value of claims has adversely impacted on the council’s ability to maintain services.
Council borrowing (including PFI debt) remains comparatively high at £3.47 billion. This will increase over the next few years and is forecast to be £3.65 billion by 31 March 2016.

It’s also emerged that the deficit on the council’s pension fund has risen to £2 billion, with the result that contributions must increase.

The letter contains a blunt warning and hints at raising money through selling buildings and other assets: “The council will need to manage its finances carefully over the next few years and make some significant and far-reaching choices about service provision and the use of its asset portfolio if it is to remain financially stable and a going concern.”

The audit letter suggests the council isn’t spending enough on children’s social services: “We are concerned, based on the Ofsted inspection, that the council’s arrangements for the protection of vulnerable children have not been effective during 2012/13.

“We note that the council’s planned spend per head on children’s social care for 2012/13 was considerably below the comparator group average. Given the issues highlighted with regard to the protection of vulnerable children the council should consider whether its inadequate arrangements are the result of insufficient resources or are the result of other management, staffing or governance failures.”

Even though council debt has never been higher, the figure remains below the maximum level for Birmingham permitted by the Government.

Council leaders point out that about £300 million of the debt repayments is self-financing and includes the business transformation project, refurbishing the National Indoor Arena and setting up Enterprise Zones.

However, a number of additional capital projects will not be self-financing and must be paid for through additional borrowing.

These include the new Library of Birmingham, the equal pay bill, and new swimming baths.

The auditors are concerned about the council using sparse cash reserves to prop up the revenue budget.

The letter states: “Reserve levels have increased to £512 million as at 31 March 2013. However, the majority of these reserves are earmarked for specific purposes.

“A General Fund balance of £25 million is maintained. This is comparatively low when considered against the council’s turnover. The council plans to temporarily borrow £60.9 million from earmarked reserves to help balance the budget to 2016/17. We consider that borrowing from reserves weakens the council’s financial resilience.”

Despite expressing some concerns, the auditors concluded that the council has proper arrangements in place for securing financial resilience along with robust systems to manage risk.

Highlights during the year were listed and include:

– Opening the Library of Birmingham.
– Implementing the national welfare reform programme.
– Reducing levels of obesity in adults over the age of 16.
– Improving educational performance in English and maths at Key Stage 2.
– Improving GCSE results with 63 per cent of 16 years olds achieving 5 A-C GCSE grades including English and maths.
– Increasing the number of 16 to 18 year-olds in education, employment or training.
– Building more affordable homes.

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