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Council still a ‘going concern’ but financial storm clouds mean an uncertain future

Council still a ‘going concern’ but financial storm clouds mean an uncertain future

🕔20.Jan 2015

Birmingham city council remains a going concern as a business but Government grant cuts and a “eye watering” £1.2 billion equal pay bill will pose major challenges in future, the district auditor has warned.

Mark Stocks issued three qualifications to the 2013-14 accounts in his annual audit letter.

He highlighted the budget strain caused by the equal pay bill, with the council forced to pay compensation to thousands of present and former female employees who were under-paid when compared with men performing similar jobs.

The sale by of the NEC Group for £307 million will go some way to meeting the equal pay bill, but Mr Stocks warned it was impossible to be certain about the size of further claims that might emerge.

Failing children’s social services, the Trojan Horse affair and questions about the council’s “ability to continue to provide services to the people of Birmingham” were also singled out in the report.

Mr Stocks told a cabinet meeting: “I do think the council’s financial position is very challenging. You will need to focus very closely on the finances, in particular the need to deliver the financial plans, your asset strategy and the service reforms you have begun. You will need all the efficiency savings you can get if you are to balance the books going forward.”

He set out the challenges in the annual audit letter: “It is clear that the council is facing major financial difficulties. The council needs to generate approximately £400 million of savings over the next four financial years.

“In addition, the council needs to make significant payments to settle its equal pay liability. There are also a number of negative key performance indicators including very high levels of borrowing (£3.1 billion) and relatively low levels of general fund reserves (£85.8 million compared to a revenue budget of £3.5 billion).

“On the basis of our review we are satisfied that the council remains a going concern. In drawing this conclusion we have taken note of the significant level of savings needed and also the need to deliver its asset strategy in 2014-15 and 2015-16.”

He warned that the council would face increasing financial pressure in 2015-16 and 2016-17, which would be particularly demanding years. He added: “The council is reacting appropriately to these challenges. However, it will need to manage its finances carefully over the next few years if it is to remain financially stable and remain a going concern.”

One of the more controversial steps the council is taking to generate revenue involves re-mortgaging the local authority’s £3.1 billion debt – pushing repayments forward to future years. By reducing the Minimum Revenue Provision – the amount set aside to repay debt – the council will have an additional £51.5 million to spend on service provision next year.

Mr Stocks described the strategy as “contentious”, although he accepted the decision was lawful.

The council will save £567 million over the next 20 years by re-mortgaging. However, for the following 30 years after that, the council will pay £1.7 billion more in interest and debt repayment than would otherwise have been the case.

The decision to re-mortgage has been attacked by opposition Conservative councillors who claim the council is “passing on a debt pile to our children and grandchildren”.

Deputy Tory leader Cllr Randal Brew, an accountant and former auditor, claimed Mr Stocks’ description of the decision as contentious was shorthand for “barking mad”.

He added: “I am genuinely concerned about this. There is a real risk that we are building up substantial extra cost in the future.”

Mr Stocks praised the council’s leadership, both members and officers, who he said had a clear understanding of the financial problems.

He added: “In summary, the council’s arrangements have enabled it to deliver £375 million of savings in the last three years. As at September 2014 it is on course to deliver its 2014-15 savings plans. It has responded appropriately to the equal pay settlements and has clear action plans to generate the resources needed to fund the remaining balance.

“There remain significant risks to the council’s financial position. If the council is unable to deliver its savings plans and/or asset strategy this will severely impact on both its liquidity and its ability to meet its statutory financial duties.

“On balance we consider that the council has adequate arrangements in place to secure its financial resilience.

“In particular, we consider that the council has demonstrated clear leadership and challenge in prioritising resources, notably through the leadership team’s understanding of its current financial position and the future implications. The council also has good arrangements in place for the delivery of its transformation programme.”

Mr Stocks praised the authority’s finance officers for managing to file the accounts by the statutory deadline, for the first time ever. It marked a ‘step change’ improvement in its performance, he added.

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