Who’s afraid of the big bad Section 114?

All over the country, councils are sounding alarm bells and talking about something called Section 114. It’s a big deal.
It’s the time of year when finance directors and councillors huddle in airless rooms to set budgets. Just like every household, they calculate how much money they need to meet tbills, and then work out where they are going to get it from.
People outside in the real world are asked what they want to see the council spend its money on, and they all want bins emptied on time, grass verges cut and potholes repaired.
But it all has to be paid for, and these days the government doesn’t give your local town hall nearly as much money every year as it did a decade ago.
Councils have to fulfil all their functions with tens of millions of pounds less money from central government in their war chests. The amount they do receive is currently not even keeping up with inflation.
Costs are rising, and in places like the westcountry the price of looking after vulnerable children and social care for adults has escalated. The population is generally older here, and people are living longer, which means repercussions for the care sector.
It costs millions upon millions of pounds every year to provide services people expect as a right, and councils can only demand so much from households in council tax. The government sets a cap on the amount by which bills can go up, and will only ease it in exceptional circumstances.
Council tax bills will all go up this year by a little under five per cent.
It all means councils have to be canny with their money, and find clever ways to make ends meet. Torbay, for instance, has invested more than £200 million in commercial properties outside the bay.
Its cinema in Somerset and pasty factory in Cornwall have become the stuff of headlines, but it turns out that the once-controversial investments are bringing in a tidy return, and that’s just one of the reasons why the bay won’t be calling Section 114 any time soon.
WHAT IS A SECTION 114 AND WHY DOES IT MATTER TO ME?
The Local Government Information Unit (LGIU) explains that a Section 114 notice can be issued  if a local authority has no prospect of setting a balanced or lawful budget. It is also a sign the council doesn’t have enough money in its reserves to meet emergencies.
It basically means that a council is facing bankruptcy unless it quickly gets its finances in order. Once the notice is issued, the council can continue to provide the basic services it is compelled to do by law, but can’t plan additional or non-essential expenditure.
Northamptonshire Council went for a Section 114 in 2018, and since then they have also been issued in Birmingham, Nottingham, Woking, Thurrock, Slough and Croydon.
In Birmingham, it’s reported that up to 600 city council jobs could be lost, with cutbacks in street cleaning, parks and maintenance, leisure, libraries and bin collections.
This is why this piece of arcane council procedure matters to every household in the country.
According to the BBC, Somerset County Council needs to find £100 million to avoid falling into the same black hole.
Cuts to services totalling £35 million are proposed, as well as a possible 10 per cent increase in council tax as an emergency measure. It says the costs of delivering services, particularly adult social care, are rising significantly faster than income.
WHAT HAVE COUNCILS DONE TO PROTECT THEMSELVES?
Councils up and down the country have seen this crisis coming, and many have been taking steps to soften the blow.
The cumulative effect of years of under-funding has led them to take out loans and invest in commercial properties just to keep services running.
The BBC’s Shared Data Unit analysed government figures that show councils owe their lenders a combined £98 billion, equivalent to £1,141 for every UK resident.
The figures, taken last September, show Torbay is 33rd in a list of 387 councils, with a debt standing of £2,747 per person, based on a total debt of £383 million.
Since then, Torbay’s debt has come down by around £20 million.
Other Devon councils have differing levels of debt, right down to Teignbridge Council which has none at all.
Dame Meg Hillier, who chairs the Public Accounts Committee, said some examples of debt are “staggering”.
But Jonathan Carr-West, chief executive of the Local Government Information Unit, said: “It’s no surprise to see that many councils across the country have significant levels of debt, often levels of debt that can look quite frightening when you place them against the council’s income. 
“There have been 13 years of incredible pressure on local government finance. We’ve seen funding from the central government to councils reduced by nearly 50 per cent.
“Councils have been encouraged to undertake more commercial activity, to be more entrepreneurial and make their money work harder. They shouldn’t just be sitting on their reserves.
“Many councils have felt that they have had little choice but to undertake commercial investments, particularly commercial property investments, in order to refresh their public realm and boost their finances.
“The money coming from central government, the money that they have coming in from council tax, is not enough to cover rapidly rising bills, particularly around housing and homelessness.” 
WHAT DID TORBAY COUNCIL DO?
Torbay Council borrowed money from the government’s Public Works Loan Board to invest in a property portfolio which includes that cinema in Somerset and that pasty factory in Cornwall. Of the £383 million mentioned in the analysis, £211 million was spent in what the council’s finance director Malcolm Coe describes as a “deliberate and targeted investment strategy.”
Critics at the time said it was high-risk, and accused the council of ‘playing Monopoly’ with council taxpayers’ money. The practice was outlawed by Westminster early in 2020, preventing new purchases, but the bay’s out-of-area holdings continue to make money.
It was suggested at a recent committee meeting that the council might sell some property to raise funds, but cabinet member for finance Alan Tyerman (Con, Churston with Galmpton) told the meeting: “Offloading them at a time in which capital values have fallen doesn’t seem a very sensible thing to do.”
And deputy council leader Chris Lewis (Con, Preston) added: “These investments bring in millions of pounds a year. If we hadn’t bought them we would have had to cut services by millions. This has been a real benefit to the bay.”
Independent group leader Darren Cowell (Ind, Shiphay) commented: “Without that money plugging the hole left by the reduction in government grant, some of Torbay’s services would be in a dire state.”
Cllr Tyerman said commercial investments hadn’t succeeded for every council that had tried them, and some had invested in businesses which subsequently failed. Torbay, on the other hand, had invested solely in property.
The investments currently bring a net profit of more than £4 million a year.
“We made them in a way that I think deliberately played safe,” said Cllr Tyerman. “We deliberately did not focus them solely in the local area in order to spread the risk.”
The contents of what the council calls a ‘diverse’ portfolio currently include:

Wren Park retail centre at Torquay
Shopping centre run by Tesco at Ferndown, Dorset
Gadeon House office block near the M5 at Exeter, let to EDF Energy
Fugro House office block at Wallingford, Oxfordshire
Distribution warehouse London Medway in Kent
Travelodge hotel at Chippenham, Wiltshire
Twyver House office block, Gloucester, let to the government
Woodwater House, Exeter, offices let to solicitors Michelmores
The Range, Torquay
Food factory let to Proper Cornish Ltd in Bodmin, Cornwall
Industrial warehouse occupied by Crown Records at Marsh Barton, Exeter
National distribution centre for Chef Direct at Didcot in Oxfordshire
Amazon warehouse near Exeter
Odeon Cinema, Taunton.

“We own a lot of assets, and we don’t need to sell them to balance the books,” said Mr Coe.
“The strategy was sound. We should be reviewing our investments at every opportunity, but our budget does not depend on us having to sell them.”
And, said Cllr Tyerman, saying councils had been ‘forced’ to invest in faraway commercial properties was not quite right.
“There was no force about it,” he said. “The Local Government Association suggested it, we looked at the possibilities and we went into it.
“We researched it and decided it was the right thing to do. There was no element of force.”
WHAT ELSE IS THE COUNCIL DOING?
Torbay Council puts around £750,000 into an Investment Fund reserve each year to cover any unforeseen costs of maintenance of commercial assets and/or reductions in rental income, and that fund currently stands at around £3 million.
It has also invested millions of pounds on local projects. It has, for instance, spent £9 million to buy dozens of properties in the bay for temporary accommodation for homeless people and families.
The council says this provides better outcomes for the families in the short term, and saves the Town Hall the money it used to spend on providing bed and breakfast accommodation for families in need.
It also borrowed around £8 million to build the EPIC Centre at Paignton, creating jobs in the high-tech engineering sector. The income from the centre’s tenants is covering the cost.
It will, however, take decades to pay back the £17 million the council had to borrow to pay its share of the cost of the South Devon Link Road by-passing Kingskerswell.
Torbay has not taken out any new loans for around three years, thus avoiding the escalating interest charges of the recent past.
WHAT’S THE PICTURE ELSEWHERE?
Elsewhere in Devon, Plymouth City Council ranks 85th in the table of 387 councils, with debt amounting to £478million (£1,805 per person).
The other council figures are Exeter City Council (133rd) with £166 million (£1,280 per person); Devon County Council (238th) with £508 million (£624 per person); East Devon District Council (252nd) with £84 million (£549 per person); West Devon District Council (261st) with £28 million (£482 per person); Mid Devon District Council (270th) with £34 million (£413 per person); South Hams District Council (313th) with £14 million (£156 per person); North Devon District Council (339th) with £3 million (£30 per person); Torridge District Council (347th) with £482,000 (£7 per person) and Teignbridge District Council, has no borrowing at all.
CONCLUSION
While Torbay Council will not be one of the local authorities to call a Section 114 this year, local government finance is unpredictable, particularly with a general election looming.
A change of government could bring a change in funding policy, but the pressures of providing care for growing numbers of young and old people in need will continue to eat away at the council’s coffers.
Mr Coe said: “We’re not complacent in any way, but we’re fortunate enough to be nowhere near a Section 114. I think our finances are on solid foundations, and borrowing towards commercial investments is part of that.
“But there are pressures around children’s social care, adult social care and homelessness. There are challenges coming.”
The children’s social care budget for the current year is going to be overspent, and next year the contract for adult social care which the council has with the local health trust comes up for renewal. That is likely to mean extra cost.
The government’s cap on council tax means local authorities can put up their share of the bills by up to 4.99 per cent, of which two per cent is a specific rise to meet the costs of adult social care. This year Torbay Council is planning to ask for a rise of 4.75 per cent.