FAQs about depositing money with Croydon Council

At the full Council meeting on Tuesday 15 December it was agreed Frequently Asked Questions (FAQs) and responses would be helpful in explaining why the council is depositing £13m in Croydon Council. Croydon Council has issued a Section 114 notice due to the severe ongoing financial challenges facing the authority.

What is a Section 114 notice?
In England, the Local Government Finance Act 1988, Section 114 (3) sets out the requirement for the chief finance officer of a council to make a report under this section if it appears to him or her that the council’s expenditure in a financial year is likely to exceed the funding it has to meet the cost of services. This is what has happened in the London Borough of Croydon. It means that the no new spending is permitted, with the exception of funding for statutory services, such as safeguarding vulnerable people. However, existing commitments and contracts continue to be honoured – including the money deposited there by Midlothian Council.

Does it mean Croydon Council is bankrupt? 
No. Bankruptcy is where an individual or organisation cannot pay its debts. Croydon will continue to meet “expenditure required through existing legal agreements and contracts.” This means Croydon continues to pay what is due to suppliers, contractors, staff and councils, such as Midlothian, who have placed deposits with them. 
What is currently underway in Croydon involves some form of government intervention.  A temporary management team may be put in place there and some form of financial direction or support may be granted by the government until they secure a balanced budget.

Why are we depositing money with another council when we are asking the Scottish Government for a fairer funding package?  
Like all councils, Midlothian Council holds funds which are committed to meet future costs. This includes the cost of building new council houses and other capital investment projects such as schools. Until these funds are needed, they are deposited with other councils to secure a financial return.  
We are seeking a fair funding settlement because the annual grant we receive from the Scottish Government - which pays for things like teachers, care packages and other day-to-day service costs - is not keeping pace with our fast population growth.  

Do other councils deposit funds in this way? 
Yes. It is normal practice and, given the current financial landscape, it forms a key part of a council’s treasury management strategy. There is over £15bn of inter-authority lending across the UK. Information received this year shows that over £800m is placed on deposit with other UK local authorities (councils) by Scottish councils. 

Why can’t we spend this £13 million on our own council services? 
These funds are already committed – meaning they will be spent on our own services but are not required at the present time. For example, we have set aside funds to meet the cost of our extensive council housebuilding programme. The money on deposit with other councils will be used in future years to meet these costs. Without this approach, the number of houses the council can build would have to be reduced or tenants’ rents would rise quite steeply.

Are we confident Croydon will pay the money back? What happens if it doesn’t? 
Yes, we are confident. Counterparty risk is very low for term deposits with councils and other public bodies. Any UK local authority is underwritten by what is known as an implied guarantee from the UK Government and ultimately councils have tax-raising powers to fall back on.  The issuing of a Section 114 notice does not change this.  Only three councils have so far issued Section 114 notices (Northamptonshire a few years ago, Hackney many years ago and now the London Borough of Croydon). On both previous occasions, the councils involved resolved their financial issues with government support and intervention. 
What is currently underway with Croydon involves some form of government intervention. A temporary management team may be put in place and some form of financial direction or support may be granted by the government until they secure a balanced budget.

What benefits do loans like this bring to Midlothian in terms of extra income and how will that money be spent?  
By placing the deposit for a longer period, Midlothian Council has secured a return of £240,000 per annum. This income helps meet the cost of delivering day-to-day council services.  A shorter-term deposit would have resulted in lower interest and less certainty.  Alternative deposits with banks are considered higher risk and deposits with the UK Government would have generated very little income or no income at all. Indeed, on 14 December 2020, overnight deposits placed with the UK Government’s Debt Management Office had small negative interest rates - meaning lenders had to pay the government to deposit funds with them.

Why are we asking our external auditors to look into this? 
The work of our external auditors, Ernst Young (EY) already includes what is known as wider scope work on the council’s financial management, financial sustainability, governance and transparency and value for money. This will be part of that work, already due to be carried out by Ernst and Young early in 2021.

18 Dec 2020