Minutes:
The Interim Director of Finance introduced the
report and highlighted paragraph 3 on page 39 of the agenda which
stated that Thurrock Council was currently in a grave financial
position, with a £469m deficit in the current year, and a
£184m deficit for 2023/24. He explained that these deficits
were mainly from investments and page 40 of the agenda provided a
breakdown of the current position, including a write-down on
investments, prudential borrowing, and further losses from
investment income. He explained that the Council could undertake
limited mitigation to reduce the deficit to £452m, as set out
in the table on page 40, but exceptional financial support (EFS)
would still be required from central government and a Section 114
notice would likely be issued before Christmas. The Interim
Director of Finance explained that the most significant balances
related to the write-down of the valuations of four investments,
the most significant of which were the solar investments. He
explained that the Council’s position also reflected forward
compliance with the new prudential code that would come into effect
in April 2024. He explained that the position on investments had a
long way to run, and the Council were currently quantifying issues
surrounding this investment to form the basis of further
discussions with central government. He added that there was only
limited mitigation to date. He stated that the EFS request to
central government was expected to be sent next week, but the
government had been engaged with the process and had seen the
report being presented to this Committee.
The Interim Director of Finance continued and outlined the
Medium-Term Financial Strategy (MTFS) position, which he felt was
also worrying as the Council continued to identify problems with
the ongoing impact of investments. He highlighted Table 2 on page
41 of the agenda that outlined the ongoing impact of these issues,
which totalled approximately £167m in addition to the
Council’s operational budget. He explained that if the
Council divested their investments, then this would reduce interest
costs and Minimum Revenue Position (MRP) costs, but the Council
would continue to be in a deficit position. The Interim Director of
Finance explained that the divestment strategy was ongoing,
particularly regarding the solar investment assets, which were now
likely to be sold from within an administration process, and noted
that the administrator had recently appointed KPMG to lead on the
sale of these assets. He was hopeful that the sale of this asset
would happen within two years.
The Interim Director of Finance stated that although the investment
figures were large, this should not detract from underlying issues,
as regardless of the investment figures the Council had already had
to use temporary measures to balance the budget in 2022/23, such as
the use of reserves and capital receipts. He commented that this
had been a problem before the investment issues, and the Council
now needed to prove that it could become a sustainable Council in
the future. He highlighted the Commissioner comments on page 42 of
the agenda, and stated that the report had been agreed with them
before publication. He explained that they had noted the
Council’s position in terms of the budget position, the level
of reserves, and the impact of investments, and further work was
required to look at other investments which would be outlined in
the Quarter 3 Financial report. He explained that an initial review
of the tail of investments had identified one further issue which
was being quantified, and this would be presented to the Financial
Reporting Board soon. The Interim Director of Finance explained the
wider financial review remained ongoing and was an iterative
process, which would also look at areas such as the Housing Revenue
Account (HRA) and subsidiary companies. He felt that lots had
happened at the Council in the past three months, and the Council
would continue to work with the Commissioners and central
government to consider whether the Council was sustainable, and
this included work undertaken through the Best Value Inspection
(BVI).
The Interim Director of Finance summarised and stated that the
recommendations had been produced in consultation with the
Commissioners, and the report had been deferred by Cabinet to
ensure Corporate Overview and Scrutiny comments and feedback could
be received. He added that meetings were currently being set up
between the Council and external auditors to consider the revised
MRP approach, and a further report would come back for Quarter 3 to
confirm a prudent and robust approach was undertaken.
The Chair asked if anything had changed since publication of the
report. The Interim Director of Finance replied that one investment
may have lost value, but this still needed to be verified and would
be brought back as part of the tail of investment report. He
explained that some changes and fluctuations were normal, but the
Council would be taking a view on all investments and would
undertake a constant dialogue to increase transparency. He added
that the next phase was to understand the future of the MTFS with
the divestment strategy over the next 5/6 years, but would also
consider what the Council’s finances would look like
post-divestment, and the team were currently modelling different
scenarios to do this.
Councillor Holloway highlighted that the Council’s reserves
were being decreased, and asked if this would open up the Council
to further risk, and what this would mean practically for the
Council. The Interim Director of Finance replied that the
recommended level of reserves was £11m, and the
Council’s reserves were currently projected to be just above
this level. He stated that this could leave the Council open to
financial exposure, although the team were working to ensure
reserves were built back up through a Reserve Strategy to achieve
financial sustainability. He felt that this would help transform
the Council and lead to sustainable decision making. Councillor
Holloway questioned the impact that the Council’s finances
would have on the HRA and subsidiary companies, and asked if due
diligence would be carried out before monies were secured. The
Interim Director of Finance responded that the Council’s
finances could have an impact on the HRA, and the HRA could be
considered as a capital asset of the authority. He added that
consultation was currently being carried out to assess the capital
contribution this asset could make. He explained that the first
step was to understand the 30-year business plan of the HRA, but
significant work needed to be carried out to decide if it could
provide a financial solution. He stated that the two subsidiary
companies were Thurrock Regeneration Limited (TRL) and Thurrock
Regeneration Homes Limited (TRHL), who currently had one major
project in St Chads to complete. He explained that the plan was to
divest this housing, which would fund the TRL/TRHL loans. He
explained that there could be exposure for the Council in this
strategy due to housing and interest rates, but due diligence would
be undertaken and would be presented to Members.
Councillor Holloway highlighted page 46 of the agenda and asked
what financial assumptions had been made, what these assumptions
had been based on, and what would happen if these were incorrect.
The Interim Director of Finance responded that as some financial
assumptions had been made within the report, the financial
situation could deteriorate further, due to other costs such as the
£1.5m intervention fee and short-term resources would be
needed to fix these issues and therefore become a sustainable
Council. Councillor Holloway then queried 3.11 on page 48 of the
agenda and asked what it meant that the external audits were still
outstanding. The Interim Director of Finance clarified that the
audits assessed the financial situation of the Council when issues
started arising. He stated that the current set of open accounts
were in 2020/21. He explained that the auditors could reflect
issues arising back to the end of 2018/19 and attach losses to
previous periods as appropriate. He commented that these technical
assessments were complex and included judgement decisions from
auditors that could affect reserves and the open sets of accounts.
Councillor Holloway asked how long the Commissioners would be in
Thurrock. The Interim Director of Finance believed that the
Commissioners had been appointed for a minimum of period of three
years. He explained that this was to ensure they could oversee
financial aspects of the Council such as the divestment strategy
and reserves, but they could be here longer to ensure the
Council’s sustainability. He explained that the Council was
currently in conversation with the Department of Housing, Levelling
Up and Communities (DHLUC) to develop a 30-year MTFS
strategy.
Councillor Arnold thanked the Interim Director of Finance for the
report, and asked if terminology within the report could be clearer
to ensure residents could understand. He urged Members to contact
the Interim Director of Finance if they did not understand
terminology within the report. Councillor Arnold sought assurances
that statutory services would continue to be provided. He also
highlighted 3.12 – 3.13 of the report on page 48 of the
agenda and asked what would happen if Thurrock did not comply with
the Prudential Code. The Interim Director of Finance highlighted
that Members would continue to be invited to Q&A and briefing
sessions regarding the Council’s finances. He explained that
there had been two prudential codes iterations during the period of
the investment strategy. He stated that a third iteration of the
code was expected in April 2024 which the Council was currently
working on to ensure forward compliance. He stated that under the
first iteration of the Code, the Council’s investment
strategy had been compliant, but the rules regarding write-down of
investments had changed in April 2019 with the second iteration of
the Code and the Council were made no longer compliant. He stated
that when the investment strategy had been agreed as an approach it
had been Code compliant, but this had not been challenged when the
rules had changed. He also confirmed that statutory services and
contractual obligations would continue if a S114 notice was issued,
but all spend would be considered in more detail to ensure good
decision-making. He clarified that the S114 notice would probably
be in place throughout 2023 to ensure revenue and capital spend was
considered, but confirmed that staff and contractors would continue
to be paid.
Councillor Kent thanked the Leader for deferring the Cabinet report
to ensure Overview and Scrutiny comments could be included. He
sought clarification that the budget and capital strategy agreed by
Full Council in February was accurate. The Interim Director of
Finance replied that the budget had been accurate, but the MRP
policy had assumed that the recovery of funds would pay back
borrowing. He stated that up until recently this assumption had
held, and was an approach being taken by other Council’s and
supported by advisers, but the risks had been underestimated.
Councillor Kent queried if the Q2 report being presented to the
Committee was accurate and compliant with the Prudential Code. The
Interim Director of Finance responded that the Q2 report was
accurate and compliant with the Prudential Code. He stated that the
investment approach had been deemed acceptable under the first
Prudential Code, but had become unacceptable under the second
Prudential Code as MRP was required on all assets. He felt that it
was clear retrospectively that the Council’s approach had
been non-compliant with the second Code iteration, but the Council
had not been challenged on this and were now having to remedy this
issue. He clarified that the investments had caused the
Council’s financial issues, but the MRP was a judgement call
made by all local authorities. He felt that as some local
authorities were under financial pressure, such as Thurrock, they
had gravitated to setting a level of MRP which created greater
exposure to the issues that subsequently arose.
Councillor Kent asked what an EFS and capitalisation directive was
and how this would affect the Council. The Interim Director of
Finance explained that the EFS confirmed that the Council had a gap
on its balance sheet that it could not close, and allowed the
Council to borrow money from central government to close this gap
and pay it off over approximately twenty years so it remained
balanced in the future. Councillor Kent asked what the consequences
would be of an S114 notice. The Interim Director of Finance replied
that an S114 notice was confirmation from the S151 Officer that the
Council cannot deliver its budget within existing resources for
2022/23, and committed the Council to spending controls throughout
the S114 period. He explained that a panel would be set up to
approve spending limits, including on capital projects. He
explained that it did not prevent the Council from spending money
on sustainable transformation projects, but these would be subject
to higher levels of scrutiny. He added that the BVI could override
spending controls, but the bar for these exemptions would be high.
The Interim Director of Finance sought assurances from Members that
cost controls would be implemented, as the Council had to
demonstrate to the BVI and external auditors it could manage costs
appropriately. Councillor Kent felt concerned that money had been
borrowed from the Public Works Loan Board (PWLB) and they had not
done their due diligence. He queried if questions needed to be
asked of the PWLB. He added that external auditors had not
challenged the Council on their lack of compliance with the
Prudential Code, and if the Council also needed to ask questions of
them. The Interim Director of Finance replied that the when the
first iteration of the Prudential Code was in place, local
authorities committed to fund borrowing and interest, and although
there were restrictions in place, local authorities simply had to
confirm they could pay their borrowing back. He stated that he
could not comment on the due diligence of the PWLB, but concerns
had been raised as other local authorities had also borrowed money
from the PWLB, so felt it was not unreasonable to ask them to
assess their borrowing process. He stated that from 2020 onwards
the PWLB asked local authorities to confirm that they were not
borrowing to invest. The Interim Director of Finance stated that
the external audit was ongoing and would make assessments regarding
investments.
Councillor Kent explained that an S114 notice would mean the
Council would retreat to a statutory minimum, as defined by the
S151 Officer, and asked what the Council’s statutory minimum
position was. He also sought clarification as several local
authorities had sought EFS and capitalisation directives, and these
authorities were now subject to a 1% future supplement on PWLB
borrowing. He asked if this would be the same case for Thurrock.
The Interim Director of Finance replied that Thurrock would have a
1% supplement on future borrowing from the PWLB. He added that the
Spend Panel would make the judgement on all spend within the
Council, and the rules on spend would come to a Full Council
meeting. Councillor Kent asked what Member oversight there would be
on the Spend Panel. The Interim Director of Finance responded that
the team were currently working on this, but felt that Member
oversight would be key to the Panel.
The Chair sought confirmation that an S114 notice would trigger a
Full Council meeting within 21 days. He asked what would be on the
agenda for this meeting. The Interim Director of Finance replied
that Full Council would need to meet within 21 days to acknowledge
and endorse the S114 notice. He added that Full Council would also
need to consider spending controls. He stated that the team were
currently working on dates for the Full Council meeting to ensure
the S114 notice could be implemented, and the report would make
several recommendations to ensure Members fully understood the
Council’s position. Councillor Holloway stated that although
other local authorities had submitted a S114 notice, Thurrock was
in a unique position due to the deficit level and governance
issues. She asked what would happen in the future to ensure that
this level of deficit and governance issues does not happen again.
She felt concerned regarding the level of Member oversight and
sought assurances from officers that Members would be included in
decision-making. The Interim Director of Finance replied that the
BVI would consider all governance arrangements, and actions from
this would be picked up through the Improvement and Recovery Plan.
He added that the Commissioners would also provide another level of
oversight, and would help reset the financial future of the
Council. He stated that officers were taking all Member comments
on-board, and these would also be included in the BVI report, which
was due imminently.
RESOLVED: That the Committee:
1. Commented on the 2022/23 forecast funding gap of £469.581m
including a request for exceptional financial support from central
government.
2. Noted the request for exceptional support will be delegated to
the s151 officer.
3. Commented on the updated Medium Term Financial Strategy which
has a projected deficit in 2023/24 of £184.381m and which is
expected to require a further request for exceptional financial
support from central government.
4. Noted that the position is subject to change, as further work is
outstanding (as highlighted in the Commissioners commentary) which
is likely to lead to changes.
5. Noted additional actions will be required to identify further
savings to manage the reported General Fund budget pressures.
6. Noted that use of reserves as set out in appendix 5, subject to
the finalisation of the audit process relating to financial years
2020/21 and 2021/22 ad noted balances are subject to change.
7. Noted the proposed uses of further capital receipts projected to
arise in 2022/23 as set out in Table 5 to mitigate the request for
exceptional financial support from government.
8. Noted that further consultation with external audit will be
required to finalise the technical accounting treatments relating
to the investment valuations and the associated Minimum Revenue
Position transactions.
9. Noted the position set out in respect of the capital programme
and the reported slippage as set out in para 5.4.
10. Noted that Thurrock’s 2023/24 Schools funding formula be
implemented as stated in Appendix 6. This being consistent with
Cabinet’s decision made between 2020/21 and 2022/23 schools
funding formula as per the report in Appendix 6.
Supporting documents: