Croydon Council accused of collective corporate blindness towards its financial position

Croydon Council accused of collective corporate blindness towards its financial position

Croydon Council has been accused of ‘collective corporate blindness to the seriousness of its financial position’ after ‘deteriorating financial resilience for a number of years,’ an auditor’s report has found.

The Public Interest Report stated that in the past three years, the council has reported significant service overspends of £39.2 million within children’s and adult social care. The council used the flexibility granted by government to apply capital receipts to transformation schemes in both children’s and adult social care.

Despite applying £73 million of transformation monies in the past three years, Croydon Council continues to experience overspends in both departments and planned significant growth funding in the original 2020/21 budget. Therefore, there is little evidence that the transformation monies have been used to achieve the government’s intended aims of this capital receipts flexibility, namely, reducing demand, delivering savings or reducing costs, the report said.

“There has been collective corporate blindness to both the seriousness of the financial position and the urgency with which actions needed to be taken. The council commissioned a review of its governance arrangements in March 2020 which concluded that improvements were needed to the culture around decision making. We agree with this recommendation and we note that we have not seen an improvement in the culture of decision making as it relates to financial sustainability,” said the Grant Thornton report.

Pressures of COVID-19

New leader of the council, Councillor Hamida Ali, who was appointed last week, apologised over the findings and vowed to urgently address the areas of concern.
The report concerning Croydon Council’s financial position and related governance arrangements was produced in the Public Interest under section 24 and Schedule 7 of the Local Audit and Accountability Act 2014.

The report said that while there were significant funding pressures in children’s and adults services over the past three years, the extent of the financial gap in 2020/21 has increased due to the additional financial pressures as a result of the COVID-19 pandemic.

The council’s external auditor identified concerns relating to the financial sustainability criteria of the value for money conclusion in 2017/18 and raised recommendations for improvements. The financial position deteriorated during 2018/19 and the recommendations made in 2017/18 and 2018/19 were not implemented and, as a result, the financial position continued to deteriorate during 2019/20.

The spending pressures identified in 2017/18 continued into 2020/21 and the auditor wrote to the former Chief Executive in April 2020 setting out action considered as vital. However, by the end of August 2020, the council had failed to produce a formal action plan or to respond to the audit recommendations effectively. A formal written response was received on 28 September 2020.

The council has had an unsustainably low level of reserves for some time and has failed to address this. The budget monitoring reports during 2019/20 showed significant overspends, which reduced following ‘corporate adjustments’ of £17.7 million. The reports were accepted by Members without an appropriate level of challenge to continued service overspends, continued Unaccompanied Asylum Seeker Children (UASC) overspends or the validity of adjustments made to improve the outturn position.

Not good enough

“The council set the 2020/21 budget in March 2020 prior to the covid-19 pandemic being declared. There was insufficient challenge from Members on the financial risks in the budget, credibility of the planned level of income from third parties and deliverability of the savings plan. The council’s governance over the budget setting and monitoring has not been good enough,” the report continued.

“The council has increased the level of borrowing significantly in recent years (£545 million in three years) and used the borrowing to invest in companies it established and to purchase investment properties. The strategy for investing in properties was approved at Full Council using guillotine procedures meaning there was insufficient time to discuss and challenge the strategy and the first purchase was made two months prior to approving the strategy. The council’s approach to borrowing and investments has exposed the council and future generations of taxpayers to significant financial risk. There has not been appropriate governance over the significant capital spending and the strategy to finance that spending,” the auditor added.

Grant Thornton auditors slammed the council for “collective corporate blindness to both the seriousness of the financial position and the urgency with which actions needed to be taken”. The council commissioned a review of its governance arrangements in March 2020 which concluded that improvements were needed to the culture around decision making. The auditor agreed with this recommendation yet has not seen an improvement in the culture of decision making as it relates to financial sustainability.

The report outlines that for a number of years the council focused on:

  • Improvements in service delivery without sufficient attention to controlling the related overspends
  • Investing in the Place area without addressing whether the investment delivered the intended outcomes and
  • Financial governance was focused on lobbying government for additional funding which was not supported by actions to contain spending within the funding provided which was its statutory duty.

It states that councils are statutory entities which must follow the law which is very clear on the legal requirement for councils to set a balanced budget.

“The council’s fragile financial position and weak underlying arrangements have been ruthlessly exposed by the impact of the Covid-19 pandemic,” the report said.

“Had the council implemented strong financial governance, responded promptly to our previous recommendations and built up reserves and addressed the overspends in children’s and adult social care, it would have been in a stronger position to withstand the financial pressures as a result of the Covid-19 pandemic.

The council needs to urgently address the underlying pressures on service spends and build a more resilient financial position whilst also addressing the long-term financial implications of the capital spending and financing strategy together with the oversight of the council’s group companies,” the report concluded.

Serious issues

Councillor Hamida Ali said: “This report highlights serious issues with how the council has managed its finances in recent years. These problems have deep roots, but I am sorry we got things wrong and I want to reassure our residents, staff and partners that my absolute priority as the council’s newly-elected leader is to put this right. While a decade of austerity and the Covid-19 crisis have had a major impact on our finances they do not excuse the issues this report has laid bare.

“The council fully accepts the findings and recommendations of this report and the council’s new leadership will take swift and decisive action to stabilise the council’s finances and governance. My new administration is committed to a new culture which puts transparency, accountability and value for money at its heart.”

The auditor’s report makes a number of recommendations including:

  • The Executive Directors need to address the underlying causes of social care overspends.
  • The council should challenge the adequacy of the reserves assessment which should include a risk assessment before approving the budget.
  • The Executive Director (Children’s) needs to review the services provided to UASC and to identify options to meet their needs within the grant funding provided by the Home Office.
  • The Executive Director (Children’s) needs to identify the capacity threshold for the numbers of UASC that it has the capacity to deliver safe UASC services to.
  • The council need to show greater rigor in challenging underlying assumptions before approving the budget including understanding the track record of savings delivery.

Councillor Hamida Ali, leader of the council, added that in response to the auditor’s report and recommendations, the council is developing a comprehensive action plan which will be discussed at a dedicated full council meeting. The action plan will set out how the council will significantly strengthen its financial resilience, decision-making and governance and fully address the findings of the report.

This will build on work already under way to tackle its financial challenges. Actions in progress include:

  • Delivering a £42m package of savings this financial year
  • Developing the Croydon Renewal Plan, which includes:
  1. formally seeking a loan (capitalisation direction) from the government in order to balance this year’s budget and enable the council’s transition to a sustainable budget over the next three years
  2. a review of the capital programme
  3. an independent review of the council’s group of companies and entities.

Councillor Ali said: “The council has already taken significant steps to control our budget and more will be required in the coming months. The whole council must now come together to address the criticisms in the auditor’s report. I will set out proposals in the Croydon Renewal Plan to show how we will transform our organisation into one that is financially sustainable and rebuild the outstanding public services Croydon’s residents expect and deserve.”

Grant Thornton: London Borough of Croydon Report in the Public Interest concerning the Council’s financial position and related governance arrangements

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