Cheshire East has given on an update on its warning that it may have to declare itself effectively bankrupt following prime minister Rishi Sunak’s “devastating” decision to cancel the northern leg of HS2.
The council has now said it was “working extremely hard” to address financial pressures without triggering a section 114 notice – issued by the chief financial officer of a public body to prevent certain types of expenditure. The notices take their name from section 114 of the Local Government Finance Act 1988, (writes local democracy reporter Belinda Ryan).
The council had spent £11m preparing for HS2, including £8.6m funded by borrowing prior to the PM’s cancellation of the scheme, and a report to the full council said it would have to write off the expenditure, including funding the £8.6m through its revenue account, which funds its day-to-day operations.
”The requirement to fund this expenditure from revenue could trigger a s114 notice, as the council could be placed in a position where there are insufficient funds and inadequate reserves to manage in-year expenditure,” Peter Skates, executive director of place at the council said in his report.
Following questions from local media seeking clarification, a council spokesperson said on Friday: “While financial pressures are very real for Cheshire East Council, and for many other councils across the country at this time, the council is working extremely hard to address those pressures without triggering a section 114 notice.”
A S114 notice can be triggered when a council’s spending decisions exceed the available resources of the council. Under these circumstances statutory, services would continue and existing contracts and commitments must be honoured.
But any spending that is not essential or which can be postponed must not take place.
Further consequences could include the appointment of commissioners from the department for levelling up, housing and communities and potential restrictions on the decision-making powers of local leaders.
The spokesperson said: “Cheshire East Council has made a number of public statements in recent months regarding financial pressures on the council’s budget and the in-year position.
”The council’s committees have considered two detailed financial reports – first financial review in October and second financial review in November 2023.
”Local council finances have been under increasing pressure for a number of years.
”There are various pressures on Cheshire East Council’s finances, including the impacts of high inflation and high interest rates on loan payments seen throughout the year, the high level of demand for council services and increasing costs and complexity of needs for those children and older people who most need the council’s help.
”There is also financial uncertainty following the Government’s announcement, in October, of the cancellation of HS2 north of Birmingham and the potential impacts on Crewe, Cheshire East and the wider region.
”This is on top of reduction of Government funding for day-to-day services.”
The spokesperson added: “Cheshire East Council is seeking compensation from the Government for the losses sustained by the council and the surrounding area.
”Cheshire East Council alone invested £11m in HS2 coming to Crewe with £8m that may now have to be written off.
”The economic benefits of HS2 for Crewe and the surrounding area were forecast at £750m per annum.
”Together these factors bring significant financial pressures for the current year and for planning a balanced, affordable budget for the year ahead, with adequate reserves to protect against risk.”
On Thursday, the council’s Finance Sub-Committee considered a report on the council’s third quarter financial review.
The spokesperson said: “This report is forecasting a pressure of £13m by March 31, 2024, an improvement of £5.7m compared to second quarter financial review.
”Improvements since second quarter financial review include increased use of flexible capital receipts, increased income, holding vacant posts and reducing non-essential spend.
”However, this does not mean we can afford to stand still.
”As the council continues to monitor the position closely, the aim is to reduce the financial pressure to nil in 2023/24. This will ensure that the council’s reserves will be protected for future years.
”The council has now launched its budget engagement for next financial year. The consultation survey is for residents and other stakeholders to provide feedback on a range of budget proposals which will be considered by councillors as part of the decision-making process to set a balanced budget for the council in 2024/25.
”The decision to approve and adopt the budget will be taken at a full council meeting on 27th February.”
Despite the fact that local authorities cannot go bankrupt, issuing a section 114 notice is often described in the media as a council declaring bankruptcy.
Most councils under a section 114 notice will in fact pass a new budget to introduce cuts and reduce spending.
At the Conservative Party Conference on 4th October Mr Sunak was forced to announce that he was cancelling the HS2 scheme north of Birmingham after intense media speculation, despite the fact that the phases that would have passed through Cheshire East and enabled up to 5-7 HS2 trains per hour calling at Crewe station were already created in law. Mr Sunak did not consult the Cabinet or the Government on the cancellation.
The news was welcomed by many – not least Staffordshire County Council – but Cheshire East had invested “significant resource” over several years planning for the arrival of HS2, which it said offered once-in-a-lifetime” investment for Crewe, Macclesfield and the wider borough.
The council incurred more than £8m in direct capital costs in planning for HS2 and the Crewe hub. It also incurred more than £2m in supporting the HS2 proposals and the consultation and hybrid Bill processes.
A report to the full council said: “HS2 would have provided a step-change in connectivity at Crewe and a catalyst for growth and regeneration for the towns of Crewe and Macclesfield, the borough and the wider sub-region.
The council has spent more than £11m in preparing for HS2 and the Crewe Hub. This includes £8.6m in the capital programme, funded by prudential borrowing and £2.6m of direct revenue expenditure.
”Without critical commitments to HS2 and the Crewe Hub, under local government accountancy regulations, the council will be required to write of this expenditure. This would include expensing the £8.6m of capital costs through the council’s revenue (day to day running costs) account.
”The abortive costs are material in relation the council’s forecast levels of reserves.
”The requirement to fund this expenditure from revenue could therefore trigger a s.114 notice as the council could be placed in a position where there are insufficient funds, and inadequate reserves, to manage in-year expenditure.”
Following the PM’s speech on 4th October, the Government published the “Network North: Transforming British Transport” document, described as “a new, £36 billion plan to improve our country’s transport”.
The document set out proposals for how the HS2 funding would be instead spent on road, rail and bus projects and initiatives across the country. This included £19.8 billion to be reinvested in projects across the North.
The plan included no mention of investment in Cheshire East or Crewe, or recognition of the “direct and devastating” impacts for the town and borough caused by the decision to cancel HS2.
The Government has since announced that the Network North published plan was “illustrative” and spent some of the money on projects in London.
Cheshire East on paper could have indirectly benefitted from a new £2.5 billion fund to “transform” local transport in 14 rural counties, smaller cities and towns across the North outside the big city regions, and from an additional £3.3 billion to tackle potholes as part of an new nationwide road resurfacing scheme.
There was also an announced £12 billion investment to deliver Northern Powerhouse Rail between Manchester and Liverpool.
The council is now looking for compensation from the Government.
Said the report: “A number of media reports since the announcement have stated that Crewe is the biggest loser from the cancellation of HS2 and its replacement with Network North.
”The plans to remove the safeguarding for Phase 2a and 2b are likely to mean this loss is irrecoverable for many years, if not decades.
”The Government did not consult or engage with the council ahead of the decision to cancel HS2 or on the development of Network North.
”This is despite the council writing an open letter to the prime minister requesting a discussion ahead of any decision made.
”The cancellation of HS2 north of Birmingham is a devastating blow to Cheshire East and its ambitious regeneration plans for Crewe and Macclesfield.
”HS2 was integral to the council’s corporate plan and its green vision to be a thriving and sustainable place.”