The Somerset County Council financial crisis

How did Somerset reach this point, what does this mean for the people of Somerset and where do we go from here? 
A briefing document from the Liberal Democrats

Somerset County Council has been in the news – nationally and locally - as it continues to struggle with an extremely serious financial situation. This could, if not addressed properly, lead to the Council effectively declaring itself bankrupt, at which point Government would send Commissioners in to run the Council’s finances and oversee its operations. 


While all 27 County Councils in England are struggling to contain their finances, the problem is particularly acute in Somerset. Many factors contribute to this situation, which is complex and constantly changing. This briefing seeks to explain those factors.

How did Somerset reach this point?

Somerset’s problems stem from decisions made both nationally and locally which have impacted on the financial situation. A list of these, which is not exhaustive, and some background facts and figures, are highlighted below.

How big is the County Council budget?

SCC’s gross turnover is huge, so it appears to mimic a large business, but this masks the reality. The County Council functions as ‘banker’ for the Local Enterprise Partnership, Exmoor AONB and for schools, amongst others, but this ‘income’ is ring-fenced and cannot be spent by SCC. That money simply passes through the SCC accounts and nothing remains with SCC.

SCC has a capital budget that funds projects like building schools, roads etc and this is currently funded by grants from Government and other bodies, and from sale of assets eg County farms. 

SCC’s net revenue budget is £317 million for April 2018 to March 2019. The revenue budget pays for services for the people of Somerset and includes the payroll. The revenue budget income includes your council tax and a proportion of business rates, earned income and some specific monies for services in Somerset. The revenue budget can also include monies from sale of assets if that money is used for transformation activities i.e. new ways of providing services.

Like every Council, SCC carries reserves to provide a ‘cushion’ in case of unexpected situations like the flooding in 2013/14. Councils are recommended to hold approx. 5% of the revenue budget in reserves but this is not a legal requirement.

Councils do have a legal requirement to set and maintain a ‘balanced’ budget – even if the balancing is more a hope than a promise. If they cannot do that, then (as in the case of Northamptonshire County Council earlier this year) they must serve a Section 114 Notice, effectively declaring bankruptcy.

We hear that the NHS is in trouble too, what’s the difference?

The NHS is certainly in huge financial difficulty.  However, Councils are different from the NHS, which is allowed to set a deficit budget each year ie. a budget that does not balance and projects a loss. The Government has also promised a significant level of additional financial support for the NHS in recognition of the increasing demands on the service.  There is no similar promise so far for Councils.

Why weren’t the signs of trouble at SCC spotted earlier?

If SCC’s accounts showed the income and expenditure relating to what the Council’s finances (particularly the reserves) were in reality back in February 2018, then the warning signs would have been spotted earlier. In business, trouble with cash flow is an early warning sign.  However, SCC has no problems with cash flow – as mentioned earlier, it functions as ‘banker’ for other organisations and has large amounts of money flowing through its accounts - although it cannot spend that money - so there is rarely any visible shortage of ‘cash’.

There are questions we would wish to ask of SCC’s Auditors, Grant Thornton, whose first alert was a concern about ‘value for money’ raised in July 2018.

What about the recent savings, why has that ‘chopping list’ of services and jobs happened with so little warning?

The previous Finance Director left in June, and the Chair and Vice Chair of the Audit Committee stood down. An Interim Finance Director was appointed on a ‘consultant’ basis as it is a legal requirement for a Council to have a responsible officer for finance.

The Interim Finance Director has spent his first months in post taking apart the revenue and capital budgets, and looking in depth at the reserves of the Council. 

The reserves divide into General Fund ‘usable reserves’ (the monies available to be used for various reasons including covering overspends), ‘earmarked reserves’ (the monies that are already allocated to specific projects) and ‘non-usable reserves’ (monies held for other organisations such as schools). 

The resulting exposed picture is both stark and very worrying as ‘usable’ reserves are shown to have reduced to an estimated £7.8m at 31.3.19 but that includes £2m to be ‘refreshed’ from the over-stretched revenue budget. In February 2018 the estimate for the end of the financial year was £12.8m. In response the revenue budget has undergone more than 70 savings exercises to try and get it back to a balanced year end position for 31stMarch 2019. 

These savings, or cuts, will cover areas such as Citizens Advice Bureau overhead funding, early intervention for families and children through the Getset service, precautionary gritting of roads, supplies of salt and grit to parishes. A proposed cut to the support for children acting as carers has been postponed for the moment, but we are still awaiting announcements on cuts to the Library service.  Consultations will also commence on subsidies for public transport and more of the non-statutory children’s services that provide early help to families. 

A ‘call in’ by the Children’s and Families Scrutiny Committee has asked that Cabinet reconsider the first tranche of savings in the Getset service at Level 2 because of concerns that the Cabinet did not have full and clear information on which to base their decision.

How SCC spends its Revenue Budget money?

While £317 million for the year from April 2018 to March 2019 looks an impressive figure, with a population of 530,000 (2011 census), it represents an annual spend of £600 per person. Current estimates suggest Somerset’s population may have grown to 550,000+, which would reduce annual spend per head to £576. 

A very large percentage of its revenue budget - more than half - is spent by Adult Social Care (£134 million) and Children’s Services (£65 million).  The other key areas of spending are: Highways & Rights of Way; Recycling & Waste Disposal; Educational services and Maintained Schools; Libraries; Youth Services; Rural Transport and many other smaller County-wide services.

And how has it changed so far?
Because a large proportion of Adult Social Care and Children’s Services spend is ‘statutory’ – money spent to meet minimum legal thresholds of duty and care – that money is effectively protected from any savings or cuts. 

Protection of that part of the budget means greater savings must be made in other areas of the Council’s services.  These savings put greater pressure and have a disproportionate impact on the quality of other services provided, for instance on Highways.

First, the national situation. 

The Government has been reducing Revenue Support Grants for the past five years. For two years, grants were made to councils that froze Council Tax. Then Government started a conversation about allowing councils to retain a greater proportion of business rates, as well as the council tax collected locally.

But it hasn’t worked out. The greater retention of business rates has not been agreed or implemented except in a very small number of pilot authorities. Somerset applied to be a pilot County, was not accepted and there was no reason given, and has applied again this autumn.

As a result, Somerset’s annual revenue budget will have lost nearly £90m of the Revenue Support Grant by 2019/20 and does not yet have any additional Business Rates retention. In response, Somerset County Council has reduced its expenditure by over £100m. The reduction on expenditure is greater than the reduction on income because demands on social care and overhead costs, including minimum wage, have risen during the same period of time.

Are there other local factors in Somerset?

Yes, the national situation has been exacerbated in Somerset because Council Tax for the County was not increased from April 2010 to March 2016 – a decision made by the ruling Conservative cabinet. 

In the first years of the Coalition Government this was offset by the Government supporting those councils who froze Council Tax with a grant equivalent to an increase in Council Tax. Then the grants were taken away and Government allowed Councils to raise Council Tax by 1.99% annually, a reflection not only of inflationary pressures but also a recognition that demand on services was increasing – particularly adult social services. 

Somerset County Council elected not to increase Council Tax at all from February 2010 when it set its budget for 2010/11 year through to 2016/17, effectively putting additional pressure on all the budgets within the Council. Other councils realised that they needed to return to modest increases in Council Tax and, of course, if you don’t make inflationary increases in income, then, when you do return to increases, you are starting from a lower base level.

One direct impact of the freeze was that children’s services were targeted for considerable cost savings. The result was that the quality of service plummeted. When Tories took control of Somerset in 2009 the service was rated ‘Performs Well’, the equivalent of ‘Good’. By 2013 and again in 2015, the Ofsted report deemed the service to be ‘Inadequate’. 

Redressing this situation has required spending vast amounts of money to get the service back to ‘Requires Improvement’ but that is still a way to go before reaching the necessary ‘Good’. If the next inspection does not find evidence of ‘Good’, then the service will return to ‘Inadequate’ and the whole situation will deteriorate further.

How much has Somerset’s decision to freeze Council Tax meant to resources?

If Somerset County Council’s Council Tax had increased by 1.99% for six years between 2010 and 2016, there would have been an additional £85 million+ in the Council’s spending – more than enough to have staved off previous cuts to Children’s Services and placed Somerset in a far healthier financial situation. 

(Note: 1% of council tax increase in Somerset is approx. £2m more in the base revenue budget).

Why does Somerset have increased demand in social care?

We all know people are living longer, but while lifespans have increased, the nation’s so-called “healthspan” has not. Many more of us are spending more years in later life in poor health and needing various levels of support – either in our own home or in a care setting.

Somerset has a particularly acute situation as we have a population with a higher than average number of older people. In the 2011 census, Somerset had 21.1% of residents over the age of 65, against a national average in the UK of 16.4%. Somerset is a lovely place to retire to.

There is also a continually growing demand for children’s services, both for children looked after in a care setting (care home or fostering) and for the early interventions necessary to stop more children needing long term and high-level care. 

Many children too have special educational needs which are also funded through this budget. Adults with learning disabilities need care too, in residential or supported living or through day care services. 

These services cost a great deal of money every year and the figure is growing.

I’ve heard all sorts of stories about Icelandic banks and huge borrowing. What’s that all about?

It’s true that Somerset County Council, like many other authorities including the Audit Commission, invested in the Icelandic banks which then crashed. However, it is not widely known that approx. 90% of that money was returned to Somerset (and the wider UK) and the last monies were still being returned last year. A relatively small amount of the total amount has been written off.

During former Lib Dem administration, the Full Council decided – in common with most local authorities during the New Labour administration - to borrow considerable amounts of money from the Public Works Loan Board and on the open market before 2009. These funds enabled SCC to invest in large scale infrastructure projects such as road-building, new schools, bridges, park and ride and many more. Government did provide some grants but the majority of public sector expenditure was financed by loans or private finance initiatives.

Most of the loans are long term and on fixed interest rates. The interest is factored into every annual budget and amounts are invested in long term investments for repayment at maturation of loans. A few years ago, the loans were re-profiled, and two loans totalling £24.2million were paid off at maturity, bringing down the total interest per annum.

Somerset is average in the shire Counties borrowing table. Norfolk’s total borrowing is much higher and other south west Counties such as Gloucestershire are close to the borrowing levels of Somerset

Without undertaking that borrowing, Somerset would not have been in a position to build those roads, schools, bridges, recycling centres etc that the County urgently needed and the Full Council was responding to the instruction from the New Labour Government on borrowing to invest in infrastructure. Three schools in Somerset were built as private finance initiative projects.

How much outsourcing does the Council do – and is it good value for money?

In 2007, Somerset was one of the authorities involved with setting up South West One, a large scale attempt to outsource all of the back office functions of SCC, Taunton Deane Borough Council and Avon & Somerset Police. 

It was not successful, cost significant amounts of money and the services are all now back in-house. 

However, outsourcing continues. There is now a contract with a social enterprise called Discovery, part of Dimensions UK, delivering the services for 900 people with learning disabilities in Somerset. So far it has struggled to make any savings and appears to be costing the County Council more than it could possibly save. 

There is one large amount of money (£4.9million) that has been ‘lent’ to Discovery in a form of an ‘overdraft facility’ with the intention that will be paid back when the social enterprise starts to make savings later in the six-year contract. There appears to be no guarantee that savings will be made or that this money will be returned to Somerset. A further £3.4 million is being diverted from the Better Care Fund in this financial year to further support Discovery, with no real expectation of it being returned to Somerset County Council.

This contract with Discovery was a decision made without any input from any councillors outside of the then seven-person, Conservative Cabinet.

Lib Dem councillors have expressed concern about the way this contract was awarded and its terms, not least because of the impact on the Better Care Fund – income which the Council received from the Government in order to help prevent additional spending by the NHS. 

The contract replaces services previously provided in-house, and so (on the surface) it would appear that the Council has diverted funds to make savings which don’t, as yet, exist.

What has happened to staffing levels?

The number of staff working at SCC has reduced considerably, both by redundancies and also because of the outsourcing of learning disabilities services. However, the cost of employing top level officers has risen considerably, as it has across the country, and seven senior officers earn salaries of over £100,000 each.

Salaries at the lower grades have also risen as the effects of the minimum wage and living wage have affected many of the caring provisions of the Council. 

Despite this, in many parts of the Council - particularly social workers in children’s services - Somerset is not able to attract sufficient numbers of qualified social workers and so relies on agencies – at a cost which is considerably higher than Council-paid staff due to agency fees, adding to the overspend in children’s services.

In June, when the long standing Finance Director left SCC an Interim Finance Director was appointed on a daily fee of £900 plus agency fees.

What happens if the savings are not achieved?

The Council has a legal obligation to propose and maintain a balanced budget. 

If it fails to do so, the main contingency is known as a ‘Section 114 notice’ basically a bankruptcy notice for a Council that involves Government commissioners coming in to take over the whole service and reduce it rapidly to no more than the statutory minimum. 

The Government will charge the Council for this service, at daily pay rates higher than that of the current Interim Finance Director. There is no bail out and no financial help.

Is there any hope at all that this drastic step can be averted?

The County Council has to make enough savings to come to an outturn figure for the current year that does not exceed the ‘usable’ reserves. And it has to propose a balanced budget for the next year, 2019/20, that is ‘robust’ in February 2019 by combining three factors:

  • First, by succeeding in implementing the cuts proposed and agreed by Cabinet in September 2018 at a level that is sustainable, and without driving Children’s Services back to an Ofsted ‘Inadequate’ rating. Based on the previous year’s overspend, there is no guarantee this will be achieved.
  • Second is for the Government to accept Somerset into the second tranche of increased Business Rate Retention at the very earliest moment. This could make an improvement to the revenue budget, though not a huge one as there are so many small businesses in Somerset below the business rates threshold. SCC has submitted its application to Government. 
  • Third is the possibility of Government agreeing that Councils with the statutory care responsibility can add a ‘Children’s Precept’ in the way they have added an ‘Adult Social Care Precept’. If a further 1.99% was allowed, it would bring Somerset another c£4 million into the base budget. However, there is no precedent for this nationally and Somerset would need to argue a strong case. 

What signs do we need to look for to gauge if we are on track?

  1. The County will need to prove that it has achieved savings in the region of £2 million a month from September 2018 to March 2019. As the new budget for April 2019 to March 2020 will be presented at Scrutiny Committee in January, before Cabinet and then Full Council in February, the basic budget lines have to be in place before Christmas 2018.
  2. The Discovery contract for Learning Disabilities needs to be achieving decent outcomes and eventually some savings. 
  3. The reserves urgently need to be bolstered by refreshing them from revenue but that can only be achieved if the in-year savings are successful - and then some.
  4. The Government has to be persuaded to look favourably on Somerset and allow both greater Business Rates Retention and possibly a Children’s Precept. 
  5. SCC has announced plans to demand greater contributions from developers of new housing so that school places planning can be more realistic. SCC has a responsibility to provide school places but, for some unknown reason, has a poor track record on levels of developer contribution.

Accusations from the Conservative Leader of the Council that the Conservative Government is guilty of abandoning SCC may not be the best tactic. We understand that the County’s MPs have been approached to request support from Government, and Somerset was mentioned in Prime Minister’s Questions recently.

What could have been done differently?

It’s too late for any kind of Plan A. The Coalition Government was responsible for the first years of the austerity programme, but the Conservative Government has now had over three years to respond to Conservative Councils’ cries for understanding and financial help for statutory services – the services they are legally bound to deliver.

Other Councils started making commercial investments to generate income, some borrowing money on favourable terms through the Government to do so. SCC steadfastly refused to consider borrowing, even when they had the chance to look at investing in housing for Somerset’s people.

Other Councils invested their own reserves in ways that brought them more income. Most Councils realised the Government’s request for no Council Tax increases was flawed and so returned after two years to 1.99% increases (any higher and a referendum would have been needed). And some Councils took better care of their services so that the situation did not deteriorate to such a degree.

Plan B is where we are now. SCC is like a Council under a Section 114 Notice … but without the official paperwork and the Government Commissioners. It is nearly as painful, with services being taken away to achieve unprecedented savings and another 100+ more staff being made redundant. The surviving workforce is being asked to take a number of days unpaid leave at Christmas in order to help achieve savings. It is all too little, and far too late. 

An Extraordinary Meeting of Full Council has been called by opposition Councillors on 17th October 2018 to debate what contingency is available to Cabinet and whether the budget agreed by Conservative Councillors in February 2018 is indeed ‘robust’. The Extraordinary Meeting cannot overturn the decision to make 75 lines of savings (cuts) as agreed by Cabinet on 12th September, as that responsibility was delegated to Cabinet. Children and Families Scrutiny Committee has ‘called in’ the decision on cuts to the Getset services for families and that will be reconsidered by Cabinet in the coming week.

Plan C is C for Contingency. In other words a Section 114 Notice. That would be a disaster for Somerset, just as it has been a disaster for Northamptonshire.

Plan D is for a combination of helpful factors as itemised above to all come to fruition as a ‘survival plan’. This, however, seems very unlikely as we are now within six months of April - the end of the financial year.

What is the Government doing about SCC?

In public, very little. Either the Government is too busy with Brexit, or it is allowing Councils to do its dirty work in reducing reliance on the state, or it simply thinks the Councils need to get their own act together. 

Or possibly all three. 

SCC’s Cabinet may not be helping themselves by openly criticising the Government approach in what amounts to a family squabble – Blue on Blue. All five MPs in Somerset are Tories and in Prime Minister’s Questions on 10th October they did finally get a mention for Somerset.

What else might happen in Somerset?

In Northamptonshire where a Section 114 Notice was issued earlier this year, the Government has pushed through a Unitary Authority solution, two councils taking over from a number of District Councils and one County Council. The same could happen in Somerset, and there is the possibility that two smaller Unitary Councils of B&NES and North Somerset could be included in a reorganisation. 

The Unitary Council(s) would probably then run a minimum statutory level of services and more power (both in terms of precepting- raising money through the Council Tax - and spending) could return to the local Parish & Town Councils as it was before reorganisation of Local Authorities in 1974.

Could that be a good thing?

Possibly, but it would depend on the quality of local Councillors and the Clerks in post at the smaller Town & Parish Councils. It would also benefit from ‘area working’ for the Unitary Authority (or Authorities) as local knowledge is essential. Whether that would be done, as already happens in Lib Dem South Somerset District Council or through the smaller Parishes would be up for debate. It would be a considerable upheaval whatever happens.

Any resulting Council/s would inherit borrowing, debts, investments, housing, outsourcing from the Council/s it replaces - plus the cost of redundancies for some very highly paid officers. Not surprisingly, Councillors take differing views on the advantages and effectiveness of Unitary Authorities.

Watch this space?

Yes, definitely, watch this space. The savings in this current financial year are difficult enough, but more savings will be needed next year and those will be even more difficult to achieve. Then we’ll see the whole picture start to unravel before another plan is – eventually - put in place.

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