Nottingham City Council may have used cash ‘unlawfully’ to cope with the ‘financial challenges’ it was facing, according to a report.
An external investigation was carried out looking at how more than £15m of ringfenced cash for council housing improvements was used for other council services instead.
On Wednesday 15December, the Labour-led authority was issued with an extremely rare Section 114 order for its ‘unlawful’ breach.
This means it must now correct the mismanagement of funds and uncover what has happened.
The notice has only been handed to a small number of other councils in the past.
The investigation was carried out after funds to the tune of £15.86m from the council’s Housing Revenue Account – which should have been spent on things such as housing repairs – were instead credited to the General Fund for all council services.
The Housing Revenue Account is strictly ring-fenced for housing and cannot be used for other purposes.
The sum involved has accumulated since 2014/15.
The Chartered Institute of Public Finance and Accountancy (CIPFA), which carried out the report into the issue earlier this month.
Nottigham City Council made the full report public on Wednesday when it announced the notice had been issued.
It said ‘management fee rebate payments’ have directly supported the council’s General Fund in “coping with the financial challenges faced by the city council”.
It has called for a review on the process and systems that failed to prevent these “unlawful beaches” to ensure that they cannot be repeated.
The council intends to replace the lost money from its general reserve account – but concerns have been raised by opposition leaders there is not enough cash to replace the £15m lost.
The council’s chief finance officer, who delivered the Section 114 order, said: “Inevitably, this will weaken the council’s General Fund reserves and its ability to withstand future financial shocks.”
The council must also examine in detail the chronology of events in relation to the payments made.
This includes who conceived the payment, the accounting transaction detail, who authorised it, who knew about it, how challenges to the legitimacy of the payment were dealt with and by who and any other facts that can provide insight into how the situation arose.
There are also concerns in the report that other matters need to be investigated. An example is a car park on Housing Revenue Account land for which it receives no income, the income going to the General Fund.
Clive Heaphy, the council’s chief finance officer, also known as a Section 151 Officer, said: “This unlawful position appears to be the result of a systematic and planned approach between Nottingham City Council and Nottingham City Homes since 2014/15 whereby Nottingham City Council received an annual ‘management fee rebate’ from Nottingham City Homes in breach of its Articles of Association which Nottingham City Council subsequently treated unlawfully as General Fund income.
“Additional issues have also come to CIPFA’s attention which raise further question about more breaches which could further threaten the integrity of the Housing Revenue Account ring-fence and which will be the subject of further investigations.
“CIPFA established that ‘management fee rebate’ payments made by Nottingham City Homes to Nottingham City Council since 2014-15
have been described in various ways.
“The payments made by Nottingham City Homes to Nottingham City Council have been consistently budgeted for by Nottingham City Council since 2014-15 and subsequently accounted for in the Council’s General Fund.
“CIPFA comment that these payments have directly supported Nottingham City Council’s General Fund in coping with the financial challenges faced by the City Council.”
The council, which has almost £1bn of debt, is currently under the watchful eye of government and needs to make £38m of savings over the next four years.
If it fails to do so, then government commissioners could be called in to run the authority in the future.
A Department for Levelling Up, Housing and Communities spokeswoman said: “Following concerns around Nottingham City Council’s Housing Revenue Account, we are aware that the council has decided to issue a section 114 notice in recognition of the fact that this activity was unlawful.
“Ministers will continue to review their options in relation to Nottingham City Council, including considering whether it is appropriate to use their powers to ensure the council is complying with the Best Value Duty.”
Cllr David Mellen (Lab), leader of Nottingham City Council, said: “I am absolutely committed to making sure that the council continues to deliver vital services whilst ensuring that issues such as this are discovered and dealt with immediately.
“As leader of the council, I am determined that an investigation is carried out without delay to understand how this happened and will absolutely ensure that measures are put in place so that something like this cannot happen again.
“The fact that this continued unchecked for a number of years is clearly disappointing and whilst we understand how this could have happened, it is only right that issues such as this are unearthed and dealt with transparently.”
Cllr Andrew Rule, opposition leader of the Conservative Group at the council, said: “What now needs to happen in the light of these findings is a forensic analysis of all payments by the council to its wholly owned companies to ensure there have been no other unlawful misapplications of funds, together with searching questions of the council’s external auditors as to why this activity was not picked up by them previously.
“The Section 114 report is the latest in a line of unwelcome accolades that through its mismanagement of the council the Labour leadership have bestowed on the city.”