Conservative run Northamptonshire Council has become the first local authority in two decades to signal it is close to bankruptcy. The council issued a section 114 notice this month banning expenditure on all services except those it has a statutory obligation to provide to safeguard vulnerable people. The Council Leader cited “severe financial challenges” saying they had been “warning government from about 2013/14” the cuts being imposed by central government were not sustainable. A last ditch plan to avoid the section 114 notice by proposing to increase council tax by five per cent, implementing cuts of £34.4m in 2018/19, and selling the council’s £53m headquarters, which only opened in 2017, failed.

It is ever more important for investors to understand the economic and political stability of local authorities. Authorities are the commissioners and funders for a broad range of services. From adult and child social care to education and housing, there is a clear market for investors to support innovative providers to help councils deliver services more efficiently. Alongside this, there has also been a long-term trend towards outsourcing amongst councils, with contractors taking on more ‘everyday’ maintenance and administrative work, as well as specialist services. Councils’ financial security and political direction dictate the future success of these ventures.

It is hotly contested whether Northampton is an isolated case of financial mismanagement, or an indicator of a system under critical pressure. But there is clear pressure for a new funding settlement for local government. The Local Government Association has argued shrinking budgets, coupled with increased pressure on social care and child protection services, are leaving many councils “close to the edge”. A 2016 report by Zurich Municipal similarly found “endless plate spinning” by authorities to manage their finances was becoming more difficult. MPs from all parties have been calling for additional or ‘fairer’ funding for their local councils, while a group of Conservative Council leaders wrote an open letter to government in January saying a failure to act on funding has put social care at a tipping point.

Government has responded to the squeeze on finances with a number of new measures. Local Government Secretary Sajid Javid announced in December 2017 that councils will be allowed to raise council tax by a further one per cent (to six per cent) without a referendum in 2018/19. Earlier this month, he announced an additional £150m for social care as part of the Local Government Finance Settlement. This followed warnings that at least ten councils were preparing to impose emergency spending controls. These have been described as ‘sticking plasters’ by critics, designed to keep services functioning for now, while avoiding long term questions around funding.

In an attempt to generate further resources locally, twelve authorities will be piloting the retention of 100 per cent of their local business rates. This is expected to generate around £25 million for the councils next year. The policy was due to be rolled out sooner, as a means of replacing lost revenue from the government grant, but its implementation was delayed, while cuts to the grant went ahead. The move remains controversial with Labour, who argue that retention of business rates will benefit richer regions over poorer ones as they generate more revenue to retain.

The government’s continued emphasis on ‘sticking plaster’ solutions and the move towards increasing reliance on locally generated budgets mean it is more important than ever for investors to understand the financial and economic realities of the authorities their assets (or target assets) operate in. The political will to use reserves to tide over budgets, or increase council tax will be particularly pertinent. Westminster Council last week asked richer residents to pay a voluntary ‘tax’ to cover the costs of local projects, despite being one of the richest councils in the country, holding £1.9bn in reserves. Other Conservative councils have faced criticism for an unwillingness to increase Council Tax resulting in large budget deficits or deeper cuts. The requirement to hold referenda for large increases in Council Tax makes it difficult for many to now make up this revenue. These variations in political will mean the same asset may see stark variations in growth in different regions.

There will be winners as well as losers. The financial pressures on local authorities mean investors in products and services which improve the efficiency of service delivery (provided they have limited upfront costs), are likely to see strong demand. Specialist services are also likely to benefit from this trend as individual councils, who don’t have the resource to fund specialist services themselves, recognise the value of working with partners.

The wider political question also needs to be addressed – whether the ‘sticking plaster’ approach will remain politically sustainable in the long term, or whether government will bow to pressure from a Labour Party which has pledged to increase funding and powers for authorities, but which is heavily critical of private sector involvement in the delivery of many core services. Either way, the prospect of more councils issuing 114 notices 12 weeks from local elections already expected to be extremely challenging for the Conservatives should be enough to focus government minds.