Could a Scottish council run out of money?

North Lanarkshire is the latest Scottish council to deliver difficult news about local services, with plans to close libraries, swimming pools and sports centres.

It is far from alone, with all 32 local authorities facing similar dilemmas.

How bad is the financial situation, and is there is a risk that a council could actually run out of cash?

Where does the money come from?

Local authorities have three main sources of cash to fund services in any given year.

There's the core grant from the Scottish government, which accounts for the lion's share of funding, and is always a topic of contention at budget time.

Each year we seem to do the same dance where ministers announce a "fair settlement" in December, councils say it's short by about a billion quid, and then an extra hundred million or so is found down the back of the sofa in February.

There are local levies like the council tax, which accounts for about 13% of spending. With the era of the council tax freeze coming to an end, every local authority raised rates this year on a range from 4% to 10%.

And then there's reserves - funds squirrelled away for rainy days, but which are increasingly being leaned upon. Only a handful of councils avoided eating into their savings when setting this year's budgets.

Town halls are facing particularly acute issues at the moment between past constraint on the grant from central government, the weight of inflation and public sector pay deals.

But the Scottish Fiscal Commission has warned that even bigger challenges may be coming over the horizon, with Scotland's aging population a looming demographic difficulty alongside things like climate change.

Difficult choices

As well as having a finite amount of money to work with, councillors are also limited in how they can move money around within their budgets.

Chunks of their funding are "ring fenced" to deliver promises made by the Scottish government, like free childcare, school meals and social care.

Humza Yousaf told the Cosla conference this week that he is looking to "loosen" the ring fencing, as well as give councils more power to raise funds on their own via measures like the Transient Visitor Levy (a.k.a. tourist tax) and Workplace Parking Levy.

But the first minister also said that process cannot happen overnight, so councils are still left with a relatively small range of areas where they can make savings.

The first minister addressed the Cosla conference in Crieff

The fat was trimmed long ago. The cuts now are going into the bone.

North Lanarkshire is an example where an unpalatable decision has been pushed through.

On the flip side, opposition councillors in Falkirk just voted down a proposal - described as the "least worst option" - to cut the eligibility for free school bus travel.

Officials have warned that teaching and classroom support jobs could have to go instead, with the administration branding the vote an "abdication of responsibilities".

Short of raising a significant sum from local ratepayers, via things like parking or garden bin collection charges, or steeper council tax hikes - an equally unpopular move during a cost of living squeeze - something has to give.

Could a council run out of money?

When the city council in Birmingham effectively went bankrupt, it provided what Cosla called a "wake-up call" to the possibility of financial collapse.

But this is actually quite a difficult question to answer, given the murky nature of budgets and forecasts across 32 different authorities.

One approach is to look at the "budget gap" councils are facing - the shortfall between expected revenue and expenditure.

Most councils are trying to look ahead at least a couple of years, and by 2025-26 that figure is over a billion pounds for the 32 combined.

But the gap Scotland-wide has frequently been in similar territory in recent years without anyone actually going to the wall.

Birmingham's council ran into financial trouble following an equal pay claim

Another method is to look at reserves - how much councils have to fall back on in an emergency.

Reserves are complicated, even more so since the Covid pandemic funnelled extra cash to authorities under a range of different grants and headings.

There are specific reserves for capital projects as well as for maintenance and insurance, and other general reserves which have already been committed to projects.

Perhaps the most useful measure is uncommitted reserves - true contingency funding that could be drawn upon in a crisis.

That figure for all 32 councils combined currently sits at £400m - which is really not a huge sum, and a few have already emptied the piggy bank of all reserves.

So while it would be unprecedented for a council to actually run out of road, it's not unimaginable.

What would happen?

Councils have a duty to balance their books.

We don't have the exact mechanism which was triggered in Birmingham - known as a section 114 notice - but there are similar duties for the watchdogs which audit Scottish councils.

If one reported it was struggling to set a balanced budget, the Accounts Commission - an independent audit body which literally holds local government to account - would be the first port of call.

It has various bureaucratic powers, which mostly revolve around reports being drawn up. The administration would be given help to try to solve the problem, although many councillors would see it as decisions being taken out of local control.

The auditors can also haul the council up in front of a public hearing to go over the books - something which has happened on a few occasions, and which could essentially shame them into finding a solution.

But beyond that, it's not entirely clear what could actually be done if the worst came to the worst. Some kind of political settlement with central government would likely be required to plug the gap.

Everyone in local government is hoping we never have to find out.