Employees were told not to “rock the boat” when they questioned the transfer of funds wrongfully spent by the city council and Nottingham City Homes, an investigation of up to £40m worth of payments found. It emerged on Tuesday (April 26) an independent report has concluded money has been misspent by the authority and Nottingham City Homes, dating back more than five years.
It follows a probe into Nottingham City Council and Nottingham City Home s accounts by the Chartered Institute of Public Finance and Accountancy in conjunction with Richard Penn, a local government expert. The full report, published on Tuesday, found Housing Revenue Account (HRA) money from council house tenants’ rent – which should be ringfenced for council housing – was used on general services instead.
Nottingham City Council says it is arranging for the money to be paid back into the right fund. Reacting to the report, Nottingham City Homes said on Tuesday (April 27) £17m worth of the payments had not been spent elsewhere and the money remains available for council housing.
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The report said HRA money is believed to have stayed within the council but was used to prop up services and prevent council job losses – but this meant resources have been “systematically taken away from some of its [the council’s] most vulnerable citizens”. It concludes the practice was first put forward by officers, rather than being directed by elected councillors – and was not created as a specific plan to get money into general council services.
But the report says ‘poor governance’ meant it was allowed to continue. Known as the Penn Report, the probe was commissioned by the council to investigate the management of funds between Nottingham City Council and Nottingham City Homes dating back to 2014-15.
It has concluded the payments in question were conceived initially by the-then corporate director of development as part of a wider and ongoing budget and savings exercise. The concept of the payments would have been evaluated by a working group of officers and councillors, and subsequently agreed at council budget meetings.
Having been adopted in 2014-15 these savings and payments became a standard expectation of the budgeting process, the report states. In total, the investigation has found up to around £22.8m was misspent by the council and £17.1m by Nottingham City Homes.
Nottingham City Homes is a separate company set up by the council to manage and operate its council housing. The report says: “Nottingham City Homes had a sufficient knowledge of the Housing Revenue Account ring fence to know that returning surpluses back to the council to help with General Fund budget pressures could not be justified but they went along with the proposal.
“The chair of Nottingham City Homes did report that there had been a formal inquiry challenging the use of Housing Revenue Account, but this did not result in any form of review or revision of the approach.”
The report also stated as time went on there were more concerns expressed by councillors and a former council director of finance who were appointed to the Nottingham City Homes Board about what had become annual payments from Nottingham City Homes to the local authority.
But the concern was only about “the increasing quantum of the payments and the detrimental impact on tenants and not about the principle of the payments or their lawfulness”. The report stated that the decision to transfer ‘surpluses’ from the Housing Revenue Account to the General Fund in the 2014/15 council budget, originated from the former corporate director of development – who had responsibility for housing at the time.
The report stated: “Assurance was given by him and by the finance staff involved to anyone who questioned whether this proposal was ‘legitimate’, and when junior officers associated with the management of the Housing Revenue Account questioned this and other ‘adjustments’ that it was all ok, there was backing from the political leadership and not to ‘rock the boat’. However, I have not concluded that the payments were initially ‘a mechanism conceived to divert Housing Revenue Account funds to the General Fund’.
“The evidence indicates that the payment in the 2014/15 budget process was an officer-driven proposal, not a political instruction, in an environment where there were many proposals to reduce expenditure or increase income in order to meet the political imperative to maintain services and avoid cutting jobs. However, the annual payment then continued, and the amount of the payment differed from year to year as did the description of the payment, and this increases the likelihood that it did become an accepted mechanism to divert funds from the Housing Revenue Account to the General Fund.
“That this was allowed to happen and continued for so long was down to poor governance practice, principally at Nottingham City Council but also at Nottingham City Homes. There has also been a serious failure of governance at Nottingham City Homes where the Nottingham City Homes chief executive and others had a sufficient knowledge of the Housing Revenue Account ringfence to know that returning surpluses back to the council to help with General Fund budget pressures could not be justified but they went along with it.”
The probe has been running since the council was issued an extremely rare Section 114 legal notice in December after it was first uncovered that more than £14m of money had been ‘unlawfully’ spent. The Penn report concludes that up to another £24m has also been misspent. The money must now be paid back into the Housing Revenue Account by the city council.
On publication of the findings on Tuesday, Nottingham City Council Leader David Mellen (Lab) said: “I would like to reassure our council tenants that we are committed to dealing with these past issues, ensuring that lessons are learnt so that these mistakes cannot be repeated in future.
“It’s important to make clear that the funding in question has been used for purposes that benefit local people but that are not an appropriate use of what is effectively tenants’ money.”
Nottingham City Homes has said it only “undertook activity requested by or supported by the council”. “There has been full transparency and accountability to the council throughout,” a spokeswoman said.
A spokeswoman for Nottingham City Homes added: “Nottingham City Homes is wholly owned by the city council.
“We only undertake activity requested by or supported by the council. There has been full transparency and accountability to the council throughout.
“We report on performance and finance to the council, and we have council nominees on our board. Nothing we do has been undertaken without the council’s full knowledge since we were established in 2005. “We have noted a number of concerns in the reports being presented to the council, the most concerning being the comment that NCH may have “potentially” spent £17m HRA funding on non-HRA activity.
“We would like to confirm that [we] haven’t and that this funding remains available for council housing. “In addition to managing council housing, we also provide homes for homeless families and survivors of domestic violence – we fund these from the rental income received from those homes without using any funding earmarked for council housing.
“Since Nottingham City Homes was established we have delivered for council tenants, we brought over £200m investment into Nottingham to meet the Decent Homes standard, greatly increasing tenant satisfaction, and delivered the largest programme of new council house building for a generation. “We have also managed and maintained council housing very cost effectively. Independent benchmarking shows we are nearly £8m a year most cost-effective than other councils and housing associations.
“This has enabled the council to keep rents low for tenants – and tenant satisfaction with repairs has risen from 54 per cent in 2005 to 80 per cent in 2022.”
