Why agreeing the balance sheet split early matters

This article sets out why that agreement cannot wait, how the process works, what councils need to consider, and what an early, well-governed split means for long-term financial sustainability.

Why the balance sheet split cannot wait

The balance sheet split determines how assets, liabilities, debt and reserves pass from predecessor councils to successors. Leave it unresolved and the consequences cascade through budgets, audits and services for years.

Grant Thornton’s value for money work across eight unitary councils created since 2019 shows consistently that financial sustainability is, at least in part, a function of the inherited position. A council that starts with a disproportionate debt burden or inadequate reserves faces structural pressure that good management alone cannot quickly overcome. The risks of delay are real and interdependent:

• Year one budgets cannot be robust without a credible opening balance sheet. Shadow councils cannot approve the first budget and MTFP responsibly without knowing what each successor authority is inheriting.
• External audit cannot proceed cleanly and Section 16 principles are subject to audit verification. Contested or undocumented allocations delay completion and risk qualified opinions at the moment a new council most needs to demonstrate financial credibility.
• Council tax harmonisation often the most politically sensitive element of LGR depends on a clear view of each successor’s financial starting position: debt burden, reserve strength and capital commitments.
• Transformation investment is at risk. The business case for reorganisation depends on reserves being available to fund the transition and without early clarity on what reserves each council will hold, that planning is uncertain.

Services that cross geographical boundaries

Many council services and the assets and liabilities associated with them do not map neatly onto the geography of successor authorities. Deferring the split does not make boundary questions go away; it makes them harder and more expensive to resolve.

Consider a waste processing facility serving multiple predecessor districts but sitting within one successor’s boundary. The asset is physically located in one area, but the debt funding it was shared across the county. Allocating the asset to one council while PWLB borrowing follows a different methodology creates immediate structural imbalance. The same applies to leisure centres straddling new boundaries, highways depots positioned for county wide coverage, and adult social care facilities whose catchment bears no relation to the new unitary footprints.

Decisions that do not align to geography

Not all capital investment was geographically driven. Much was made at county level reflecting political priorities, procurement efficiencies or partnership arrangements leaving assets, debt and revenue consequences dispersed across what will become separate unitary footprints. A county commissioned ICT upgrade, shared services arrangement or jointly procured fleet system may have no obvious geographic home.

A simple geographic allocation methodology produces arbitrary outcomes in these cases. Finance officers must work back to the original rationale: who benefited, in what proportion, and how were costs recovered? Earmarked reserves for unfinished strategic projects need a decision framework that geography cannot provide. These are exactly the items that consumed years of management time in some previous Local Government Reorganisations.

Services spanning different socioeconomic areas

Boundary complexity is sharpest where successor authorities inherit populations with very different socioeconomic profiles. A county reorganising into an urban unitary with high deprivation and a more affluent rural one will face stark asymmetries in demand but the assets and liabilities of services currently spanning both areas may be split in ways that ignore those pressures entirely.

A children’s safeguarding service or debt advice scheme may have been commissioned county wide, but its caseload is disproportionately concentrated in the more deprived area. If reserves, liabilities and staffing are split by population share rather than actual service demand, the higher need council starts life under resourced with no quick mechanism to correct it. The split must interrogate where services are actually used and by whom not just where assets sit on a map.

How the split is agreed

The legal instrument is the Section 16 agreement, made under the Local Government and Public Involvement Act 2007 and the Transfer Regulations 2008. Principles must be agreed by shadow authorities before vesting day, refined as data becomes available, and formally documented with a clear working paper trail. MHCLG can make a determination if local agreement cannot be reached, but local agreement is always preferable.

Finance officers from all affected councils must work collaboratively through each material balance sheet category to determine a fair, evidenced and auditable allocation. The principal categories are:

• Property, plant, equipment and infrastructure often location-specific but sometimes serving wider populations
• Long-term borrowing, including PWLB debt allocation must reflect where capital was invested, not simply where legal title sits
• Debtors and Creditors, whilst sounding obvious there can be areas that are more difficult e.g. Section 106 arrangements and social care debt.
• Pension fund liabilities reflecting decades of employment history across the county workforce; typically one of the largest and most contested items
• Usable reserves the financial cushion that determines each council's capacity to manage risk and fund transformation from day one
• Capital financing requirement and capital adjustment account technical accounting balances requiring detailed analysis of historical decisions, sometimes dating back many years
• Collection fund balances, PFI commitments, provisions and contingent liabilities

The LGA recommends setting a materiality threshold so finite capacity focuses on items that matter most. All modelling must comply with the CIPFA Code of Practice, and accounting policies on depreciation, capitalisation and provisions must be aligned across successor councils from the outset.

What councils need to consider for an effective split

An effective split requires deliberate choices, made by the right people, at the right time. The following action plan draws on Grant Thornton’s experience and the LGA’s finance essentials guidance.

The political dimension

Balance sheet negotiations involve elected members as well as officers. Where two or more successor authorities are being created, each has an interest in securing a fair share of assets and an equitable allocation of liabilities. Grant Thornton’s experience is clear: constructive relationships with shadow councils must be built proactively. The Institute for Government emphasises that strong relationships at both political and officer level are a prerequisite for successful LGR nowhere more so than in balance sheet negotiations.

Supporting financial sustainability after disaggregation

The split determines whether each new council can afford to run services, invest in transformation and manage risk over the medium term. Grant Thornton’s experience identifies three sustainability risks that trace directly back to how the balance sheet is handled in transition.

Inherited debt constrains the revenue budget

Long-term borrowing generates debt charges that fall immediately on the revenue account. Where debt is allocated without a corresponding productive asset base, the new council faces structural revenue pressure from vesting day. Reconciling differing MRP policies before the first budget is set is essential.

Reserve levels determine transformation capacity

A new council with inadequate usable reserves cannot bridge the gap between vesting day and the point at which efficiency savings are realised. Medium-term financial planning must limit reserve dependency but that discipline requires knowing what reserves the council starts with. Where the split leaves one successor underfunded, the reorganisation business case unravels.

Demand-led services: the hidden revenue risk

Adult social care, children’s services and temporary accommodation carry the most unpredictable revenue pressures of any service area and they fall unevenly across successor authorities. Demand is driven by deprivation, age profile and housing conditions, none of which follow administrative boundaries. Splitting budgets, reserves and contracts by population or geography will leave the higher demand council structurally underfunded from vesting day. Allocations must be based on actual caseload and historic spend; county-wide commissioning arrangements need their footprint reviewed; and earmarked reserves for demand pressures must follow the demand, not the boundary.

This wave of LGR runs in parallel with new mayoral combined and strategic authorities, placing unprecedented demands on finance teams. The balance sheet workstream must be treated as programme critical from the outset not deferred until other workstreams are settled and its outputs 

Grant Thornton's consistent finding from new unitaries

Disaggregation needs to happen as early as possible. Understanding the legacy reserves position early is key to ensuring the MTFP is not overly dependent on reserves. Financial sustainability is, at least in part, a function of what is inherited and assurance on that position can only come from high-quality audited accounts produced in a timely way.

How Grant Thornton can help

Grant Thornton has direct experience across the full LGR finance cycle as external auditors of new unitary councils, as advisers on financial modelling and transition governance, and as a firm that knows what has worked and what has not. We can support with:

• Independent review of disaggregation and aggregation principles and methodologies
• Financial modelling of opening balance sheet positions and stress-testing under different allocation scenarios
• Audit-ready documentation and working paper support for the Section 16 agreement process
• Programme assurance and governance support across finance transition workstreams
• Specialist capacity support for finance teams during the transition period
• Advice on pension fund liability allocation and engagement with actuaries
• Facilitation of constructive working between successor authority finance teams where relationships are under pressure

To discuss how we can support your area, please contact Rob Turner.

Why Grant Thornton

Getting the balance sheet split right requires more than accounting knowledge it requires lived experience of how these processes unfold, where they go wrong, and what it takes to reach a durable, auditable agreement under pressure. Grant Thornton brings a combination of capabilities that is genuinely difficult to replicate.

Direct experience from the current and previous waves of LGR

We have served as external auditors to new unitary councils created since 2019 and have directly observed what works and what creates lasting financial risk. That experience is embedded in every engagement not drawn from textbooks, but from the reality of contested balance sheets, delayed audits and councils managing transformation alongside business-as-usual.

An integrated team, not a collection of specialists

Balance sheet work cannot be separated from financial modelling, audit, pensions, treasury and programme governance. Our LGR team draws on all these capabilities in a coordinated way, so advice is joined up and does not create gaps at workstream boundaries.