Aberdeen City Council Special Report: Behind the granite façade lies a city in municipal ruin

It is Europe's oil capital, but its city council is suffering a financial crisis, so what has gone wrong with Aberdeen, asks DAVID MADDOX

WHEN he was confined to a wheelchair a decade ago by spina bifida, a condition he was born with, Kevin McCahery hit the depths of despair.

He was trapped at home with nowhere to go and nobody to meet. He even contemplated suicide.

A sea change came when he was introduced to Choices Day Care Centre in his home city of Aberdeen, where he discovered a new life.

But that all came crashing down this year when the city council decided to close the centre to stave off a financial crisis in a round of cuts which some allege are as high as 50 million – a vast amount for a council with a budget of 417 million.

It left Mr McCahery, 45, and the other 56 people who use the centre asking one question: "How could this happen in Europe's oil capital, a city full of millionaires?"

His bewilderment has been reflected around the country that a city which is home to an industry worth an estimated 15 billion this year alone, and helps float the British economy, cannot afford to pay for its services.

The citizens of the Granite City pay Scotland's highest council tax bills – band D 1,195.83 – and its council has been hauled before the auditors at the Accounts Commission.

Eight schools will be closed or merged. The main swimming pool, the Choices day care centre which costs 240,000 a year, Doonie's rare breeds farm (which has a stay of execution), a Glencraft factory for the blind costing 650,000 a year and ice- rink with a saving of 900,000 in 18 months, are facing closure or have already shut.

Money to charities like the Cyrenians, which lost 880,000 a year, and Alcohol Support was withdrawn. Unions fear between 1,000 and 2,000 job losses, although this has been denied. There is not even money to cut the grass verges – this week the council rejected a resident's offer to mow for free.

The Accounts Commission said the council was spending 10 million over its limit for five years and "did not have the capacity for change". So perhaps not surprisingly, many have put Aberdeen's woes down to bad management, others to the paucity of Scottish government funding, others to union intransigence on much-needed reforms.

The impression of poor management was rather reinforced during the commission's inquiry, when council leader Kate Dean appeared unable to answer questions on policy.

But no-one has resigned or even accepted blame – Ms Dean is still in post; her Labour predecessor, Len Ironside, is still leader of the opposition; Neil Fletcher, the former Liberal Democrat finance convener, is now a vice-president of Cosla and the council's deputy finance convener; only chief executive Douglas Paterson has taken early retirement from his 127,000 a year post after a scandal involving the 10 million under-sale of properties.

The Convention of Scottish Local Authorities (Cosla), which has stepped in to help out Aberdeen and has provided support from senior figures in other councils, has forced the key players at the council to remain quiet. But The Scotsman has managed to get access to key documents, people and information which shed light on a complex series of events that have ultimately led to Aberdeen's ruin.

The bad news for many of its hard-pressed councils is that the evidence suggests Aberdeen's troubles today may be replicated elsewhere tomorrow.

The complexity behind the issue is summed up by the argument over how much has been cut. The latest figure banded around is 50 million. Originally in February it was said to be 27 million. However, the SNP-Liberal Democrat leadership insists the actual cuts were 16 million.

But the real story begins in the mid-1990s when the Tory government in Westminster organised a change in Scottish councils from the old two-tier system of burgh and regional councils to 32 unitary authorities.

Its effect in the north-east of Scotland was to see the end of the fairly efficient and well-run Grampian Regional Council, which was replaced by three unitary councils – Aberdeen, Aberdeenshire and Moray.

Faced with either carrying out a complex review of need or making a simple calculation, Grampian's regional councillors decided to slice up the region's funding the easy way. They gave Aberdeen 40 per cent, the shire 40 per cent and Moray 20 per cent.

In Aberdeen now, this is believed to be one of the root causes of the city's problems. People argue that the city should have got nearer 50 per cent, because it is the hub for the North-east region. It was left to pay for regional facilities such as the Aberdeen Exhibition and Conference Centre used by people from all over the area.

One facility which was recently closed temporarily to save money was the ice rink. The Aberdeen North SNP MSP Brian Adam received much correspondence about its closure.

"None of them lived in Aberdeen," he said.

Maureen Watt, a former regional councillor, now schools minister, even suggested that Aberdeenshire should help out. But their party colleague Gordon McDonald, who is now a Moray councillor but was convener of Grampian Regional Council, insisted little else could be done.

"We had to keep it relatively simple and 40, 40, 20 roughly reflected the populations," he said."Nobody really complained at the time."

Perhaps more importantly the reorganisation of local government also led to a reorganisation of the funding formula internally in Cosla, which was dominated by Labour's west of Scotland councils. A crude joke in the North-east used to be that the funding formula included a category on how many people of Irish descent were living in the area to give the west of Scotland authorities even more cash.

The formula, based on poverty and deprivation, put Aberdeen right at the bottom of the pile when it came to funding. This year it means that the city receives 1,777 for each person living in its bounds. This compares to a Scottish average of 2,108 and, at the top end of the scale, Glasgow at 2,585.

And just to rub it in, the city has a net loss of 50 million a year of the business rates it collects and has to send down to the Scottish Government in Edinburgh to be redistributed to other authorities, which would explain where all the oil wealth goes.

Cosla refused to comment on this discrepancy or explain it, but one councillor quipped: "The SNP go on about how Scotland's oil wealth should be for Scotland, but what about Aberdeen's oil wealth for Aberdeen?"

Aberdeen suffers because families with children have moved in large numbers to the commuter belt in Aberdeenshire, still use city facilities but pay Aberdeenshire council tax bills. That also means a falling school roll and less money.

There is also nothing in the formula that recognises its drugs problems. The city is Scotland's capital for crack cocaine and addiction problems have put a huge strain on social services, not least care for the children of addicts.

John Swinney, the finance secretary, has ordered a review, but change will be fiercely resisted.

There are some in Aberdeen who think the idea of its problems being down to funding distribution is a red herring. The Labour Aberdeen North MP Frank Doran said: "There are far greater social problems there with deprivation, poverty and unemployment than in Glasgow and funding needs to reflect need."

He and his Labour colleagues believe the issue in Aberdeen was mismanagement – but conveniently only after Labour was kicked out of office in 2003.

The argument for mismanagement does on the surface appear to be a powerful one. Labour has made no bones about where it sees the problem.

Labour says that when it was voted out in 2003, it left reserves of 23.5 million and Scotland's lowest council tax.

Now the council has a debt of more than 500 million, roughly in line with other large councils, from prudential borrowing and Scotland's highest council tax, and in that time spent 50 million more than it should. Still, cuts have had to be made. In that time there was also the under-sale of several properties by an estimated 10 million.

"The fact is that we have always had the same funding level, but managed to make the books balance, (and it] suggests that something went very badly wrong when the Liberal Democrats took over," said Mr Doran.

His and Labour's particular bte noir is the proposed 80 million move from the current council office, St Nicholas House, which is close to being condemned, to the historic Marischal College building.

"How they can push through a project like that when the city is facing a financial crisis is staggering," Mr Doran said. "It should be cancelled and a different less expensive option considered."

The attacks from Labour have infuriated the Liberal Democrats, who were in coalition with the Conservatives between 2003 and 2007 and since then have hooked up with the SNP.

They believe that the seeds of destruction were sown in the 1990s.

Even though Ms Dean and her colleagues refuse to comment, one issue they are willing to talk about on the record is Marischal College.

John Stewart, the Liberal Democrat councillor in charge of the project's board, said: "The fact is that our capital projects are spend-to-save projects. If we stayed in St Nicholas House we would have to spend the same money for something that may just last a decade if we are lucky.

"In the meantime we would have to find temporary accommodation for staff at further expense."

He and his colleagues argue that much of the money will be recouped anyway when the St Nicholas site is sold. They also claim that the failure to invest in these projects in the past, mainly because councils could not borrow to the same degree until 2003, had meant that successive administrations had always gone for cheap buildings and cutting maintenance budgets.

Mr Stewart noted: "The council taxpayers are now picking up the bill for those short-term decisions." Although he added that the same strategy had been followed by other councils across the UK.

They also say that Labour's claims of leaving 23.5 million are "a lie" and that the real amount was 14 million.

But their real grudge was that Labour left nothing in the account to fund the single status pay agreement of 1999. This was an agreement all councils in the UK made with unions to even out the pay of employees, mainly women, who were being underpaid. The idea was that it would be self-funding because some people's pay would go up while others went down. It was also hoped the Scottish Government would put up the cash for it.

Neither of these things happened and on top of that Aberdeen was told it could not borrow to fund the equal pay agreement, which will cost well over 20 million in backpay and, when it is finally agreed and implemented, another 11 million per year added to the annual wages costs.

There is an acceptance that more should have been done to modernise the council. But before their enforced silence, several senior Liberal Democrats complained loudly about the unions' opposition to reforms. This included passing on leisure facilities to a trust and removing them from the council's books. It was something successfully done in Edinburgh and Glasgow, but the Liberal Democrats claim that union opposition and small majorities meant that these tough decisions could never be made in Aberdeen.

Tommy Campbell, the local Unite representative, is furious about the allegation. "This is just a smokescreen to hide their own incompetence," he said.

The one reorganisation they did push through was to get rid of several top-tier officers, including the heads of education and social services. On the face of it this saved money, but Mr Doran is scathing. He said: "It meant there was no direction or strategy and a lot of replication. It's probably cost the city millions."

And if its problems were not bad enough, another problem is on the horizon – Aberdeen's landfill runs out in 2009 with no affordable alternative, and, like other councils, it has rising pension costs and needs to make annual efficiency savings of 2 per cent.

The conclusion of one senior councillor who has looked at the travails of some other councils in Scotland, particularly Fife and Edinburgh, is that Aberdeen is possibly the first of many to be hit badly by a combination of history and rising costs.

"For years the squeeze has been put on councils and they have taken expedient measures such as cutting maintenance budgets," he said. "But now is there nothing more to squeeze and we have infrastructures that desperately need repair and replacing. Added to that we have a convergence of single status pay costs, landfill, pensions and many other things and councils are going to find it hard to cope.

"Aberdeen was the least able to cope with all these factors for the simple reason that it is the worst funded. That is why it was first to get into trouble this way."

It is an argument many do not accept, not least the Scottish Government.

A source close to Mr Swinney said: "It is clear that in Aberdeen there were particular circumstances coming from the fact that it was spending 10 million a year beyond its means."

Only time will tell whether Aberdeen is a harbinger of doom for councils or a one-off created by underfunding and mismanagement.