SENIOR managers of an NHS trust knew they were facing financial problems when the takeover of the Friarage Hospital at Northallerton was being discussed, members of a local authority health watchdog have been told.

Spiralling debts surrounding South Tees Hospitals NHS Trust, which has been ordered by the district auditor to make savings of £66m over the next three years, have led to fears for the future of services at the Friarage, control of which was transferred in a merger.

The trust, which employs 7,500 people and has an annual budget of £320m, has been steadily accumulating debt since it was bailed out by the County Durham and Tees Valley Strategic Health Authority early last year. It also runs the James Cook University Hospital at Middlesbrough and Guisborough Maternity Hospital.

Despite a cost reduction programme and a recruitment freeze, the trust ended the last financial year £9m in debt and was warned last month that, if steps were not taken, it would face a cumulative debt of £32m within a few years.

A savings plan would have regained £44m over the next three years but the trust has been ordered to find an additional £22m in savings by district auditor Lynne Snowball, who served the board with a public interest report.

This criticised the trust for placing its future at risk by allowing the situation to continue.

The trust board has backed an interim savings plan which will cut up to 166 jobs, although 112 of the posts are either vacant or filled by temporary staff, and has tried to reassure local people that patient services are not at risk at the Friarage.

On Tuesday, the county council health scrutiny committee questioned trust chief executive Simon Pleydell and finance director Wendy Hull, who revealed that the financial crisis was a deep-rooted issue which had emerged since 2000.

Committee chairman Coun John Blackie reminded them of a 2001 public consultation document on the proposed merger of the South Tees and Northallerton trusts and said: "There was no mention that there were financial difficulties when you were extolling the virtues of the merger.

"People feel they have been led up the garden path because we have put our dearly beloved hospital in the hands of another trust and the downside has not been made clear."

Mr Pleydell replied that, at the time, the financial issues were not seen to be significant.

Coun John Smith suggested there had been inefficient management and said: "I am concerned that the trust borrowed money which in commercial terms it was not able to repay and that would suggest foolishness."

Mrs Hull said: "We are not the only trust nationally to be in this position. It has been a very challenging time overlaid with the commissioning of the James Cook site. It has been a time of massive change and has an impact which is never truly planned for."

She said the trust board had approved a three-year recovery plan aimed at returning the trust to balance by 2007-8 through better financial controls and proposed savings across the organisation.

She stressed: "The Friarage represents ten per cent of overall savings and 16 per cent of total income. There is no undue targeting of the Friarage."

Mr Pleydell said: "We have set ourselves the objective to continue to provide a full range of services and make savings. We are reorganising more effectively with the support of staff."

Coun Blackie said he was encouraged that Mr Pleydell and Mrs Hull had been transparent and accountable but was disappointed that the strategic health authority had not been represented, adding: "The authority had a part to play in the financial difficulties and a part to play in the recovery plan."

The committee agreed unanimously to send a letter expressing deep concern.