Council's debt-funded investments ‘very large and uniquely complex’

The Chartered Institute of Public Finance and Accountancy (CIPFA) has carried out a review of the Labour-run council’s debt and investment risk profile.

The report, which has now been published, says the council’s portfolio of debt-funded investments is ‘very large and uniquely complex’.

In the report, it says loans to housing associations is the ‘largest single area’ of council indebtedness – and these loans, should they be ‘fully drawn down’, would take total loans to housing associations to £920.7 million.

The report says: “While the portfolio has challenges and complexities, some elements are deemed comparatively self-managing. Loans to housing associations, for instance, receive limited review from the finance team and take up little officer time.

“There appears to have been no assessment of whether loans will be fully repaid, with the council reliant on past history for confidence about defaults and the security of collateral. However, the risks appear relatively low for a reasonably assured, if modest, return.

“Moreover, housing associations are tending not to renew these facilities as loans mature. So this area of indebtedness may start to decrease appreciably. We recommend that the council undertakes a piece of work to model a small range of scenarios regarding loan payback.”

The report also says there are ‘numerous processes’ in place for decision-making, governance and oversight of individual projects.

“We have heard representations from some members criticising these arrangements, suggesting an officer-led agenda, characterised by overuse of Part Two reports and discomfort with dissent,” it said.

“And we have heard robust rebuttal of these views by lead officers and members of the administration.

“It has been suggested that the investment portfolio unbalances the authority, requiring a substantial staffing, significant expenditure on external experts, and lots of management attention at the expense of engagement with more day-to-day council business.

“Again, such suggestions have met flat repudiation by lead officers and members. It is not for us to referee these disputes, and our work is time limited. However, we do believe there are issues that require lasting resolution and we have proposed an approach to achieving this.”

The report has made eight recommendations.

These include the council and Department for Levelling Up, Housing and Communities agreeing to the appointment of an independent investments advisory panel, and the council undertaking an objective review of all aspects of its capacity drawing on best practice from the sector.

Furthermore, it recommends that the council undertakes ‘further and more detailed analysis’ of the issues raised in the report to identify the full impact of all the commercial activities of the council against the current budget and MTFS.

It says ‘because at this stage we are not confident that the council has fully assessed these factors’.

“The outcome of this review will enable the council to impact-assess any immediate of near-term detrimental effect on the council’s overall financial situation,” it adds.

“We consider this recommendation be addressed as a matter of urgency.”

Furthermore, the report recommends that the council continues to assess whether it should be making further impairment decisions within its commercial portfolio, adding ‘for example, we suggest that the dilution of the council’s share in the Redwood Bank is an immediate impairment issue’.

It also recommends that the council undertakes regular reviews of its MRP to ensure that any additional expected credit loss has been factored in.

As reported on Wednesday, the Government has ordered a ‘best value’ inspection into Warrington Borough Council amid its huge level of debt.

In a written statement, minister for local government Simon Hoare said: “Warrington Borough Council is one of a small number of councils carrying the biggest risk in terms of debt leverage.

“The council is the most indebted unitary authority in England, with a capital finance requirement of £1.85 billion – 5.5 times its total service expenditure (as of March 2023).

“My department commissioned the Chartered Institute of Public Finance and Accountancy (CIPFA) to undertake a detailed review of Warrington’s capital finances.

“The review, which we are publishing today, found that their portfolio of debt-funded investments is very large and uniquely complex – to a degree that is concerning and puts the council at risk. The report also raises some concerns with decision-making, governance and oversight.”

The Labour-run council issued a statement.

A spokesman said: “The inspection will undoubtedly have our full co-operation, and we will work positively, openly and at pace with the inspector.

“Equally, we welcome the CIPFA review report being made public, following their review in February 2023. We have supported the report being made public since receiving the draft report in September 2023.

“While DLUHC recognises that we have taken steps to address areas for improvement, we will continue to identify any learning and further improvements that can be made as part of this inspection process.

“Finally, we would like to reassure residents and businesses that this review will not impact the valuable services that you depend upon. We will continue to make sure that our day-to-day services remain at the standard you expect and deserve.”