Agenda item

This matter is the responsibility of the Portfolio Holder for Communications and Corporate Resources, Cllr Benet Allen.

Report Author: Paul Fitzgerald, Assistant Director – Finance and Section 151 Officer

To consider and note the arrangements in place to mitigate risks, and the further actions taken in response to the auditor’s key recommendation.

Paul Fitzgerald, Assistant Director Finance and Section 151 Officer introduced the report:

·       This is an update on a key recommendation that Grant Thornton made in respect of the 2020/21 set of accounts, which related to the level of risk in respect of commercial investment, in particular the total level of investment and our total level of borrowing requirement.    

·       Following the recommendation, we’ve had two reviews undertaken by our Internal Auditors (SWAP) relating to the Council’s Commercial investment strategy. The first focused on the governance arrangements that the Council put into place to manage this activity.  Secondly, there was a follow up audit to test the actual implementation of the agreed strategy and making sure decisions being made in line with the agreed strategy and process. In both cases the Internal Auditor gave a substantial opinion which is the highest level of assurance they can give. There were only two recommendations across the reports and both of those were fully implemented.

·       Page 23 provides a summary of the risk management factors that are already in place as well as the additional measures that have been put in place to strengthen those measures and to reduce the level of risk.

·       Instead of borrowing money, we’ve used £3.5m of the Council’s revenue reserves to finance the purchase of investments.  We’ve also accelerated the debt repayment where we have previously used borrowing to buy assets. Therefore, we have reduced the level of debt that was required to support that particular strategy.

·       By the end of this financial year the Council will be down to 92.5% residual borrowing compared with the original £99m total investment.

·       The Council holds around £4.8m in our Ear Marked Reserves (EMR) which are specific reserves held to manage and mitigate risk in respect of this activity. If income was to fall there is some cushioning to reduce the impact if a property was void for a period of time.

·       The Council currently holds £6m in general reserves which are there to support the budget generally and to help to withstand any unforeseen or unexpected financial risk that may emerge during the course of business.

·       The Council has done well with Treasury Management. We have a borrowing requirement which is a lot bigger than we held previously, and we secured loans at a lower interest rate compared to the changes in the market in the last two or three months. We took good action to secure the loans we needed for this financial year which has helped to manage that and reduce the risk in that area.

·       As part of the wider management of the capital programme, the Council agreed to remove £35m worth of previously agreed spend from the capital programme which would have been additional borrowing requirement on top of that needed for the commercial investment strategy.

·       In summary, we’ve reduced the level of debt and we’ve reduced the future need to borrow for the capital programme, which reduces the level of future borrowing.  This in turn reduces the level of risk.

During the discussion, debate took place around:

·       The fact that the Council has received a reasonably substantial income from the commercial investment assets, with our gross income being around £6.9m in a full year for the invested portfolio

·       The turbulent national economy and higher interest rates being set by the Bank of England, and the fact that its likely to be about 18 months to two years before interest rates start to reduce

·       The fact that the commercial investment assets are revalued at the end of each financial year. The actual carrying value at the end of 2021/22 was slightly above the value of the assets on the balance sheet

·       Migration to a single unitary authority from 1 April 2023 and the challenges that brings given that all four district councils in Somerset have undertaken activity to acquire an income through investment in property.

·       Part of the work of the finance workstream preparing for the unitary is looking at all investments together to consider matters such as how long we can rely on that income, when are leases due to expire, does the value of the portfolio when you add all of these things together remain decent in terms of managing risk?  The workstream is looking at the financing requirement, the overall balance of investments and borrowing requirement and Treasury Management position for the unitary authority.

·       SWT have used a lot of internal borrowing as well as taking advantage of relatively low cost, shorter term loans in the main from other local authorities.

·       The cost of borrowing today would be more expensive than what we have been used to paying previously. 

·       Treasury Management and that fact that we hold quite a significant surplus in the current financial year.

·       The fact that the council adopted its strategy for Commercial Investment due to funding cuts from the government

·       Whether the Council would have to pay more for loans from other authorities going forward, and the fact that it would still likely be cheaper than borrowing from the Public Works Loan Board (PWLB).  Inter authority lending rates were around 3 to 3.5% at a point in time when the PWLB rate was around 5%

·       Whether section 24 would kick in if the Council had to go out and replace any short term loans before the new unitary authority goes live on 1 April 2023.  Section 24 covers any contracts that the council might enter into before April 2023. There is consent from Somerset County Council to undertake any borrowing up to £5m and 365 days. So if we were planning to enter into any larger of longer term loans consent would need to be obtained from the SCC S151 Officer.

·       The Housing Revenue Account (HRA) being a ringfenced account and is responsible for maintaining its own borrowing profiles.  For any HRA loans that are due to mature, this will be looked at by the Unitary finance workstream in terms of the future borrowing requirement

·       Whether Capital Gains Tax applies to the sale of council assets.  Clarification was given that as a local authority the council is exempt from Capital Gains Tax. As and when the authority decides to sell any assets the value will come into the authority as a capital receipt and go into the pool of capital receipts and the authority will need to decide what to do with it.

The Committee resolved to consider and note the arrangements in place to mitigate risks and the further actions taken in response to the auditor’s Key Recommendations.

(proposed Cllr Dawn Johnson; seconded Cllr Janet Lloyd)

The Chair advised the Committee that he proposed to change the running order and take agenda item 9, the Annual Governance Statement before agenda item 8, External Audit Finding Report 2021/2022.

The Committee resolved to amend the running order as set out

(proposed Cllr Ed Firmin; seconded Cllr Simon Coles)