HEREFORDSHIRE Council’s borrowing debt is edging ever closer to £200m as its use of short term “ends meet” loans from other authorities continues.
The final debt figure is feared to be far higher once accrued interest and other accounting adjustments are added on.
Latest figures show the council’s total external debt to be £195.74m.
Another £40m alone needs to be borrowed over the coming financial year to cover costs related to the joint county incinerator project.
More millions are needed for other capital and contractual commitments.
In October last year the council’s own statement of accounts for 2012-13 warned of the council being exposed to “significant risk” over interest rate movements on its borrowings and investments.
Then, the borrowing debt topped £157m.
The current £195.74m sum specifies the principal outstanding, figures in the council’s soon to be published annual accounts will be higher as they include accrued interest and other accounting adjustments.
Former council leader Cllr Terry James feared that with all the add-ons the debt could rise to around a quarter billion – a figure that could crush the council if interest rates rose.
“I remember being lambasted when the debt reached £48m and much of that inherited from Worcestershire. It seems that debt is now the council’s default position,” he said.
Independent group leader Cllr Sebastian Bowen said the “binding” debt had to be brought down to a more manageable level.
“We have certainly become too reliant on short term borrowing,” he said.
As measured by the capital financing requirement (CFR), the council’s underlying need to borrow as at March 31 was £216.65m.
The difference of £20.91m between the CFR and total external borrowing represents internal borrowing from reserves and working capital.
In October 2012, the Hereford Times revealed Herefordshire Council’s policy of borrowing from other local authorities to help make ends meet or, in the council’s words, “provide additional liquidity at a time when balances were relatively low.”
Loans collectively worth millions of pounds have been taken from other councils and local authorities to date.
With short-term interest rates being much lower than long-term rates, the council claims it is “cost effective” to take short-term loans from other local authorities.
By doing so, the council says it is able to reduce both borrowing costs and overall treasury risk.
But the council concedes that whilst such a strategy is “most likely to be beneficial” over the next 2-3 years as interest rates remain low, the policy will be kept under review and short-term loans will be replaced with longer term finance when it is deemed best to do so.
In 2013/14 the council’s weighted average cost of total borrowing was 3.48%. The weighted average cost of long term borrowing was 4.05% compared to 0.40% for short-term borrowing - 0.40% being the gross cost including brokers commission of between 0.03% and 0.10%).
The council currently holds just over £23m in investments as instant access accounts, notice accounts and term deposits – an increase of £13.86m on £9.47m as at April last year.
Security remains the council’s main objective over investments, maintained by following the a counterparty policy set out in its treasury management statement for 2013/14 which defined “high credit quality” organisations as those having a long-term credit rating of A- or higher that are based either in the UK or a foreign country with a sovereign rating of AA+ or higher.
In March, market analyst Moody’s downgraded the long-term credit ratings of both the Royal Bank of Scotland and NatWest Bank to Baa1.
As this rating is below the council’s minimum credit criterion of A-, the Royal Bank of Scotland was withdrawn from the counterparty list for further investment and NatWest, which is the council’s bank, will only be used for operational and liquidity purposes.
The council saw a surplus in the interest on its investments, the £332k up £73k on the £259k budgeted for.
Interest received in the year exceeded budget due to the amounts invested being higher than the budgeted amounts and the average interest rates achieved being higher than budget for the first seven months of the year to October 2013.
However, interest rates on the council’s bank accounts fell sharply during the year with the result that the average interest rate achieved fell short of budget between November-March.
The average interest rate achieved during the year was 0.75% which compares favourably with the generally accepted benchmark of the average 7-day London Inter-Bank Bid (LIBID) rate of 0.41%.