Guildford Borough Council’s chief finance officer has warned that the authority could face a section 114 notice in the future due to the increased cost of financing its £300m borrowing debt.
A new report by Peter Vickers, Guildford’s section 151 officer, has outlined that despite the council making “positive progress” to balance its 2023/24 budget, its financial position over the next two to four years “remains a concern”.
The report highlighted that the council is most concerned about the increased need to finance its £300m debt over the medium term.
“Guildford Borough Council’s challenge is greater and more urgent than most councils due to these factors and a legacy of ambitious decisions to support infrastructure and regeneration that have increased our requirement to finance the council’s overall debt, c. £300m, which is expected to rise further,” Vickers said in the report.
In a joint statement, Vickers, alongside Tom Horwood, Guildford’s chief executive, said that as the council’s projected budget deficit of £18.3m over the life of the medium-term plan will be plugged using the authority’s reserves and making savings, a section 114 notice will not be issued “at this time”.
However, due to the council’s debt financing concerns, they added that “a section 114 notice will be reconsidered in time for the October council meeting”.
High-risk borrowing strategy
Vickers’ report outlined that the council’s £300m of debt is made up of short-term and long-term borrowing debt. In addition, Guildford financed a “significant element” of its capital programme using short-term funds rather than external long-term borrowing from the Public Works Loan Board (PWLB).
He stated that this strategy was appropriate whilst the base rate of the loans was significantly below the PWLB rate, but now “this has increasingly become a high-risk strategy that has not adjusted to current and projected interest rates”.
The report highlighted that the costs of capital financing are “significant” in 2024/25 at 74% of the projected £8.7m deficit, and 83% of the £5.9m 2025/26 estimated deficit.
Loans to subsidiary companies
The report also outlined that Guildford has pursued a debt-backed commercial investment strategy to generate income, which is higher than its borrowing costs. Through this strategy, the council has made loans to various subsidiary companies, such as North Downs Housing (NDH), “without enough consideration of the full longer-term debt risks”.
NDH is Guildford’s wholly-owned housing company, which was established in February 2016. The investment in NDH is a mix of equity shareholding and loans funded by the council from internal and PWLB borrowing, with Guildford receiving £1.25m annually on the interest of these loans.
Vickers’ report also identified Guildford’s Weyside Urban Village regeneration project as having a big debt burden on the council as the costs of the scheme are “considerably higher than first envisaged”.
It stated that there is a “significant” borrowing requirement to fund this scheme, with the projected deficit being c.£50m at a 5.5% borrowing rate.
The report added that the deficit will impact the General Fund budget by £3.8m per year if it is permissible to finance and amortise over 50 years from the point the ability to capitalise borrowing costs ceases.
‘Investment decisions biggest threat to council’
The report said: “The council’s investment and borrowing decisions leave a legacy for the council and pose the biggest threat to its future financial resilience.
“It is the view of the s151 officer and the Corporate Management Board that the council has given insufficient attention to its short-term financial viability and the associated risks of the scale of these investments on the council’s own budget in an uncertain national economic environment.
“Not enough attention has been given to consider the council’s financial resilience and its risk profile.”
Vickers’ report also stated that the council’s investment decisions were made with “insufficient provision or consideration” of the council’s in-house capacity and capability to manage the regeneration programmes effectively.
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Audit backlog risk
In his report, Vickers expressed concern over Guildford’s external audit situation, as its most recent audited accounts were those for 2019/20.
He stated that since 2019/20, the council has been through a “significant transformation” within various senior leadership teams and reduced its staffing capacity.
“The absence of external oversight of financial controls, and the assurances and working papers to support balance sheet positions, means the council’s financial position is at further risk,” Vickers added.
Commenting on the report, Richard Lucas, lead councillor for finance and property, said: “The report issued on our finances indicates that a key issue for Guildford is how we fund our borrowing with interest rates remaining high for the foreseeable future.
“This debt has come from historic, ambitious decisions to support regeneration and infrastructure projects.
“The budget we had originally set aside to pay the interest on these debts is now not enough to cover the costs. We have some tough decisions ahead of us.”
The report is to be presented to Guildford Borough Council’s Executive on 20 July.
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