Somerset Council is set to dispose of its £220m commercial investment portfolio amid a £100m budget gap for the next financial year and a section 114 notice warning.
The authority has forecasted a budget deficit of £100m for 2024/25, which has increased by £58m since the council’s original forecast in February. On top of this, Somerset has predicted funding gaps of £42m for 2025/26 and £41m for 2026/27.
In a letter to the Department for Levelling Up, Housing and Communities (DLUHC), Jason Vaughan, Somerset’s executive director for resources and corporate services (section 151 officer), outlined that due to the budget gap for the next financial year, he will need to “consider” issuing a section 114 notice as part of the budget setting process, unless “significant” progress is made.
As a result of Somerset’s financial position, Vaughan stated that the council must take “decisive action”, which includes targeting “big ticket” areas of the budget to deliver savings and reviewing the medium-term financial plan assumption.
In an October financial strategy update, Vaughan recommended that the authority also consider disposing of its commercial investment portfolio to bridge its budget deficit, which at 31 March was valued at £220m.
According to the report, the council inherited the commercial investment portfolio, which at the time of purchase was valued at £289m. Some of the investments within this portfolio were financed through short-term borrowing due to interest rates at the time being 0.1%.
“Since then, rates have significantly increased meaning that the portfolio is no longer profitable. Given this and the [authority’s] overall financial position, the council is recommended that the decision is made to dispose of the commercial investment portfolio,” Vaughan wrote.
The report added that Somerset Council has a £391.6m General Fund Capital Programme and £122.6m Housing Revenue Account Capital Programme, which are currently being reviewed in terms of priorities and affordability.
‘Stark and challenging’ situation
The October financial strategy update report stated that Somerset’s “stark and challenging” financial position is due to the cost of delivering services increasing significantly faster than the income it receives.
In the strategy, Vaughan highlighted that adult social care costs are the main reason for the increase in the budget gap, with service costs in the area expected to rise by £70m in 2024/25.
He added that Somerset has a “relatively low level of reserves”, with £104.9m held in earmarked reserves (currently under review) and £49.8m held in general reserves.
A letter to Somerset by auditors Grant Thornton also identified concerns over the council’s financial sustainability. The risk that “unsustainable calls” will be made on the authority’s reserves due to the estimated budget gap was highlighted. This would reduce reserves to levels that are “insufficient to manage financial risk and fund service improvements in the future”.
The letter also outlined that Somerset has no council-wide transformation programme or pipeline of savings to address future year budget gaps and that action must be taken in this area.
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