Treasury adviser Arlingclose will next month launch a new rating system to rank the financial strength of local authorities, which it says will complement a similar initiative launched by the Chartered Institute of Public Finance and Accountancy (CIPFA).
The firm will award gold, silver and bronze rankings to authorities, based on a series of indicators, namely level of indebtedness, interest cost burden, income flexibility, the level and rate of use of revenue reserves, and budgetary control.
However, unlike CIPFA’s “traffic light” financial resilience rankings, plans for which were revealed earlier this year, Arlingclose’s will only be available to councils lending to other authorities through its online platform.
David Blake, strategic director at Arlingclose, told Room151: “Authorities have asked for analysis of their peers, and we are responding to that demand.
“Our analysis is different to CIPFA’s proposed financial resilience index — we’re focusing on financials and credit metrics including debt servicing costs, rather than Ofsted ratings, auditor VFM judgments or social care expenditure. But there is certainly some overlap, particularly on the level and use of reserves.
“There is no harm in having a different set of metrics. It is not a competition.”
Blake said that the ratings would not be a definitive guide to financial strength, but an indication of underlying risk, based on publicly available information, to alert councils to where further due diligence might be needed before a loan is completed.
He said: “We think it is appropriate for local authorities to ask about the creditworthiness of counterparties. Some lend over £200m to other local authorities.”
“At the moment a lot of local authorities aren’t doing any due diligence. You couldn’t easily analyse all the information before. This fills that gap and acts as a starting point.”
He also warned that the information on which the new rankings are based is reliant on local authority staff completing government returns in accordance with the guidance notes, which is not always the case.
Where blatant errors in returns appear, Arlingclose will correct them, but other errors may slip through, he said.
“We are quite clear on the limitations of the analysis. We can’t get a level of detail that a ratings agency might get, at least not across hundreds of authorities, but it is a step in the right direction.
“We believe this is consistent with best practice, as per CIPFA’s Treasury Management Code of Practice, particularly the requirement to hold well-documented records of the standing of counterparties an authority deals with.”
Unlike CIPFA’s proposed code, which is set to be published annually, the Arlingclose rankings will be updated every quarter.
The rankings will not be published more widely, to avoid them being “manipulated by the media or opposition councillors”, Blake said.
“We want to deliver financial strength ratings discretely, showing the ratings of those looking to borrow to a compatible lender only when orders are matched”, he added.
Blake said that credit default by councils, especially over the short-term durations of most authority-to-authority transactions, was possible, but unlikely.
“Rating authorities in this space is more about complying with the treasury management code of practice, understanding the risk profile of counterparties and managing reputational risk,” he said.
