Spelthorne Borough Council will be the subject of a Best Value Inspection after the government deemed its debt-funded investments to be a “clear financial risk”.
Secretary of state Michael Gove decided to commence an inspection after considering several factors, including the authority’s “extremely high levels of debt and borrowing” and the results of a CIPFA capital review.
The inspection will be led by experienced local government senior leader Lesley Seary.
As of 31 March 2023, Spelthorne’s debt was £1.096bn, which the Department for Levelling Up, Housing and Communities (DLUHC) said was 87.1 times the council’s core spending power (CSP) and 52.4 times its total service expenditure.
“In perspective, this compares to the median debt to CSP ratio of 5.65 for district councils. Spelthorne has the second highest level of debt for a district authority in England,” a letter from DLUHC to Spelthorne chief executive Daniel Mouawad stated.
CIPFA’s capital review of July 2023, meanwhile, concluded that the portfolio of debt-funded investments for Spelthorne Borough Council was “very large” and its impact so significant that the authority appears to be “not so much a council with a commercial property portfolio as a commercial investment company that happens to run a council”.
The authority purchased eight investment properties at a total cost of around £1bn between December 2016 and August 2018. The investment portfolio’s value has fallen by some £70m (7.3%) since initial purchase.
A further three properties were purchased for regeneration purposes, with the value of this portfolio falling by some £11m since purchase.
The review also noted “that there were serious financial concerns relating to the council’s affordable housing plans”, which represent £325.2m of borrowing until 2027.
The CIPFA report has been released today (8 May), and concludes that the authority “required expert independent support to assist with its immediate and ongoing financial challenges, to put in place risk mitigations and undertake a thorough examination of the authority’s governance and decision-making culture”, the letter stated.
CIPFA’s report noted that the expansion of Spelthorne’s risk profile “represented by the affordable housing programme cannot be divorced from the fact that the council already has high indebtedness owing to the commercial portfolio”.
These factors in turn “have implications for the management of the revenue budget, the sinking fund, reserves and the overall Medium Term Financial Plan (MTFP) position”, CIPFA said. “There are also concerns about the council’s capacity to manage this array of challenges. Finance is shorthanded, internal audit arguably so. There are potential long-term sustainability challenges even in the management resources for commercial property.”
The report called on DLUHC to work with Spelthorne to “deploy some additional independent support” in meeting the financial challenges, which will now take the form of the Best Value Inspection.
Appointed to lead the inspection, Lesley Seary is the current acting head at Redbridge Council, and was chief executive at Islington Council between 2011 and 2019. She will recommend the appointment of assistant inspectors.
Gove’s directions to Seary for the carrying out of the Best Value Inspection are comprehensive. They encompass DLUHC’s concerns over governance and “the strength of associated audit, scrutiny and risk arrangements”; capacity and capability across the organisation, particularly the finance function; the adequacy of the authority’s plans and capacity to address the recommendations made by the CIPFA capital review and to control its debt levels and reduce them over time; what an appropriate level of capital risk would be for the authority; the impact the investment portfolio and its management has had on service delivery; and, the “prudence of financial decision making”.
Seary has been directed to report the findings of the inspection to the secretary of state by 30 August 2024, or as otherwise agreed.
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