The government’s response to financial problems at Northamptonshire County Council reinforces the creditworthiness of the local authority sector, according to ratings agency Moody’s.
In early May, communities secretary James Brokenshire sent in government-appointed commissioners to run the finances and governance of the council following its difficulties in setting a balanced budget.
Despite fears that the move signalled that the local government sector is in an unsustainable funding position, Moody’s said that its view on the credit quality of the sector remains unshaken.
In a research note, it said: “…this recent intervention, in addition to the strong institutional framework governing local authorities, upholds our view of a high likelihood of support in a situation of acute liquidity stress or to avoid a default on debt obligations by a regional and local government.
“This supports our view on credit quality for the sector, which remains close to the sovereign through the support mechanism.”
Moody’s added that it appeared that the willingness of central government to intervene is set to remain strong despite increasing fiscal autonomy for local authorities.
It said that central government is strongly supportive of the sector’s creditworthiness by providing low-cost access to liquidity through the Public Works Loan Board.
In addition, the ratings agency pointed to strong intervention rights held by the secretary of state, including the ability to set limits on borrowing levels for individual authorities.
Moody’s said: “Lastly, we consider that there would be significant concern about the reputational risk to the central government in the event of a local government default, increasing the likelihood of government intervention.”
Christian Wall, director at PFM Advisors UK Limited, welcomed the note, saying: “As legislation is needed to dissolve and create local authorities, and councils deliver critical public services, many of which cannot be interrupted, it has always been the case that the government would have to step in when faced with situations such as Northamptonshire County Council.
“It is simply impractical to liquidate an insolvent local authority. While the Local Government Act 2003 allows for the appointment of a receiver that may take control of an authority’s revenues to pay creditors, legislation does not provide for liquidation.”
Moody’s blamed Northamptonshire’s recent financial difficulties on the council’s low level of reserves and continued overspending on core statutory services.
In particular, it said that the authority’s overspending on adult social care was significantly higher than the three councils with similar responsibilities it produces credit ratings for.
It said: “The last issue of a section 114 notice was in 2000 by the London Borough of Hackney.
“As in NCC’s case, this was because of an inability to pass a balanced budget, significant financial and governance failings, service failures (particularly in education services) and a lack of controls or scrutiny.”
However, Mark Horsfield, founding director at treasury adviser Arlingclose, said that the Northamptonshire episode is likely to change the investment advice it gives to its local authority clients.
“We have revised our credit policy towards local authorities and have undertaken our own initial proprietary credit analysis of a number of different local authorities,” he said.
“That analysis has highlighted some relatively high dispersions in the ratios we have employed that could be interpreted as leading indicators of potential credit stress.
“We have not drawn any final conclusions in terms of investment advice at this stage whilst we review those outcomes and undertake further analysis.”
