Warrington Borough Council has been warned that its approach to calculating its minimum revenue provision (MRP) could present a threat to delivery of its medium term financial plan (MTFP).
The council is currently only applying MRP to any reduction in value booked during yearly valuations – rather than the whole amount of spending funded by borrowing – as reported by Room151 earlier this year.
The practice has been highlighted as a potential risk to the authority’s financial stability in a peer review carried out by the Local Government Association.
The review said that the council should continue to monitor any “risks to the delivery of the MTFP and address these appropriately”.
It said: “These include but are not limited to delivery of savings, commercial income and the methods by which MRP is accounted for.
“In the case of MRP specifically the council should look to ensure that the risks are fully understood by all and are clearly articulated when informing decision making.”
The report went on to say that the council should “satisfy itself that it is fully compliant with legislation and generally accepted accounting practice in the way it manages, finances and accounts for its commercial activities and MRP”.
Earlier this year, Warrington’s deputy chief executive Lynton Green explained the thinking behind the council’s approach to calculating MRP.
He said: “We don’t want to pay twice for the debt by paying MRP on properties whose value hasn’t dropped.
“These investments are held for the potential of a future sale.
“This approach ensures we won’t get to the point of deciding to sell an asset after say 10 years and find the value has dropped.
“It just means that if we sell a property after five years and are able to pay off the debt, we won’t have wasted money on paying unnecessary MRP, the debt would be covered by the capital receipt.”
The peer review, warned that additional commercial income earnt by the council through its widely-publicised commercial investment strategy was not an insurance against having to make savings.
The council’s MTFP forecasts that the council will receive £20.5m of income from the commercial portfolio during 2019/20.
It said that the council has consistently overspent against its budget in recent years, with shortfalls made up through a combination of further additional income, financial changes or the use of one-off reserves.
This, the report of the review team said, meant that general fund and MTFP reserves had reduced to just £6m, with that amount expected to drop further.
In response, the review suggested an overhaul of the council’s budgeting processes.
It said: “While the council is aware of the risk of continued overspend against the revenue budget and the wider consequences this can have for financial sustainability, it is the clear view of the peer team that the budget approach taken to date should be redesigned to ensure the council is able to deliver services from a more sustainable financial footing.”
This would see savings plans for each line of the MTFP put in place to identify risks and potential shortfalls in savings.
“These plans should also highlight early risks of slippage or non-delivery and where capacity for a fixed period may be required to ensure delivery of savings,” the report concluded.
Responding to the peer review, council leader Russ Bowden, said: “It’s clear we have some difficult decisions to make as we continue to face our continued, austerity-driven budget pressures and we need to ensure we are agile and able to cope with future demands.
Steven Broomhead, chief executive of the council, said: “We will now go through the report in detail and have developed an action plan to take forward.”
