Woking Liberal Democrats Statement on Section 114
Statement following today's announcement by Woking Borough Council issuing an 'effective bankruptcy' Section-114 notice, signalling that a balanced budget is now unachievable:
7 Jun 2023
Woking Council Budget at "Existential Risk" from Conservative Debt Legacy
27 Jan 2023
- New Council administration to narrowly set annual budget this year, for 2023/24
- Even stark financial choices may not be enough to provide for mounting investment losses
- Proper budgeting to make funds available to pay back Council company debts makes future annual budgets very challenging
Woking Borough Council is expected to set a working budget for the coming financial year, starting in April 2023. However, the former Conservative administration's failure to properly budget for cash to cover losses in Council companies means it will be hugely challenging to set a budget for future years.
New papers to be presented to the Council Executive on the 19th January will also reveal that existing loan repayments, falling asset values and a lack of income from investments look set to overwhelm the Council.
The Executive meeting will be told by officers that a balanced budget for the following financial year of 2024/25 is currently not expected to be achievable - even if extreme measures to cut costs continue to be taken.
The report details how emergency measures including "substantial services rationalisation" would have been enough to respond to external and relatively short-term pressures such as inflation, the pandemic and the war in Ukraine. However, the Borough has financial challenges unlike other local authorities, such as huge loan repayments unsupported by enough income.
Woking Borough has the highest level of Council debt per household in England. Annual debt repayments (over £60 million) are more than five times its revenue from council tax.
Cllr Ann-Marie Barker, Leader of Woking Borough Council since May 2022, comments:
"Tonight's report points out what many residents have feared all along - that borrowing was wholly disproportionate.
"The previous administration continued to borrow without adequate consideration for how to find the cash to make regular year by year loan repayments.
"We are looking to a future where Woking is a successful council not a failing bank. This could take decades, and certainly will involve years of emergency measures. It's vital the Council is honest about the future to local people. Given the scale of this inheritance, I am determined to work closely and constructively with partners in central government to plan an ambitious but realistic solution for long-term prosperity in Woking."
Cllr Dale Roberts, Portfolio Holder for Finance and Economic Development at Woking Borough Council, further explains: "Setting this year's budget is necessary for the council to determine the level of council tax and continue to deliver services to residents.
"Beyond this though, our focus is on resolving the issue of how much the council should have been setting aside to repay its loans. The scale is overwhelming. WBC has borrowed £1.5 billion from the government just to lend to its own subsidiary companies, Thameswey and Victoria Square Woking Limited. Proper budgeting for these loan repayments between the various entities will be enormously challenging.
"Before we took office eight months ago, we committed to affordable, responsible, and sustainable borrowing. That means we will be working diligently with the government appointed review team to resolve unambiguously the question of how much is adequate provision for these loans."
Notes to editors include:
- Minimum Revenue Provision (MRP): the regulation that should have stopped the losses (an explainer)
- Steps taken to date by the new Liberal Democrat administration to stabilise Woking Council finances (summary of other recent developments)
- Notes from EXE23-021 Medium Term Financial Strategy (official wording)
- Minimum Revenue Provision:
The regulation that should have stopped the losses
Councils have a legal obligation to set aside certain amounts for loan repayments under regulations called minimum revenue provision (MRP). Liberal Democrats, in opposition, supported a legal challenge from a local resident questioning the way the previous administration calculated MRP for the Woking borough Council (WBC) accounts in 2019-20 and whether it was sufficient. WBC accounts for 2019-20 have still not been signed off by auditors. Local Lib Dems have continued to probe the prudence of the MRP since taking control last year.
On this basis, Conservative loans to subsidiary companies standing at £1,500,000,000 (£1.5 billion) should have required tens of millions set aside from each year's budget, not the small number of millions the previous administration set aside. However, this was avoided by the previous administration. Using so-called 'arms-length' companies helped the administration at the time to not treat this Council activity using the same rules of prudence.
Tonight's report to the Woking Borough Council Executive underlines that auditors and independent advisors have judged that the previous administration's provision for borrowing may technically have been just within the letter of the law. However, it was not prudent. If the Council's auditors or the government-appointed Rapid Review Board require a change in the way the MRP is calculated, it is likely to demonstrate that council finances have in fact been unsustainable for years.
- Steps taken by the new Liberal Democrat administration to begin to stabilise Woking Council finances so far include:
- Shared with residents the news of Conservative losses within the Thameswey Limited group of companies, where newly-audited accounts (22nd December 2022) showed that in 2020 Conservative Councillor Directors overstated the value of both sales and assets, uncovering £30 million of non-existent revenue, £14 million of extra costs. and increased negative net asset values
- Reduced Victoria Square borrowing requirements by £13 million to date (as of 1st December 2022) compared to plans inherited from the Conservative administration
- Stopped the disastrous planned purchase of Woking's 'Red' car park from a council-owned company, which would have broken financial prudence regulations
- Paused the Victoria Arch project which was already expected to be £50 million over budget.
- Removed Councillors from roles as directors of Council-owned companies, bringing in independent management and public scrutiny (21st July 2022)
- Reset the objectives of WBC's companies requiring them to change the way they do business and to make sufficient income to enable them to repay all their loans as and when they fall due.
- Set in motion a long-term strategy to stop WBC being a banker and a property developer and concentrate on delivering affordable services for its residents.
- Published the Ministerial warning letter addressed to the previous Conservative leader on financial mismanagement, following election victory (17th May 2022)
- Led on all efforts from opposition to reduce WBC borrowing and expose asset valuations and income gaps, including initiating the EY Independent Financial Review of 2021-2020
- In opposition prevented the Conservative attempts to lend £250 million to an outside property developer
- Notes from EXE23-021 Medium Term Financial Strategy (official wording):
- The size of borrowing alongside the policy it has adopted on Minimum Revenue Provision is equally disproportionate to the Council's financial size, resilience and ability to respond to risks on loan impairments caused by an economic downturn
- The Council does not have the financial resilience to absorb the impacts of the current economic downturn in the short and medium-term and cannot solely rely on its investment approach to protecting services. The Council needs to develop a more far-reaching strategy of service rationalisation that will enable it to manage within the predicted level of funding available whilst both ensuring it maintains the services it is statutorily required to provide and uses the strategic priorities established within the Woking for All strategy to target funding.
- The Council has very high levels of borrowing. The current policy and judgement in assessing the appropriate level of Minimum Revenue Provision (MRP), the set aside for the repayment of that debt, enables a balanced budget to be set. There is a significant and substantial risk that a more prudent assessment of MRP provision should be adopted. At this stage no additional prudent provision has been made and any change in assessment of MRP would result in an unsustainable position.
- There is equally a significant and substantial risk that a more prudent provision for impairment of capital loans should be made. At this stage no additional prudent provision has been made and any change in assessment of MRP would result in an unsustainable position.
- The Council's position on MRP will be subject to further independent assessment and review and the risks will be comprehensively outlined in the Director of Finance's Statement of Budget Robustness as part of the MTFS report to Council at its meeting on 23rd February 2023.
- If it is assessed that there is a risk of impairment of capital loans then it is appropriate to commence charging a MRP on the balance. The review of both Thameswey and Victoria Square investments indicate risks through asset values less than loan balances, reductions in valuations, long term business plans which are sensitive to assumptions and require support for many years, and losses which may be realised and not contained within the Group.
- The government have previously consulted on changes to the guidance for provision of MRP. Given the level of investment the Council has made through capital loans, any changes which affect these loans are likely to cause an additional unsustainable pressure to the General Fund budget.
For media enquiries please contact:
Cllr Adam Kirby, group head of publicity, Woking Borough Council Liberal Democrats
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