Northants moves to bolster confidence over council loans

Northamptonshire County Council has tried to reassure other councils of its ability to repay loans from them.

A second quarter update to its Treasury Management Strategy 2018-19 says: “This concern is unfounded because whilst the council may have a budget difficulty, it does not have a cash shortage”.

It goes on to note the benefit its cash position has received from the sale of its headquarters at One Angel Square.

At the end of the second quarter the council had borrowed £148m from other local authorities, most of which was short term. An inability to roll this funding over would mean the council turning to the Treasury, which currently offers fixed-rate funding for one year at 1.58%, and for five years at 1.94%.

This contrasts with the 0.75% to 1.00% Northants is paying for short-term borrowing from other councils.

“The council is therefore keen to continue with these arrangements, and make it clear to local authorities that it represents no greater risk than others because of its current budgetary position and continues to be a going concern”.

Northants estimates the additional cost of funding from the Treasury (via the Public Works Loan Board) at between £1.2m and £2.9m in interest costs each year.

Northants issued a Section 114 notice, imposing emergency spending cuts at the beginning of the year. It was the first council to issue such a notice in 20 years. It followed this up by issuing a second 114 notice in July.

A handful of local authorities (not including Northants) in the UK have ratings from the ratings agencies – ranging from AA to A+.

The UK itself is rated AA by Standard and Poor’s and Fitch, and the equivalent Aa2 by Moody’s.

There is thus a range of ratings, but all the ones officially rated are strong, helped from a credit point of view by the fact that much of their funding comes from the central government and they are constrained to run balanced budgets.

Within local authorities there is a generally held belief that they will not be allowed to fail.

However, some authorities refuse to lend to what they perceive as their weaker peers – and this will be especially the case for a council that had received two 114 notices.

There is moreover some concern over how the credit quality of councils could change over the longer term, especially with the radical changes to their funding over the past few years.

David Green, strategic director at Arlingclose, told Room 151: “There is still a general perception that none can default. Local authorities are more likely to be concerned about awkward questions they might face if they are seen to be lending to names in the news, rather than about the prospect of not getting their money back”.