S&P: Councils remain “high investment grade quality”

Councils are likely to continue providing all statutory services and are unlikely to default on their debts despite continuing austerity, according to ratings agency Standard & Poors.

In a report on the sector released today, S&P said that, despite expected further cuts to budgets, local government is still viewed as “high investment grade quality”.

It said that councils are underpinned by one of the most supportive institutional frameworks in the world, accompanied by a generally cautious financial culture.

The report said: “A key question from a credit perspective is to what extent local authorities can continue to reduce their spending in this way, in an environment that is likely to include continued real-term funding reductions.

“Broadly speaking, we remain confident that local authorities have the technical capacity to set balanced budgets, and monitor and control their spending accordingly, without breaching their statutory duties.”

It said that this might require some local authorities to merge services, or require extraordinary support from central government.

But it added: “…we believe that government-imposed funding reductions are unlikely, in themselves, to lead to defaults”.

Risks to creditworthiness would be more likely to arise where councils took on significant debt-servicing commitments, funded by revenue streams exposed to their local economies.

This, it said, meant that risk appetite demonstrated through debt levels, balances after capital accounts, and management of potential revenue volatility, “will play a key part in determining changes in creditworthiness”.

But S&P praised the cautious approach of council strategies in the face of cuts, which have led to reserves increasing between 2010 and 2014.

“Most local authorities have absorbed the cutbacks by cutting their spending, either by finding efficiencies or reducing service levels,” it said.

A key feature underpinning the system identified by the agency is access to debt (and therefore liquidity) from the Public Works Loan Board.

Photo: (cropped) LendingMemo, Flickr