Rotherham Council finances “dire”

The lead commissioner at Rotherham Council has warned that the authority’s finances remain “dire” and the estimate of the savings it needs to make in the next three years has increased from £40m to £48.1m, with 500 jobs set to go.                                 A council report now states that there “are a number of additional unavoidable or essential service pressures which have been identified in the coming years” that could add up to a further £6.5m to the budget challenge in 2016/17 and could be repeated up to this level in the future years.

The world of finance is not easy to understand, for example terms such as asset turnover, debt ratios, liquidity, current ratio and net present value can be used to identify the financial health of most organisations.

Rotherham Council is trapped repaying £173m of long term commercial loans taken out before the global financial crisis at interest rates fixed above current rates. The Council has 16 LOBO (Lender Option: Borrower Option) loans, including four with Barclays, three with Germany’s Dresdner Bank AG (now part of Commerzbank) and three with Dexia, the state-owned Belgian-French banking institution.
Rotherham Council borrowed £15m from Germany’s real estate bank, Eurohypo (now also part of Commerzbank) at an interest rate of 6.88% for a period of 60 years from February 2006. The “special features” of the loan mean that the bank could alter the interest rate every six months if it gave three days notice. If the Council chooses not to accept the new rate it could prepay the loan without penalty. If the lender chooses not to alter the interest rate, the council cannot prepay the loan.
Rotherham Council last used the PWLB to borrow £15m in 2012. The three loans were for between 19 and 22 years at interest rates of between 3.26% and 3.44%.
Also in 2012, another LOBO loan was arranged, this time with Siemens Financial Services for £10m over a period of ten years at an interest rate of 3.22%. It included a termination sum amounting to the full loan amount plus all accrued but unpaid interest, breakage costs and any other due but unpaid amounts.
In late 2013/14 arrangements were made through a forward deal for the Council to borrow £20m in 2014/15 from the pension fund of BAE Systems. The rate of interest on this debt is 4.05% and the loan period is 44 years.
http://www.rothbiz.co.uk/2015/07/news-5340-rotherham-councils-173m-lobo.html

How City banks and brokers stitched up local authorities with LOBO loans
http://www.ianfraser.org/how-city-banks-and-brokers-stitched-up-local-authorities-with-lobo-loans/                                     

It appears that the overall debt per RMBC resident is about £2,200 and RMBC’s debt repayments cost £29 Milli0n per year.

Historically, councls have borrowed to fund social housing construction via 50-year fixed-rate loans from the PWLB (recently at between 3-5% interest). However, this arrangement meant council debt showed up on central government accounts so in 2003 Tony Blair pushed through the Local Government Act 2003 which changed the way that local authorities finance themselves. Legally bound to run balanced budgets (i.e. no deficits), local authorities in the UK have to borrow money to finance large capital projects like schools and hospitals – either from central government (via the PWLB), private companies (e.g banks) or other local authorities.

It is a great pity RMBC’s Borough Treasurer and the robotic Labour clowns did not familiarise themselves with some of the documents highlighted.
In the final analysis the Borough Treasurer was out of his depth and as a consequence misled the council IMV.
Most Labour councillors will admit to not understanding finance but at the secret meetings they hold before the full council meetings where they decide voting strategy 99.99% of the time is to agree to accept and vote for the recommendations put forward by the Labour leader of the council who is equally ignorant of rate swaps, asset turnover, liquidity ratios and gearing.
Thirty minutes spent researching on the ‘net before a council meeting where finance is on the agenda might help to improve Labour councillors woeful lack of knowledge about what they are being asked to vote for.

Reblogged from https://rotherhampolitics.wordpress.com/2016/01/12/news-rotherham-council-finances-dire/#comment-51737

 

Further reading: http://www.businessballs.com/finance.htm

http://moderngov.rotherham.gov.uk/documents/s99051/Prudential%20Indicators%20and%20Treasury%20Management%20and%20Investment%20Strategy%202015-16

https://www.gov.uk/government/statistical-data-sets/live-tables-on-local-government-finance#borrowing-and-investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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15 Responses to Rotherham Council finances “dire”

  1. A regular reader says:

    Nick Dunbar has a new piece out on the LOBO issue.
    http://nickdunbar.net/2016/02/01/a-cornish-gamble/
    (registration needed).
    It includes an interactive chart that allows one to select a Local Authority, and see how well its LOBOs are performing against PWLB 20year borrowings.
    Try selecting Rotherham!
    (Admittedly the tenor of the LOBOs is generallymuch greater than 20yrs so much can go wrong in the future. )

    BTW The full list of Rotherham LOBOs can be found here:
    http://lada.debtresistance.uk/local-authorities/rotherham/

    Like

    • Watchman says:

      Thanks rr for this useful information.

      RMBC’s debts are: Long term debt-PWLB Borrowing: £352,004,000.Private borrowing: £213,000,000.
      Total borrowing: £565,004,000 (Five Hundred and Sixty five Million and Four Thousand Pounds)
      The PWLB debt represents 62.3% of the total.

      These figures show once again that Labour numpty’s cannot manage public finances at National or Local government levels.
      Same old story; Borrow,spend and raise taxes.

      Like

    • A regular reader says:

      Watchman,

      I think you have misunderstood.
      As I have said elsewhere, I don’t play the blame game, but this page from Debt Resistance UK, gets close to my current feelings on LOBOs.

      http://lada.debtresistance.uk/the-issue/

      Like

    • Watchman says:

      I try not to misinterpret or misunderstand comments posted on here.I take your point about not ‘playing the blame game’ but as I understand it the issue is the colossal debts accrued by RMBC since 2007.
      The links you provided give a useful insight into how LA’s are at the mercy of the banks but…….RMBC could learn to say no and reorganise its financial management.
      It is our money that is at risk.

      Like

  2. S Thornton says:

    Would “stu” like to identify his/her self ???.

    Like

  3. A regular reader says:

    It may be worth noting here that Local Authorities have been putting together a municipal bond system that have just gone live. It should (hopefully) be able to provide funds at a lower interest rate than the PWLB .
    “Municipal bonds agency opens for business”
    http://www.publicfinance.co.uk/news/2016/01/municipal-bonds-agency-opens-business
    ________________________
    I have no knowledge of RMBC’s involvement or standing in the planning and implementation of this.
    But I do welcome the concept.

    Liked by 1 person

    • Watchman says:

      Thank you for your post and for providing very useful information.
      RMBC will face financial penalties if it tries to pay off the PWLB loans earlier than the contractual end date.
      RMBC could possibly pay down a substantial part of the debts to the PWLB by refinancing but they cannot pay the debts off in one lump sum under standard PWLB contracts.

      Like

    • A regular reader says:

      Of course, PWLB wasn’t offering overdrafts.
      My background is in monetary economics, but I’m at a early-learning starting point on Local Authority finance. …and it is fascinating; and as a market. totally flawed.

      May I add more to this thread as I get my thinking together?
      RR

      .

      Like

    • Watchman says:

      You are more than welcome to comment anytime and on any subject.

      Like

  4. S Thornton says:

    “Stu” One could argue that if it was not for the cuts by the Government, RMBC would still be wasting £90 odd million pounds a year. Whilst some services have been cut and caused alarm amongst the community, the early years of “savings” had no real affect on the general public. It is only now when all the “wasted money” has gone are the real cuts biting.
    We still have not had an explanation of why its acceptable to cut services to Children`s Centres, yet make no move to cut RMBC Cllrs allowances.
    RMBC is still awash with “surplus cash” hence the £400,000 odd loan to magna, whilst still cutting our services. The large loan amounts to the Three Crane Pub ,whilst cutting services to the Public and the £5 Million pound loan to the New York Stadium, again whilst making cuts to our services.
    Pray do justify such issues.

    Like

  5. S Thornton says:

    Just to be clear, the person who posts under “Stu” is not me ( S Thornton)

    Like

  6. S Thornton says:

    I was always taught that you cannot spend what you have not got. One has to ask about the financial “savvy” that these Cllrs have. The Labour Cllrs who were in charge of Anston Parish Council`s budgets left a lot to be desired. As for RMBC, Whilst in charge of the business portfolio, Cllr Beck was involved in a scheme to buy two empty industrial units at the Advanced Manufacturing Park. This cost us the Rotherham Taxpayers £4 million pounds. This was at a time when they were “bleating” on about the Government cuts, and the time that they were stripping our local services. One has to also question what the employed officers are doing, should one of them not have said, “hang on a minute, we already have massive debt, do we need more?
    Any house holder that does the home budget, could tell you, reduce the loans before getting more debt.
    Simple, the man or women in the street understand this, so why can not the Cllrs and Officers at RMBC understand such a simple concept.
    Would you vote for more of this ??.

    Like

  7. Insider. says:

    Town and city councils could not simply carry on borrowing and raising council taxes to pay for pet projects and expensive PFI deals.
    Because Blair and Brown wanted to make the public finances appear healthier than they were councils were in effect cut off from central government funding and forced to find their own sources of finance.This was a double edged sword because most councillors do not have clue about high finance and councils took out loans from anyone and everyone at rates and on terms that seemed advantageous at the time.
    RMBC’s financial woe’s go back a long time but today’s taxpayers are being forced to pay the price for incompetence and economic illiteracy.
    Consider this: RMBC pays £29 million per year interest payments on its debts but gives Magna a sweetheart deal on £440,000 loans ‘to preserve jobs’. It is not the function of a borough council to subsidise employees working for a private company.
    It is not so much “cuts” that force councils to rethink their economic policies but the wider vision of providing local taxpayers with value for money. RMBC has more councillors per head of population than Sheffield. Why is that?

    Like

  8. stu says:

    I think if it was not for the huge imposed cuts and austerity measures by the current conservative government Rotherham’s finances would look much healthier. Maybe not perfect though.

    Like

    • Veritas says:

      @stu
      “Rotherham’s finances would look much healthier.”
      Even without current austerity measures RMBC has to repay the loans, the majority of which were taken out before the Tories took office.
      Not forgetting of course Rotherham’s £10million bill as part payment for the Yorkshire Broadband fiasco and the massive debts incurred by failed PFI policies promoted by Gordon Brown. Whichever party is in government RMBC’s debts will not be written off.
      The residents of Rotherham have been stitched up incompetent councillors who did not and do not bother to familiarise themselves with high finance and the consequences of their stupidity.

      Like

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