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.
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