LevellerLive

It has not been a great day for South Somerset District Council (SSDC). Earlier we reported on the report by auditors, Grant Thornton, slamming the way a senior executive was paid off. The same report also lays into the way SSDC built an investment portfolio.

The auditors note that the scale of commercial property investment potentially exposes the council to significant financial risk. Something The Leveller has been pointing out for over three years. The concern we have pointed out, is the “all eggs in one (property) basket” approach to investment. If property prices fall, SSDC is in trouble.

The concern of the auditors is equally profound.

• By March 2020 SSDC had invested £56m in commercial property.
• By March 2021 that amounted to £79.8m.

To date this is funded by short term debt and the interest and other debt servicing costs amounted to £3m for 21/22. The auditors note that as interest rates rise, so SSDC is exposed to ever increasing interest payments. As SSDC used short term borrowing, this will constantly need to be refinanced as each tranche of borrowing needs repaying. Grant Thornton observe that funds may not be so freely available in future. many of the short term borrowings are from other councils. Many of which are increasingly short of cash themselves. Hence such funds that are available are likely to be made available at much higher interest rates.

They also note that HM Treasury was giving councils a clear steer to stop investing in commercial property. Grant Thornton suggest this advice dates from at least November 2020. The CIPFA financial code published in December 2021 made it even more explicit that investing for a revenue return was no longer permitted.

For their part the council note that until December 2021, borrowing to invest in commercial property was not explicitly banned. Since December 2021 they did follow the rules and stopped borrowing. Unfortunately that really misses the point. The may have followed the rules precisely, but they also ignored clear government warnings. The council is now exposed to a significant interest risk.

It is the lack of understanding of financial risk that is the problem here. And it looks as if Somerset Unitary Council will be left to pick up the cost when it merges with SSDC next year.