Why BCP Council want to raise debt limit to more than a billion pounds

A meeting of the corporate and community overview and scrutiny committee tonight (Monday), will hear the council's chief finance officer detail the challenges of the cost of living crisis in a medium-term financial plan update.

As well as tackling the cost of living crisis and its impact on the budget, the report also details why the council want to increase their debt threshold to more than a billion pounds.

What's important to know about the budget this year?

It's been described as a "bold, confident, and dynamic, budget".

However, CFO Adam Richens has said it comes with numerous risks of "significant value".

One of these is using £66.2million of council reserves as well as a funding gap of £28.3million which is expected to be addressed through revenue from "new commercial models".

BCP Council increase debt threshold

In September last year, the council approved a revision to its self-imposed debt threshold raising the debt threshold to £855million.

The report from Adam Richens, the CFO to the council said BCP's borrowing was "towards the lower end of the third quarter when compared to upper tier authorities including metropolitan boroughs."

In March 2022, borrowing was £487million.

The report states the council has committed to using all the current £855million. This is what it's going on:

• Futures Fund £50m
• Carters Quay £46m
• Green Futures Fund £20m
• SEND Capital £10m
• Multi-year investments in the Council New Build and Housing Acquisition Strategy
• Capitalisation of neighbourhood highway maintenance up to and including 2025/26

But now, it is being proposed to increase the threshold to £1.334billion.

• Read the report in full here

Why is it being increased further?

The report to members said: "This headroom will provide the council with a further £479m to support delivery of its Big Plan.

"It will be allocated based on prudent business cases that take account of risk, support the levelling up agenda, and will be particularly focused on the delivery of housing or extra care housing related schemes, be that via the councils housing revenue account, or any BCP FuturePlaces Ltd or Bournemouth Development Company LLP led projects.

"It will not be invested in any commercial for yield activity."

What are the rules on this?

Strap yourself in for some very dry rules.

BUT according to new rules from the Public Accounts Committee, CIPFA (Chartered Institute of Public Finance and Accountancy) updated the Prudential Code in August 2021.

One of the changes was that borrowing to fund solely for yield generating investments, from whatever funding source, is not permissible under the code as they represent an unnecessary risk to public expenditure.

Borrowing to support service-based proposals, regeneration and housing continue to be permitted under the code.

In these instances, authorities are advised to consider if they can demonstrate value for money and whether they can ensure the security of such funds.

It should be noted that whilst some parts of a regeneration project may generate net income this income should be recycled within the project or applied to related regeneration projects, rather than applied to wider services.

So there you go.

What does the government say?

DLUHC have made it clear that local authorities taking on excessive risk and any non-compliance with the framework will see increased interventions from government which could potentially leading to caps on borrowing.

The Levelling Up and Regeneration Bill published on the 11 May 2022 proposes to amend the LG Act 2002 to give the Secretary of State powers to issue a “risk mitigation direction”.

This could be issued if a council receives a section 114 notice, receives a capitalisation direction, or breaches one of the five capital risk thresholds, Mr Richens says in his report.

What happens next?

The council's audit and governance committee will be requested to endorse this in July, and if so, the request will be put to September 13 council meeting.

What are the concerns?

In one significant part of the report, CFO, Mr Richens said: "The CFO suggested an alternative budget configuration which he considered would better support the council in 2022/23 and future years.

"Councillors duly considered and rejected the recommendations of the CFO."

He also said:

• At £16m the unearmarked reserves of the council are currently below the recommended 5% CIPFA minimum level.
• Commitments to debt are currently at the council’s threshold level accepting that a significant number of the underlying schemes are yet to commence. No further schemes which it is proposed be financed by borrowing can be agreed until such time as the debt thresholds have been extended by Council.
• The delivery stage of a significant number of council capital projects are likely to commence or be built out in a period of high inflation and increasing interest rates. The viability of these schemes will need to be kept under constant review

What about the cost of living?

It's not only residents who will be feeling the pinch. This report states: "The Council will be particularly exposed in respect of rising energy costs, especially electricity (street lighting / leisure centres / owned building) and gas, and contracts which include inflationary causes such as waste disposal.

"To emphasise the volatility, the price of electricity and gas increased by 80% within a single 24-hour period after February. The resultant financial challenge will be felt by both our community, be those residents or businesses, and directly by the Council with costs significantly above those assumed in the budget."

Basically, it could cost the council £13.3million.

And there will be no extra cash for councils from central government. That has been made clear.

The report says early action has been taken, including a series of budget meetings, as well as weekly reviews by the leader, deputy leader and senior officers.