Surrey Heath in financial turmoil as debt interest spirals
Errors were found in accounting figures that has left the council scrambling to find an additional £4m a year to cover the cost of its loans.
Surrey Heath Borough Council is facing potential bankruptcy unless serious interventions are taken after it emerged it “catastrophically” underestimated interest payments on the £170 million it borrowed for its loss-making property portfolio.
The revelations came out during the Tuesday, September 24, meeting of its Audit, Standards and Risk Committee where errors were found in accounting figures that has left the council scrambling to find an additional £4m a year to cover the cost of its loans.
The council’s annual revenues are about £14.7m, so the increase in interest repayments it needs to find each year is about 20 per cent of its overall pot – which borough leader Shaun Macdonald described as “just completely wacko”.
The details are emerging as part of the council’s process to work through its financial accounts, which have not been audited and signed off for five years.
Historically, the council has covered its debt interest though the performance of the property portfolio, but that is no longer the case, the meeting heard. However, there has been a massive reduction in its property income and can no longer cover its interest.
Minimum revenue, money that needs to be set aside to cover the costs of its loans, will be £9.5m this year and th £6m budgeted income from the portfolio is not going to be achieved .
Councillor Shaun Macdonald, leader of Surrey Heath Borough Council, said: “There is a £4m gap in terms of the profitability, or the robustness of that portfolio.
“When we now look forward into future years, that’s the bit that really worries me, because a one-year £4m hit can be accommodated, what I don’t understand is whether it should be, assuming it’s a £4m next year, the year after, the year after that, because that is catastrophic to the council’s finances.”
Among its portfolio are flagship purchases including sites in London Road and House of Fraser which themselves are worth almost £79m less than the £160million it bought them for seven years ago.
It means the council could be forced to consider selling off assets, seeking large council tax hikes and big increases in car parking charges as it looks to balance its books, the meeting heard.
Surrey Heath’s chief financial officer Bob Watson told the meeting the council could be out of cash and in ‘negative reserves’ territory such was the speed it was now burning through money.
Cash set aside for interest is expected to run out this year forcing the council to dip into other funds, made up in part by loans, which themselves could be exhausted in as little as four years.
Cllr Shaun Macdonald told the meeting: “We are supposed to flag up ahead of time whether we are in trouble or not.
“My view, based on these figures and projections that we are starting to see, is that we can’t be far away from having that conversation about how do we get the support, which could include things like retaining more of our business rates or potentially getting proper funding for new houses rather than hitting an arbitrary cut off.”
Mr Watson said options were limited as any government support would need to be backed by considerable reforms within the council by which time “it may or may not be too late”.
In neighbouring Woking Borough Council which declared itself bankrupt in 2023, this has meant losing a fifth of all staff, selling of assets, closures or severe reductions to popular services and council tax increases of 10 per cent.
Mr Watson said: “I can, if it’s so wished by the administration, write a formal letter to the ministry and secretary of state saying we consider ourselves to be in a position where unless something turns round we’ll be running out of reserves at the end of our Medium Term Financial Strategy .
“As you say it is partly my decision but the unfortunate thing is that the only time I have the authority to write a letter saying the council has gone bust or is going bust is when the council has gone bust.
“So I’m quite happy if that’s what the administration wants me to do.”
Mr Watson said the council should look at all options for generating extra income.
He said: “Currently we are running at a deficit.
“If we keep running at a deficit we will eventually run out of its reserves and potentially the council will have to go into some form of special measures or if need be a section 114 (bankruptcy) notice will be issued.
“But the expectation would be that expenditure would have to be curtailed before we go to that position.
“If that does not work or fails I would have to write a letter to the leader, auditors, the chief executive stating the council is no longer able to set a balanced budget.”