Many of the newly reorganised unitary authority boundaries have now been announced, with a vesting day of 1st April 2028 (with the exception of Surrey which will be 1st April 2027). With just over 18 months’ to prepare, and with crucial information on the basic structure now available, how should local authority treasury managers make borrowing and investing decisions for their current authorities that also account for the impending changes?
One of the prime things to establish will be whether the new authority is likely to be a net borrower or net investor. New authorities will be made up of amalgamations of the current authorities, but also in most cases splits of some of them. Large county councils are very likely to be split, but many of the smaller second tier district and borough councils are also being split up. For amalgamations, adding up the current position is likely to be straight forward. Splitting authorities is harder: we may know which land areas will be split, but decisions about how debt and investments will be split are not so straight forward and are very unlikely to have been made yet. Arlingclose would not recommend that this is the time to aim for exact accuracy: broad judgements on splits should be able to be estimated from population statistics or Band D equivalent numbers. For example if you know the county is going to be split in two with broadly similar populations, estimating a 50%:50% split of debt should give you a sufficient idea for the time being.
Knowing whether your new authority is going to be a net investor or net borrower is important because it is likely to inform whether new borrowing or investing that goes beyond vesting date is likely to be suitable. For example if your authority is a small district that currently has a long term borrowing requirement, but you are expecting to be merged into a new unitary that is a net investor, it is unlikely to be sensible to borrow significant new long term amounts now if in 20 months’ time these loans won’t be needed and you’ll be wanting to repay them. However, if you have a long term borrowing need and your new authority is also expecting to have a long term borrowing need, there is a good argument for continuing to manage your debt as you were. Conversely, if you are currently a net investor who expect to be merged to a new authority that will have a borrowing need, committing new amounts to long term investment products that are hard to get rid of may not a be a wise decision.
Those authorities with a HRA should also bear in mind that the reduced PWLB HRA rate is currently due to expire on 31st March 2027. Whilst it may well be extended, this is not guaranteed. Authorities that currently have a HRA borrowing need, and expect to continue to have one in their new reorganised unitary, should not put off HRA borrowing decisions at the expense of not being able to take advantage of this rate while it is available.
It is likely that some authorities will be very much dwarfed by the size of the new restructured authority. This is not necessarily in terms of population levels (although it may be this as well), but of the size of debts and investments. If your authority’s circumstances mean that you have both modest investment and debt balances, but you expect to be joined with your neighbour who has a huge short term borrowing portfolio for example, this makes any risks you are managing now much less significant after vesting date, when they will be overtaken by new risks.
There may be circumstances where strategies would be advised to be more flexible in the year up to vesting date. For example if your current limit on loans maturing in less than a year is only 20% of your portfolio, but you are advised that the new authority will be a net investor making it more appropriate for you to only borrow short term before vesting date, raising this 20% limit might be appropriate. That said, of course your existing authority needs to remain solvent before vesting date as well: so strategies must still not expose the existing authority to undue risk.
The best way to estimate your new unitary’s position is likely to be the production of a ‘combined’ liability benchmark for the new authority. This can be based on existing balance sheets of the constituent authorities (and parts of them) and amalgamations (and splits) of existing capital expenditure plans and changes to reserves. Figures won’t be perfect, but they will be infinitely better than not knowing at all what investments or debts you might have on 1st April 2028 and beyond. Planned expenditure will be important as well as the current actual balance sheet positions: even if the new authority would be a net investor now, if everyone has huge capital expenditure plans that are likely to go ahead this could quickly turn the net investor into a net borrower.
Arlingclose have past experience in assisting local authorities when planning for reorganisation. If you require assistance in preparing a combined liability benchmark for a new unitary, or in any other matters concerning reorganisation, please contact us at info@arlingclose.com.
