Folkestone & Hythe DCs Usable Reserves

It is always wise and prudent to put money aside for a rainy day.

Folkestone & Hythe District Council (the Council) certainly put considerable usable reserves aside for a rainy day between 2014/15 and 2020/21.

In this period under a Tory led administration, reserves rose by 99%, reaching £56.3m 

Since 1 April 2021, usable reserves have fallen to the end of the financial year 31 March 2024, by 33%, leaving current reserves at £37.7m.  

Usable Reserves

Usable Reserves are those reserves that the Council may use to provide services, or reduce local taxation (Council Tax) subject to the need to maintain a prudent level of reserves and any statutory limitations on their use (e.g., the capital receipts reserve that may only be used to fund capital expenditure or repay debt).

The graph below shows the Council’s usable reserves for the last ten financial years (1 April – 31 March)

The graph makes clear the last Conservative led Council administration did put money aside for a rainy day; then came inflation & interest rates. In 2021 inflation and interest rates began to rise.

Locally, this drove prices up for the council’s planned Princes Parade development. The rise in inflation was mirrored by the increase in costs for the project, gas & electricity; raw materials for construction, caused by supply chain issues during the covid pandemic. The Princes Parade severance costs paid by the Council to the constructor, BAM, is reputed to be in excess of £8m.

The delay of the development of Princes Parade, by the Save Princes Parade Judicial Review;  and the timing of Covid, were instrumental in saving Princes Parade.

The former leader was a man who knew the price of everything for Princes Parade, given he was to wanton to sell it David Pownceby’s Sunningdale House Developments (PP Hythe) Limited. What he failed to grasp was the value of the site; which was all to clear to the people who helped Save Princes Parade from the outset.     

During the time the previous administration were in power, Cllr Tim Prater (pictured below left) sat as a member of the Cabinet; which he joined in 2020. During his tenure as a Cabinet member, he took it upon himself to remind the then leader of the Council – David Monk – a keen angler (pictured below right), reaching a balanced budget using reserves, did not meet the USA definition of a balanced budget.

The accounts, webcast and minutes of the Council since May 2023, make it clear Cllr Prater – Cabinet member for Finance, has also used reserves to balance the Council’s budget, albeit, at a much lower level than the Tory led administration.

Cllr Prater has been in post for a year. His first act was to implement a costs saving review across the council, as there was a forecasted deficit of £16m over the next four years. Therefore he had to find a way to balance the budget for 2024/25; which is a legal requirement in any financial year. This STAR review almost eradicated the £16m deficit, meaning Cllr Prater had to use around £60,000 of reserves. This represents 0.375% of the total deficit. 

Usable Reserves consist of capital receipts reserves that may only be used to fund capital expenditure or repay debt.

Capital receipts

Capital receipts are the proceeds of sale that are generated when a council sells an asset, such as land or buildings. The amount of capital receipts the council can generate will depend on the assets that the council are willing to sell and the buoyancy of the market for such assets. A key consideration when selling council assets is the revenue income and expenditure forgone. For example, if a council decides to sell a block of industrial units, it will gain a capital receipt but forgo any rental income that would be paid by tenants.

In 2023/23 the Council’s debt repayment rose by 88%. The rise in debt servicing costs erodes the spending power the Council. One wonders what the council sold to fund its debt repayments? Funnily enough, the council’s accounts don’t go into that level of detail. What will the Council sell to to fund future year debt repayments? That’s a question worth asking by any elected Cllr, or member of the public. 

The Opening Balance at 1 April 2023, of the Capital Receipts Position Statement was £7.9m. Of this only £1.3m was available for new capital expenditure.

Capital Expenditure

Capital expenditure – is the money the council spends on improving the council’s assets, then this is capital expenditure. This would include purchasing new assets, such as land and buildings, but also refurbishing and improving existing ones. Capital expenditure is funded through capital income such as capital receipts and borrowing. 

Between 2024/25 – 2028/29, £37.0m is the proposed Council capital expenditure. It will be funded from government grant, capital receipts and prudential borrowing.

Due to decisions taken in the past, the authority as at 31 December 2023 had £106.7m borrowing at an average interest rate of 3.74%. The Council forecast there borrowing to be £143.4m in 2024/25, £166.8m in 2025/26 and £186.4m in 2026/27. All of the borrowing is below the authorized limit. So there is little risk of the Council being issued with a s114 = bankruptcy notice.

The Council no longer has significant capital reserves therefore the majority of the approved Capital Programme must be funded through borrowing. 

The Council forecasts its Capital Programme over a 5-year period. The table below summarises the position across the service units and outlines the impact on the capital resources required to fund the programme:

One notes, there are large sums to be spent on Otterpool Park Garden Town. Otterpool Park LLP – owned by the Council- already had £8m of debt as of 31 March 2023. However, the LLPs debt must be repaid to the Council, from who it has a credit facility at the rate of 6.1% per annum. The credit facility will be used until the financial year 2030/31, according to the latest set of accounts on Companies House

Now don’t forget at 31 December 2023 had £106.7m borrowing at an average interest rate of 3.74%. The Council therefore are making a yield from Otterpool Park, given the council are borrowing the money at lower rates, then building in yield from the LLP.

One does wonder though given all this borrowing and lending, when the first home will be occupied. That’s a raffle somebodymight want to put together.

The Shepway Vox Team

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