A review into how Woking Borough Council plummeted into bankruptcy has found it borrowed £160million for purposes “outside” regulations and had “sub-optimal record keeping”, writes Local Democracy Reporting Services reporter Chris Caulfield.

The authority has published the first tranche of findings from a series of investigations into its multi-billion-pound bankruptcy.

So far the borough council has said it has unearthed 11 key issues that led the authority inexorably towards financial disaster.

The dam finally burst on last Wednesday (June 7) when the local authority announced it had collapsed under extreme levels of borrowing – set to hit £2.6billion with a deficit of £1bn.

It issued a Section 114 notice which immediately stopped all new spending and said it could no longer balance its books as the sheer cost of servicing its debt, about £56m a year far outstripped what it raised through council tax  – about £11m.

As part of that Section 114 notice, the council had to meet within 21 days to set a pathway forward. 

The findings were released in papers published ahead of that meeting with chief executive Julie Fisher also issuing a statement saying the council “will require significant financial support from government. “

The interim director of finance,  Brendan Arnold ,said the discoveries were made following “a searching and continuing review” of its financial state – with some councillors saying there was likely to be more to come.

An extraordinary council meeting is being held next week for councillors to vote on a series of recommendations put forward by the authority’s chief.

What did the review find?

A series of detailed points from the review found:

  • A weak financial control environment.
  • Sub-optimal record keeping.
  • Weak management review processes.
  • Weak understanding of accounting guidance.
  • Weak understanding of statutory requirements in respect of accounting arrangements.
  • Insufficient resources generally to manage successfully the scale and complexity of the company structures, assets and liabilities that had been brought into existence by the council over many years.
  • The absence of external audit opinions on the council's accounts since 2018/19

Mr Arnold wrote the council had been using a business model based on a 50-year payback period and the partner companies used to build and own sites such as Victoria Place and Sheerwater  “would return accounting losses over a long period of time”.

However, the council was unable to fund these long-term losses and decided to “advance” money borrowed from the Public Works Loan Board (PWLB). 

Much of this money was used to pay the council’s companies to develop the sites but some, it has emerged,  was used for revenue purposes – to meet operating expenses.

This practice, the report said, falls “outside” local authority capital finance and accounting regulations. 

In total £1.3bn of the PWLB loans went to council companies, principally Victoria Square Woking Limited  and Thameswey Group Limited. 

A significant proportion of this, about £160m, is “likely to have been used to fund revenue expenses”. Any loans advanced for revenue “should have been treated as revenue expenditure in the council’s accounts rather than funded from borrowing”.

This, Mr Arnold said, “raises the prospect of a corrective charge”.

The council has also been underpaying minimum debt provision for 15 years.

As of March 2023, its debt portfolio is £1.8bn – but it is expected to climb to £2.6bn.

To offset this gross underpayment to repay its debt, the borough council must pay an additional £95m in 2023/24 and an average of £75m each year moving forward to cover the shortfalls.

In addition, the opening balance in its final accounts need to be restated – totalling £220m – to the accounts for 2018-2023. 

The magnitude of this is so vast that if the additional charges of £75m a year were met by the council through service reductions, it would mean the council could no longer afford “any services at all”  – and would still be running at a deficit.

The majority of the council’s assets that were paid for with the loans “have been re-valued by experts in the field and it is clear that asset values have diminished substantially over time and further valuation work will be required to bring these values up to date”. 

The report says this could be “a sum exceeding of £600m”.

In 2023/24, the council’s core funding – comprising council tax, business rates and government grants – is £16m and “out of step” with the size of its debt.

Because of general inflation, energy inflation, reduced parking revenues caused by homeworking, and the rise of internet shopping, the council’s assets are underperforming compared with their original commercial targets.

The council is already facing what it calls a ‘business-as-usual’ budget shortfall of £9m from 2024/25 which it says is “likely to increase as additional pressures are identified”, in addition to a repair and maintenance budget which is set to be insufficient by £45m per year.

The report said the overall balancing of next year’s budget will “result in very significant reductions in both budget and service levels”, 

It all adds up, she said, to “unbridgeable” budget shortfalls.

He wrote: “There is no prospect that the council will balance its budget in 2023/24, 2024/25 or the successive years without external intervention on a very large scale. 

“On this journey, the enriched service suite that the borough has enjoyed over a number of years will need to be removed or alternative funding sources found. 

“In this regard, work has been under way for some months to bring forward proposals to offset the £9m budget shortfall – as adjusted by additional cost pressures – already identified.”

When everything is added together, it means the council currently has an estimated negative general fund balance of about £350m at March 31, 2023 – that will more than triple to around £1.2bn by March 31, 2024.

He wrote: “To resolve this position, the council will need a commensurate injection of cash or removal of liability.”

Hopes of achieving any easy savings were also dashed as the council is running at an overspend and “there are in reality no cash-backed reserves available to fund this overspend because the general fund balance is negative.”

Woking Borough Council is will hold an extraordinary meeting next Tuesday (June 20)  to vote on the chief executive’s recommendations.

These are: 

  • Establish actions to bridge the council’s budget gap.
  • New spending freeze to remain for some years.
  • A revised budget to bring forward future savings.
  • Note developments of the financial recovery plan.
  • Reporting the Medium Term Financial Strategy and Plan every quarter.
  • Bring the housing revenue account into balance and create 30-year business plan.
  • Optimise returns from the disposal of council’s and its companies’ assets.
  • Approach the government to explore the prospect of financial support.