Old River Lane: Labour Councillors Write To East Herts Council
Dear Richard Cassidy (Chief Executive), Bob Palmer (Strategic Finance & Property),
Please consider this letter as constructive financial scrutiny and rather than trying to ease your workload is intended to ultimately provide better outcomes for East Herts residents.
This letter is to question East Herts Council’s lack of urgency to address the considerable financial risks caused by the Covid19 lockdown on its budget and its decision to continue unchecked with risky major investment spending.
At the Executive meeting on 2nd June; EHC got its first chance to present the lockdown financial situation to senior councillors. You told them to note there was a loss of income but there was no need to cut spending. The only thing you asked of the councillors was agreement to forego some more income by voluntarily deferring business fees from businesses in hardship, actually allowing your budget deficit to worsen. There was no offer to allow councillors to delay or reassess spending in the changed context of an impending (likely deep) economic recession. During the lockdown, EHC leadership agreed to go ahead and start construction on a major capital investment, the Bishop’s Stortford Northgate End multi-storey car park (MSCP).
Private companies are already making decisions on refinancing and reducing their expenses to ensure they survive in the short term. Instead EHC has the leader saying ‘East Herts is in a sound (financial) position’ but needs to ‘build up income streams as fast as possible’ to get through this. In other words we are continuing with our plans as we are already on the right course. You say you have £30m cash in the bank so you are not at risk of running out of money, which may be true for avoiding immediate cash flow problems, but you still only have £4.5m of (real) reserves that are not allocated for other purposes. Councils are more commonly having emergency budgets and telling the government to stop reneging on its promise to ‘do whatever it takes’ and compensate local councils for their Covid expenses, which at least you are, if not publicly, doing the latter.
Your financial estimates based on ‘best information currently available’, taking the loss of income for the first full month of lockdown then saying, 3-5 months of the same loss and then back immediately to pre pandemic income levels is obviously too simplistic, as is the assumption that only one financial year will have reduced income. Even if we see off Covid19 within a year the economic downturn will have a longer lifetime. The estimates of £1.4m-£3.0m losses this year are clearly highly unpredictable figures and with only reserves of £4.25m-£4.5m the financial precipice will approach rapidly. Prudent financial management would require immediate proactive measures to minimise the scale of any future cuts to services, even well before s114 spending freezes and possible insolvency becomes relevant.
Your decisions are not based on a lack of awareness of the financial problems the Covid lockdown has caused businesses; your reports are full of the effects. We agree with your flexibility to defer business fees in cases of business hardship, and expect similar understanding for residents with difficulty paying council tax.
While it is understandable that you want to put a positive political spin on your finances and also keep councillors away from scrutinising spending decisions to avoid awkward sub optimal decisions. To then start construction on a major capital investment (Old River Lane[ORL]) that will likely be heavily impacted by the impending economic recession, without any sign of reassessing the business case for the new context, shows EHC leadership are not providing the financial caution themselves but forcing this development through trying to avoid considered scrutiny. ORL’s business case has made no financial sense for years so it is shocking to see this ‘sacred cow’ of a development continuing with its scope for massive losses when EHC should be working to avoid Covid pushing it to the edge of insolvency.
As a minimum we would expect EHC to be reassessing all current and planned significant investments in the context of how they stack up in a Covid economic environment. This is the best chance of avoiding cuts to services in future. Also you should be taking time to consider if EHC can contribute to get people back into employment and getting the local economy functioning again. Funding schemes to support these objectives might well be a better use of funds than some of the current spending plans, particularly ORL, and should at least be considered.
With development of ORL having been an EHC objective for over a decade now it might seem an irrevocably sensible thing to do. If you stand back as we and the vast majority of Stortford residents do, it makes little sense to the point of incredulity that it is still going ahead, especially now. The fact that EHC are having to do nearly all the development and financing shows how uneconomical the proposition has become. The fact that it is now being described as a redevelopment when it was conceived and specified as an expansion of the central shopping area, does not salvage any reason to continue with this waste of public money. The only part of this that makes any sense is the building of flats, but if EHC wants to become a residential property developer then do it on another site and don’t lumber it with shops, restaurants, offices and new car parks that are not needed or wanted.
We believe if you did a reassessment of ORL it would be as follows. The Northgate End MSCP that you have started work on is inextricably linked with the ORL development of a ‘cultural quarter’, replacing the car park that the ‘quarter’ would be built on. With a large economic recession looming, ORL is the first on the list for reassessment as it could save EHC large amounts of money that could be redirected to help the recovery from Covid. The core reason for ORL is to develop the current council Causeway car parks into a ‘cultural quarter’ of shops, restaurants, flats and offices plus arts centre and for the town to expand into the units. Even before Covid there was no demand for a lot of new shops and restaurants, and much less so now. There were already at the start of lockdown over 20 empty retail units in the town centre. What other town is building new shopping areas to expand into ? There is no way that ORL will be a success and grow the number of town centre businesses in a Covid environment.
If there is no justification for ORL ‘quarter’ then that removes the need for the Northgate End MSCP to replace the ‘quarter’ site. Another partial justification for the MSCP was it added some extra parking spaces on top of those it was replacing; not the about 200 spaces EHC claimed but real net difference of just under 100 spaces. You could achieve the same extra spaces: closer to the town centre, much quicker and vastly cheaper than the MSCP, by the car park changes described below.
The AECOM Stortford parking report from January 2019 proved that Stortford’s long stay car parks were under utilised but mixed short & long stay car parks were full with long stayers using their more convenient location, crowding out shoppers from parking near the town centre. AECOM made recommendations to move long stayers into other car parks to free up spaces for shoppers, which we support. Cllr Drake recommended these changes to the executive in February at a cost estimate of £13,000 along with other parking changes. These limited parking changes would assist in getting the town centre back to business and be quick and cheap to implement. They would also remove the last justification for building the MSCP.
The ORL arts centre will cost £28m to build and an estimated £0.5m per year in ongoing subsidy from EHC. Its services overlap with the existing theatre that is subsidized by the town council. In a tight spending environment we would all find it easier to only have to support one theatre rather than two.
Could you please provide answers to the following questions ?
How many people have had special measures for council tax payments arranged since the start of March ?
How many people were in council tax arrears on 1st March and how many are there now ?
How many were on Council Tax Support on 1st March and how many now ?
How is it expected that ORL ‘quarter’ is going to populate its shops, restaurants and offices with already so many competing vacant commercial units in the town centre ?
Please justify why EHC should be investing in the whole ORL development (‘quarter’ , MSCP & arts centre) and if it is financial please provide the business case(s) ?
Why is the MSCP being started when it is not definite yet that the ‘quarter’ is going ahead ?
If you cancel the ORL ‘quarter’ and MSCP, will that cause EHC cashflow problems, and if so how serious ?
If you cancel the ORL ‘quarter’ and the MSCP, will this make EHC’s budget deficit more or less, why and by roughly how much ?
The AECOM/Cllr Drake £13k parking recommendation to free up shopper short stay parking spaces close to the town centre will help the recovery from Covid and should be implemented immediately, independent of any decisions on the MSCP. Do you agree?
In the ‘Financial Update’ report, it was stated (twice) ‘no immediate need for spending or service reductions’.
Was that a legal counsel s114 judgement, or decision by other(s) and if so who?
Looking to some new issues facing the council.
Have you considered any support for local businesses to recover from Covid19 and if so what ?
Have you already or do you think you will consider any assistance to get people off unemployment back into work or will you be leaving that to others?
In the ‘Financial Update’ report 2.10 refers to the two property funds with £10m invested in each and ‘the principal sums invested are not at risk’.
Can you provide any evidence to confirm what you mean by ‘the principal sums invested are not at risk’?
What is the current valuation of the two funds?
What are the names of the two funds invested in?
How did you estimate that the income from the funds would drop from 3% to 2%, approx. £200k loss?
In the same report, 2.11, it mentions curtailed/delayed property purchases into Millstream but not the stopping of purchases. The Millstream investment was initially agreed that it would make an annual return of 4.79-6.52% which obviously includes the property price gain as well as the rental income. Property prices are highly likely to fall in the near term (house prices have gone down in much lesser recessions) so if purchased now would mean the investments making a loss initially.
Do you agree that Millstream should not be buying properties (unless exceptional deals are available) until house prices stabilise ?
Please clarify if Bob Palmer is Head of Strategic Finance and s151 officer and has been from December 2019 and has been involved in all budget related decisions from then till now?
Another issue with management of public funds is raised by the payments to Sports & Leisure Management Ltd (SLM). While they have a case to plead for payments to maintain the leisure centres while they are closed. It is less clear why EHC should give bridging type loans to pay their payroll until the furlough payments were available. SLM are a profitable business with the last full accounts showing a profit of £9.8m, but £10m of dividends were taken out of the company. It is their choice to operate with next to no cash buffer, and it is our understanding that other councils did not loan them money to pay their payroll, but EHC did. Questions below refer to your report in agenda item 10.
What payments did SLM request and what was actually paid to SLM for issues before the 20 March closures, and what was the reason for those payments? (as mentioned in 2.1 of report referring to SLM requesting payments for self isolating and reduced participation)
SLM’s lack of money for payroll could have been solved by numerous other methods: working capital, overdraft, bridging finance, normal business loan, government Coronavirus scheme loan, which they obviously used in the case of other councils. Why did EH lend them the money for their payroll shortfall ?
Why was paying the loan for maintenance but not the short term payroll loan, not considered as an option, as other councils did and opted for ?
In the report ‘Risks’ section there was no mention of the risk of SLM expecting that it can get a payment out of EHC for every financial stress during this pandemic and treating EHC as its overdraft facility, as seems to a degree to be the case already. They have asked for self-isolating and reduced participation and employee pension payments to be compensated by EHC. The result is SLM are pushing all the financial risk from their balance sheet onto EHC’s balance sheet, Why are these ‘Risks’ not mentioned ?
While you say in the report 5.2 that ‘SLM’s financial standing is not a cause for concern in normal business circumstances’. This is proven not to be true. If they do not have the contingency to pay a months rent, then it will not take much to put SLM into financial difficulty. SLM are taking the profits out of the company and trying to move all the financial risk of failure onto their customers. EHC are accepting that risk, where other councils are not. Covid social distancing and people showing valid caution will likely mean that after leisure centres reopen, usage will still be significantly below pre Covid levels. SLM will find it difficult to make enough money to stop needing EHC maintenance loans as well as pay back the loans already received within 6 months. There is a flaw in your assumptions which means it is likely SLM will be testing EHC financial backstopping again during this pandemic, especially if they believe they do not need to incur a loss, at least not one uncompensated by EHC.
What criteria are you using to decide if you should agree to SLM’s request for exceptional payments, loans or otherwise?
If EHC withdrew from the SLM leisure contract are there any payments that may be due to SLM?
Have you made an assessment of the scenario of having to bring the leisure contract back in house and the immediate workloads and expenses on EHC and longer term costs or savings?
After writing the preceding letter the documents for the next executive meeting have become available. The fact that you are finding extra costs only adds to the case that you should be reconsidering ORL and other investments in the new economic context. Instead of increasing the budget and bypassing the scrutiny on spending it.
What precautions have you taken with the Advanced Payment Bond to protect East Herts interest if the Irish supplier folds, or for any other reason, fails to deliver on the contract?
If you would only like to respond to some of the above in confidentiality, we are open to that.
Councillor Carolyn Redfern, Hertford Sele,
Councillor Mary Brady, Hertford Sele,
Hertford & Stortford Constituency Labour party