OREANDA-NEWS. December 08, 2015. Fitch Ratings has affirmed the London Borough of Wandsworth's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'AA+' with Stable Outlooks and Short-term foreign currency IDR at 'F1+'.

The affirmation reflects the UK's strong institutional framework and Wandsworth's focused financial management, conservative budgeting, and low level of debt. However the ratings also reflect low operating margins and limited flexibility to raise revenue. The Stable Outlook reflects Fitch's view of Wandsworth's performance with debt expected to decline in the medium term.

KEY RATING DRIVERS
Institutional Framework
UK Local Authorities (LAs) operate within a predictable and supportive institutional framework. This plays a key element in supporting Wandsworth's ratings. LAs are highly dependent on central government transfers as they have limited tax setting powers. London boroughs are entitled to 30% of the increase in non-domestic or business rates, and can theoretically increase council tax. LAs had their government funding from grants cut by 36% overall between FY10 and FY15. The Autumn Statement on 25 November 2015 announced further cuts for LAs over the four years from FY17 to FY20. It is unclear what the extent of these reductions will be until the details are presented in the December Budget. Nevertheless the phasing out of the revenue support grant is likely and the closure of what the Treasury terms as "low-value programmes" is expected.

Management & Administration
LAs have a statutory obligation to present a balanced budget. As such and due to the cuts in grants, Wandsworth has explored various ways of reducing operating costs. The borough has a successful track record in reducing costs while maintaining high levels of resident satisfaction levels. It claims to have achieved savings of more than GBP345m (at current prices) since 1979. Since 2010, over GBP100m has been reduced from general fund budgets. A large part of the savings over FY16-18 will come from planned budget reductions and ongoing reviews by transforming the way services are delivered in order to improve effectiveness and efficiency. The borough will be entering into a shared services arrangement with Richmond in order to establish a single staffing structure for both councils by 2017, with the aim of saving 30% on the current cost of management, equivalent to GBP10m per borough.

Wandsworth estimates that it needs to achieve total savings of GBP86m over FY17 and FY18 to keep council tax increases to within 2%. In the context of operating revenue of about GBP840m, this is about 5%. The borough expects to have to resort to use of reserves in FY17 and FY18 of up to GBP25m. Nevertheless, in the context of usable reserves of GBP584m this will not initially have a significant impact. Total investments at FYE15 were GBP474m, which had risen to GBP544m at end October 2015.

Fiscal Performance
Operating balance has fallen to GBP18m, and operating margins weakened to 2%, with debt servicing 120% of the operating balance. However, the surplus before debt variation was stable at GBP105m and overall results were also a stable GBP87m. Fitch expects the borough to be able to maintain a stable performance over the term of the next Spending Review.

Debt & Liquidity
Total debt reduced by GBP19m in FY15 to GBP177m at FYE15. Debt is expected to continue decreasing at the same level over the medium term as the Public Works Loan Board loan contracted to part-fund the Housing Revenue Account subsidy buyout in FY12 is amortised. At FYE15, Wandsworth maintained total investments of GBP474m which had risen to GBP544m at end October 2015. Cash and cash equivalents were GBP174m and GBP16m of assets were available for sale.

Economy
Wandsworth remains a prosperous borough and has above average wealth levels compared with London and national averages. The borough has an employment rate of 79%, above the London average of 72%. Privately financed development projects are expected to increase council revenue collection through both council tax and business rates. Wandsworth is also involved in a couple of council-led regeneration schemes which will involve around 3,000 units. One is a joint venture regeneration scheme next to Clapham Junction Station and the other development partner scheme is in Roehampton. The borough has GBP250m reserves in its HRA account, of which GBP100m may be used for these programmes.

RATING SENSITIVITIES
A downgrade could be triggered if Wandsworth are unable to deliver the savings expected to compensate for the reducing revenue support grants, an increase in debt beyond Fitch's expectations and a failure to consistently and sufficiently cover debt service by the operating balance.

Continued prudent management and a structural and sustained improvement in budgetary performance over and above the average over the past five years would trigger an upgrade, providing there is also an upgrade of the sovereign.