Croydon Council borrowed £13million from Scottish taxpayers at the height of the pandemic paying almost double the interest rate to secure the investment.
The detail of the loan arrangement only emerged after concerns were raised by Midlothian Council after the London authority declared bankruptcy.
As part of the deal Croydon agreed to pay 1.85 per cent in interest payments per annum for the two-and- a-half year loan period which would have seen the London council pay back an ‘attractive’ £600,000 return on the Scottish council’s investment.
A meeting of Labour run Midlothian Council’s audit committee was told that the money was invested in Croydon Council in April at the height of the pandemic when the south London council’s finances were beginning to unravel.
Now Midlothian have called in external auditors Ernst and Young to carry out a “wide-scope review” of its treasury management policy following questions about its investment in Croydon.
Scottish Conservative Midlothian group leader Peter Smaill said: “The public will be furious that this large deposit was given to a council who had racked up massive debts at a time when our own communities, businesses and residents need every penny of support.
“Shortly after Midlothian invested, a £440,000 payoff went to the former Croydon CEO.
“We have seen in the past instances where other councils have been caught out playing ratepayer roulette with these sorts of deposits. Further answers are urgently needed over what Midlothian either knew or didn’t know, but should have known, about the already dire situation of Croydon Council.
“It is clearly in the public interest for there to be full disclosure on this issue.”
It’s unclear whether Croydon has any similar arrangement with any other local authority or what the £13million was earmarked to be spent on but according to Midlothian this kind of lending is common practice with over £15billion of inter-authority lending across the UK.
Croydon has just received a £120million loan from the government, the largest in history so it can balance its budget but is still facing making a huge cuts to services including closing libraries, staff redundancies, selling off community assets and a reducing services to the bare minimum.
In November Croydon issued a Section 114 notice as it was then facing a projected overspend of £60 million which now stands at least £70million.
Midlothian also invested its money in Stoke on Trent and Waltham Forrest councils but the interest rate of return being paid by Croydon is much higher than the other councils.
The Scottish council even issued a FAQs on its website about depositing money with Croydon Council explaining the arrangement and revealing that over £800million is placed on deposit with other UK local authorities by Scottish councils.
Gary Fairley from Midlothian Council’s finance team assured an audit committee in December that while the Section 114 was issued because Croydon could not balance its books, the Midlothian investment, which he said was £13m, was secured on “its revenue stream”.
Unlike Labour Croydon, Labour Midlothian has ambitious budget proposals aimed at “leading the way out of the pandemic” which will see record investment of over £0.567 billion through to 2025.
On Monday Croydon Council, which found itself in a financial mess following a string of risky property investments and a failure to keep control of social care budgets, voted for 4.99 per cent increase in council tax which will see the average household in Croydon pay £2 a week more in council tax in 2021/22.
A government review, published in February exposed that former council leader Tony Newman created an “inner circle of a small number of cabinet members who were controlling in their management of the council and its finances”.
It also stated that council officers were pressured to reword cabinet reports to present a more favourable picture of the finances.
Cllr Newman and former cabinet member for finance Simon Hall have both been suspended by the national Labour party.
It is believed they are being investigated following a report by the Local Government Association’s Richard Penn in relation to financial mismanagement at the council. This is yet to be released.