The City of London's investment board has been questioned over a £20 million pound loan it made to cash-strapped Northamptonshire County Council.
Northamptonshire has promised it will repay the loan, saying its ability to do so is unaffected by its financial troubles.
Borrowing between councils for cash-flow purposes is common. The City of London's most recent investment report shows £20m was issued to Northamptonshire.
Northamptonshire has been vocal about its financial struggles over the past year. The Conservative-run council campaigned publicly for fairer local government funding, citing increasing demand for its social services.
The City's loan was made on January 31, for a 12-month term at an interest rate of 0.73 per cent.
Two days later, Northamptonshire became one of the first local authorities in decades to issue a Section 114 notice, freezing all expenditure.
It was at that point facing an overspend of £21.1m for the last financial year; nearly double what it had in reserves.
Minutes from a City of London Financial Investment Board meeting on March 22, published this month, showed a member queried why the Corporation had made loans to the council.
The minutes state: “The chairman advised the board that the outstanding £20 million loan to Northamptonshire County Council was underwritten by central government.
"A member raised a query about loans to local authorities that the board agreed to discuss as a non-public question relating to the work of the board.”
Efforts to gain further information on the loan have been stonewalled by the City of London.
Board chairman Andrew McMurtrie referred questions about the loan to the Corporation’s media team, which emailed: “The City of London Corporation periodically makes loans to local authorities which we publish on a regular basis."
It has not responded to repeated requests for clarification over the past week, after the Ministry of Housing, Communities and Local Government said it did not guarantee loans between local authorities.
The Corporation commands a healthy balance sheet. In the year ending 2016/17 it was running a £225.6m budget surplus.
It regularly reports its investments, including lending to other local authorities around the UK. As of March 2017, a report showed it had loaned a total of £170m between multiple public authorities.
Chartered Institute of Public Finance Accountancy (CIPFA) policy and technical head Don Peebles said local authorities' treasury management functions were heavily regulated.
He said: “Inter-council lending within that framework is common and generally represents a lower-risk transaction and at lower cost.”
However, he added the loan to Northamptonshire was riskier.
“From what is known publicly, at this moment that would represent an investment with greater risk,” he said.
Northamptonshire insists the loan will be repaid.
“This loan is not connected to the council’s financial position. Loans between local authorities are common practice for cash flow purposes,” a spokeswoman said.
“It is normal practice for councils to lend to each other for cash flow purposes and these loans are backed by [the] Government," she added.
“Northamptonshire County Council borrows prudently, in compliance with the legislation and regulation.”
Last Tuesday, Northamptonshire announced it had managed to balance its books.
In March it was planning to raid its reserves to meet its £16.7m shortfall.
It managed to sell and lease back its newly-opened Angel Square council headquarters for £64m.
Its shortfall has now shrunk to £12.7m.
Northamptonshire's overspend can be met by spending its reserves in the short term, but the authority said the pot would need to be replenished again in the near future.
Last week two government commissioners were appointed by the Secretary of State to oversee its financial and governance arrangements.
At his request, the council is now in restructuring talks with district and borough authorities.
