Sky News analysis has found that two Surrey councils spend more on interest and loan repayments than on services such as transport and social care.
Neighboring Spelthorne and Runnymede councils have said they have had to invest in response to government cuts.
Both municipalities have mainly invested in commercial real estate, which they rent out at a profit.
In 2021/22, Spelthorne spent £36m on debt financing, nearly 60% more than the £22.8m they spent on services.
Runnymede also spent almost 50% more on debt than on services, £17 million on debt and £11.5 million on services.
Eastleigh, Basildon and North East Derbyshire all spent more than half of the amount they spend on services on paying back debt and interest.
Use our tool to see what your council in England spends on debt compared to what it spends on services, and how that has changed over the years.
However, both Spelthorne and Runnymede suggest that there is no problem with their investments as they make great returns.
A spokesman for Spelthorne Borough Council said: “The income generated by the portfolio each year far exceeds the debt and therefore funding is not a burden, and in fact without this income the vital services that support residents would be directly and detrimentally being influenced.
“[…] We acquired these investment asset acquisitions in 2016-2018 as part of a capital strategy to generate sufficient long-term income to offset the impact of the loss of government grants.”
A spokesperson for Runnymede Borough Council said: “The council made a strategic decision several years ago to borrow money from HM Treasury to invest in commercial properties that we let.
“This was done to replace government funding cuts that all local authorities were facing. We have used this income to pay for substantial regeneration in our towns, bring fantastic facilities to the council, generate traffic for local businesses, build new create jobs and revitalize city centers.
“The debt we have is well managed and does not affect how core services are delivered.”
The public funding cuts mentioned by both have affected other councils across England.
This includes the Revenue Support Grant, a grant from the central government given to local authorities that can be used to fund revenue expenditures for any service.
Need-based government grants like this used to be the largest source of income for municipalities.
But after more than a decade of austerity and changes in government funding, they rely much more on council taxes and withheld business rates levied on residential and commercial properties in their area.
Across England, the amount of revenue support given to councils has generally fallen by 90% between 2013/14 and 2021/22.
Last Sky News analysis has shown that deprived areas have experienced the greatest reduction in purchasing power.
Large investments can go wrong for municipalities
Other municipalities have made major investments, such as Spelthorne and Runnymede, in response to government cuts, but with less success.
Iain Murray, Director of Public Financial Management at the Chartered Institute of Public Finance and Accountancy (CIPFA), says councils need to be mindful of the risks associated with large investments.
“They have to make decisions based not just on the here and now, but on model scenarios. Many of these decisions were made in an environment where inflation was low and fairly static and stable,” he told Sky News.
“Since the last 12 months, we are now in a completely different economic situation.”
In situations where things have gone wrong, “it may just be that some of the possible what-ifs haven’t been thought through enough.”
Another council in Surrey, Woking Borough Council, is one of many in England facing major debt problems.
The municipality said it is on the territory of issuing a Section 114 notice – which means that the government must step in to ensure that local services are sustainable.
Other municipalities are facing similar problems. Slough, Croydon and Thurrock – which are running a £500m shortfall due to a series of disastrous investments in high-risk commercial projects – all issued Section 114 notices last year.
Woking had debts of around £2 billion.
Like other councils in England, Woking’s funding structure has changed significantly over the last decade.
Woking have shared with us their sources of income for the year 2011/12 and 2023/24.
The amount the council will receive in government funding for 2023/24 is 10% lower than in 2011/12, from £5.2m to £4.7m.
The amount of revenue support it receives has fallen by 92% over the same period, while council tax receipts have risen by almost 40%, from £8.3m to £11.4m.
Municipalities exhaust their unallocated reserves
The reduction in the government grant also means that some municipalities are running out of their unallocated reserves.
Unallocated reserves are held so that municipalities can continue to provide local services when unexpected situations arise.
Unallocated reserves in Newark & Sherwood, in Nottinghamshire, Uttlesford, in Essex and South Norfolk have fallen by more than 80% between 2016/17 and 2021/22.
Cllr James Jamieson, president of the Local Government Association, said: “Over the last decade, councils have already done more than their share of the heavy lifting when it comes to making public finances more sustainable.
“Many municipalities still struggle with significant challenges in setting their budgets and trying to protect services from cuts due to the deep underlying and existing pressures they face.
“[…] Councils want to work with the government on a long-term financing plan that ensures they have sufficient resources, security and freedoms to deliver local services to our communities.”
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Does this mean municipalities are going bankrupt?
It is not possible for a municipality to go bankrupt in the same way as an individual or a company, but what it can do is issue a section 114 notice, which is basically the same thing.
This Section 114 notice triggers a form of action that blocks new spending and gives the council 21 days to meet and decide what to do next — usually by enacting a new budget that cuts spending on services.
Funding for services such as protecting the vulnerable is protected, existing financial commitments and contracts are met, as well as ongoing payments from council employees.
In itself, municipalities spending large amounts of money on financing their debts and running out of reserves does not mean they run the risk of calling 911 or causing a financial disaster.
However, debt spending and the amount of their reserves that councils are coming through are indicators that CIPFA has identified that make municipalities less financially resilient.
Other indicators of financial dependence are more difficult to measure.
For example, CIPFA suggests that councils should have sound financial management and governance.
Financial plans should be made for the medium term, rather than just trying to move from budget to budget the way struggling households can make money from month to month.
This is more difficult for municipalities because the amount of the government contribution is only determined at the end of each financial year.
We noticed that several councils, such as Thurrock and West Northamptonshire, were unable to report their accounts on time. West Northamptonshire in particular was unable to submit a number of bills despite delays.
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