REPLACING old loans cost the city council £1.9 million – and the taxpayer is still paying it off.

But council finance chiefs say taking a new loan offered the best value to residents in the long run and has left the city council better placed to make savings.

Worcester City Council head of finance Grahame Lucas said savings of nearly £1.25 million over the last five years had been made from re-financing council debt, albeit through having to take the initial £1.9 million hit.

The cash-strapped city council is making £3.2 million of cuts this year, to make budget savings blamed on lower Government spending.

At the end of 2004, the city paid £1.9 million to get out of loans which were not offering good value – known as early redemption payment – according to Mr Lucas.

It then took up a £5 million loan known as a lender option, borrower option or LOBO loan, which has a fixed rate for five years and can then be varied by the lender.

The cash to pay off the early redemption came from money made from selling off the council’s housing stock.

Finance chiefs initially wanted to write off the redemption payment over 50 years but Government auditors said the council had to take the hit in the first year, saddling the taxpayer with a £1.9 million bill. At the time the Audit Commission rated the city council’s financial standing as sub-standard, although ratings have since improved markedly.

But a city council insider said taking out the LOBO had contributed to the state of the Guildhall’s budget woes.

“By the fifth year since the payment the city is still down about £700,00 on that £1.9 million which all helps to put us in this terrible position we’re in right now,” said the source.

However, Mr Lucas said the city council was on track to repay the debt after another four years, despite an increase in the loan’s rates from 3.45 per cent to 4.5 per cent from December.

“We’ve made savings each year and we’ll make about £200,000 savings over each of the next eight years,” said Mr Lucas. “We’re looking at net savings of £1 million to the council. If we hadn’t taken the action we took back in 2004, we’d now be in a worse position.”

The city council’s £7.5 million debt will be scrutinised by councillors on Tuesday, November 3.