Local authority investments - Communities and Local Government Committee Contents


Memorandum by The Society of Local Authority Chief Executives and Senior Managers (SOLACE) (LAI 10)

What are the present arrangements for local authorities' Treasury Management—and in particular the requirement to produce Annual Investment Strategies—and how have these affected the performance of local authorities, both as service providers and employers, given recent potential losses experienced by many local authorities?

  Treasury management activities are closely regulated with all authorities required to follow best practice guidance published by CIPFA (this includes annual investment strategies, investment policies and annual reviews of treasury performance). Within this guidance authorities can take a view on the level of risk they are prepared to accept but the vast majority will have taken what they considered to be a risk averse approach. The guidance requires LAs to consider security rather than return as the key concern but nevertheless authorities are required to balance low risk with maximising returns.

  In order to form views on different institutions, authorities have generally employed Treasury advisors and used international ratings agencies (Standard & Poors, Fitch and Moodies) who are experienced in evaluating the relative strengths of different institutions. Most Local Authorities would not have the resources, access or in-house expertise to do this work efficiently themselves.

  Ratings agencies are paid by deposit taking institutions to assess them for financial soundness. The Icelandic Banks passed all the tests and had reasonable credit ratings. The real problem is that neither the Banks nor Credit Rating Agencies had adequate information on the liabilities explicit or implicit in derivative instruments such as collateral debt obligations or credit default swaps.

In the light of recent events, are any changes needed to the framework for the scale, spread and risk of local government reserves?

  The framework does not cover the scale of local authority reserves—this is covered by other guidance. We do not see that recent events should have any impact on the scale—press comment on this issue has largely been led by an ill informed understanding of why authorities operate with significant cash reserves (indeed if this were not the case, the Icelandic collapse could have had an immediate impact on services).

  There does need to be a review of whether the current framework is sufficiently robust and CIPFA is currently preparing this. Such a review needs to be realistic and conducted in a calm way rather than as a knee jerk reaction to "bad" publicity. There will never be a perfect way of judging risk. No process—short of insisting reserves are only held with the Government—will provide 100% protection from risk, and the lower the risk, the lower the return to Councils which would impact on funds available to support service delivery.

  It needs to be recognised that how local authorities take decisions on investing reserves is only one element that needs to be looked at. This problem stems from how financial institutions have been regulated. Fundamentally, had the regulation been adequate there would, as a minimum, have been a much earlier warning of the potential problems.

Should local authority money be invested in Government stock, with lower risk, but with a low return? What effect would this have on UK banks and on council taxes?

  To do so would remove a huge amount of liquidity from the banking and building societies. The Government would need to recognise the potential impact of this on local authority funding and therefore Council Taxes. It would also significantly reduce funding from investment returns currently used to support service delivery. This would result in reduced services or increased council taxes.

What is the role of central government in providing financial advice and guidance to local authorities? Should any other bodies have a role?

  Central Government already regulates the bodies in which local authorities can invest and provides guidance through various codes. Other bodies do already have a role—CIPFA.

Should the Government protect local authorities' investments in the same way that it is protecting personal assets? What consequence does this have for the relationship between local and central government?

  Yes. Not doing so means that local authorities are left inexplicably unsupported (with costs ultimately borne by individuals through the Council Tax) whilst private institutions such as banks are provided with significant levels of public support.





 
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Prepared 11 June 2009