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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