Memorandum by the Society of County Treasurers
(LAI 19)
BACKGROUND
1. The Society of County Treasurers (SCT)
comprises all Chief Financial Officers from the shire counties
in English local government. Following the reorganisation of local
government in 1997, the SCT expanded to include three shire unitary
authorities that had similar vested interests in local government
issues. Together, these authorities represent 48% of the population
of England and provide services across 87% of its land area.
Why do Local Authorities have cash balances?
2. There are broadly speaking four areas
that give rise to cash balances within local authorities although
local levels of each will vary widely.
3. The first area is reserves, either earmarked
or general. It is a pre-requisite of sound financial planning
to hold some reserves against unexpected events. Indeed, the Audit
Commission recommend that authorities hold reserves and comment
on them as part of their judgement of our use of resources.
4. The second area is large projects, especially
the capital programme, where either the grant income or debt finance
is raised prior to spend taking place. To some extent this is
inevitable since to time income and spend to coincide perfectly
would prove to be impossible.
5. The third area is general running cash
flow. Typically most authorities receive government grants on
a few days in each Month and council tax income may be in a single
lump sum depending on whether the authority raises council tax
directly or receives it by way of precept. Authorities then pay
a significant portion of their costs in salaries on one or two
days towards the end of the month.
6. The fourth area is less clear cut in
that it involves pension fund cash or cash for other local authorities
such as fire or police where it is passed to another authority
for operational reasons (public body to public body outsourcing).
These sums don't change the overall total of local authority money
but may hide its true source and the effect its investment has
on each authority dependent on which body caries the default risk
and gains from any marginal return on investment.
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?
7. Prior to the Local Government Act 2003,
Local Government Investments had to be made with Government approved
banks, with tight limits, and strong incentives to comply. Even
so, failures such as BCCI and Chancery Bank meant that some Local
Authorities had funds placed with failing banks.
8. An Authority's treasury management activities
are now regulated by a variety of professional codes and statutes
and guidance:
(a) The Local Government Act 2003 (the Act),
which provides the powers to borrow and invest as well as providing
controls and limits on this activity;
(b) Statutory Instrument (SI) 3146 2003,
as amended, develops the controls and powers within the Act;
(c) The SI requires the Authority to undertake
any borrowing activity with regard to the CIPFA Prudential Code
for Capital Finance in Local Authorities;
(d) The SI also requires the Council to operate
the overall treasury function with regard to the CIPFA Code of
Practice for Treasury Management in the Public Services.
>(e) Under the Act the Department for Communities
and Local Government (DCLG) has issued Investment Guidance to
structure and regulate the Authority's investment activities.
Section 15(1)(a) of the act sets out clearly the guidance for
investment. The guidance recommends that, "priority should
be given to security and liquidity. However, that does not mean
that authorities should ignore yield. It will be appropriate to
seek the highest rate of return consistent with the proper levels
of security and liquidity".
(f) The CIPFA Code of Practice for Treasury Management
in the Public Services requires as a minimum, the regular reporting
of treasury management activities to:—
(i) Forecast the likely activity for the forthcoming
year (The Annual Treasury Management and Annual Investment Strategy
Statements to Council in March each year); and
(ii) A review of actual activity for the preceding
year (outturn report).
9. Underpinning this at local level are
also detailed Treasury Management Practices, which deal with the
day to day operation of treasury management within authorities.
Compliance with the regulations and underlying industry best practice
is usually subject to annual inspection by each authority's external
auditors.
10. The eventual effect of the recent potential
losses is difficult to gauge as this will be dependent on the
individual authority, how they account for the losses both in
terms of short term impairments in their accounts and any actual
losses as the position of the banks in administration becomes
clearer. We welcome the CLG's announcement on 26th November of
proposals for accounting for impaired loans in such a way as to
mitigate the immediate effect on Council budgets and look forward
to seeing detailed proposals. If we assume some losses do occur
ultimately the authorities' Members will have to balance budgets
and that could mean either higher council tax levels or less service
delivery (assuming all available efficiency gains are utilised
to maximise service delivery anyway). Inevitably if there is less
service delivered it is likely that this will lead to reductions
in head count for authorities but it will depend on the individual
authorities position as to whether this can be dealt with in natural
wastage or would lead to redundancies. Inevitably it will take
some time for these issues surrounding on-going budgets to play
through.
In the light of recent events, are any changes needed
to the framework for the scale, spread and risk of local government
reserves?
11. It is important to note that the cause
of the possible losses is a once in a generation global financial
crisis. Irrespective of this fact, it is entirely correct for
all authorities to re-appraise their processes and undertake a
general review of the framework. However it is likely that any
significant change in the framework would impair the flexibility
of local members to implement local solutions to best meet local
needs. Inevitably any reduction in risk taken is likely to lead
to lower returns and could materially impact on an authority's
capacity to fund its services.
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?
12. Some local authority money is invested
in government stocks by way of balancing the risk in their portfolios.
As previously stated, restricting investments purely to government
stock could materially affect returns used to support local authority
services.
13. A survey conducted by the Society of
County Treasurers during November 2008 indicates that average
County Council balances are in the region of £170 Million
(24 county councils responded). The survey also found that
a 1% variance in investment returns would lead to an average change
in band D council tax of approximately 0.1% or £10 per
year.
What is the role of central government in providing
financial advice and guidance to local authorities? Should any
other bodies have a role?
14. Currently outside of the provision of
law and guidance central government plays no role. The current
guidance from CLG provides for three areas:
1. It is a requirement to have an annual strategy
approved by members.
2. With the distinction between specified (low
risk) and non-specified (higher risk) investments the guidance
encourages an assessment of risk and limits what officers can
do without express consent from Councillors. It needs to be remembered
that unless the deposit was for longer than a year authorities
will have classified their deposits with Icelandic institutions
as specified. The CLG guidance defines a specified investment
as being in sterling, having a maturity of less than one year
and where the counterparty is either the UK Government, another
local authority or with a body with high credit ratings. All other
investments would be non-specified.
3. The guidance specifically refers to credit
ratings, indicating that to some extent a reliance on external
commercial credit rating agencies is an appropriate tool within
treasury management. There is a wider industry question as to
whether credit rating agencies provide a useful guide to investors
of the true credit worthiness of banks. There is also a question
regarding the possible conflict of interest imbedded in the credit
rating agency model of the rating agencies being paid by the body
that is being rated.
15. Other bodies whose views might usefully
be sought are:
Association of Corporate Treasurers
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?
16. In the long term it is difficult to
see how the Government could undertake this without increasing
regulation or reducing returns or both. It is possible that further
work would find that the trade offs are acceptable to all.
17. It is a moot point as to whether greater
regulation in this area is desirable or necessary. However any
extension should be limited to an increase in the number of specific
areas that need to be covered in the Annual Investment Strategy
Statement without being prescriptive as to how each area is to
be resolved. This will increase both transparency and member control
of cash investment processes but retain the ability of local councillors
to put in place procedures and investments that best Meet local
needs.
18. Areas that Might be considered for explicit
coverage in the Annual Investment Strategy Statement are:
The use, or not, of an external advisor
Schemes of delegation and the role of the Section
151 officer
The use of and procedures regarding credit rating
agencies
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