Memorandum by Torbay Council (LAI 12)
Summary
1. The responsibility for Treasury Management,
including risk assessments of lending or borrowing opportunities,
should ultimately be the responsibility and remain solely with
Councils to manage their resources within the current treasury
management framework provided in association with CIPFA. This
provides a clear incentive for Councils to manage their investments
and borrowing efficiently. Any move to a central cash system,
as with parts of the NHS, could generate an overall loss of local
accountability and possibly income to Councils. In respect of
the former this is a move away from the direction that the Government
is encouraging with improved accountability and responsibility
and in the latter would probably impact on the public sector as
a whole and could increase council tax or result in cuts to frontline
services as a consequence.
2. The Committee needs to be mindful that
the majority of Councils did not invest in Icelandic Banks and
many of these that did had invested money for a long period and
those terms were coming to an end. Torbay Council believes that
the current system of self-regulation, by the requirement to have
a Council approved Treasury Management Strategy and supporting
procedures, should be an adequate safeguard. Although for many
Council's the credit ratings of the Icelandic banks were not considered
strong enough to invest with, the economic conditions that occurred
to cause these banks problems were exceptional. It is important
that any Select Committee response is considered and not an overreaction
to exceptional events.
Background
3. Torbay Council is a unitary council that
does not have responsibility for the management of the Pension
Fund and therefore recognises that those Councils who have these
responsibilities may hold different views as a consequence. The
Council has annual gross expenditure in excess of £300 million
and currently has some £90 million invested in the money
market. The returns from these investments plays a significant
part in allowing the Council to provide the level of services
which it currently does at a relatively low council tax rate.
Torbay's Position on Icelandic Investments
4. Torbay Council did not have any investments
with Icelandic banks as, for a number of years, based on Fitch
and Moody ratings, no Icelandic bank was rated strongly enough
to be included on its approved investment counterparty list. Torbay
Council excluded any counterparty whose individual strength rating
as assessed by Fitch was lower than B.
Present Arrangements for Treasury Management in Torbay
5. The Council currently has in house management
of its resources with support from external Treasury Management
advisors (currently Sector). In addition a proportion of investments
held by a fund manager. The Council has no plans at present to
change these arrangements. What should be made clear though is
that the advice of external advisors is exactly that and Torbay
Council sets its own policy in the light of that advice but adds
in its own safeguards and controls and takes responsibility accordingly.
6. The Council has an approved treasury
management strategy, set annually, which reinforces the prime
aim of preserving principal of investments.
7. A matrix for investments is agreed as
part of strategy based on a number of Fitch and Moody ratings.
The "safer" the counterparty the higher the maximum
amount invested and longer the maximum investment term is permitted.
The external advisor (Sector) advises of any change in ratings
or "on watch" warnings and Torbay's counterparty list
is updated immediately.
9. One issue, which is recognised by the
Council, is that Fitch and Moody credit ratings are valid only
at a point in time. Although investments are made with a prevailing
good rating, these rating may not be valid for a longer period
which may then cause problems for any longer term investments.
Local Government Reserves
10. The Council believes that providing
a Council has maximum investment limits for any one counterparty
(or a maximum limit for a group of financial institutions) then
there should be no need to fundamentally change reserve policies.
Torbay Council operates a policy of allowing no more than 20%
of its investment portfolio with any one counterparty but recognises
that an additional safeguard could be that a sum equivalent to
10% of the net budget could be used as an additional guideline.
11. Consideration could be given to requiring
Councils to ensure a percentage of their investments are held
in very liquid investments, such as money market funds, which
can be converted to cash in the unusual event of an investment
loss to ensure the continuation of payments to suppliers and employees.
12. As a generalisation the Council is not
fully supportive of the concept of capitalisation of losses arising
from changes in the financial markets. However in exceptional
cases which affect the whole of the sector the Council believes
that there is a case for some form of support and assurance from
central government that capitalisation directives could be available
to meet investment losses would be of benefit. It does recognise
that these resources would still have to be identified by the
Council but it would enable capital resources to be used in lieu
of revenue reserves.
Lower Risk Investments and Impact on Council Tax
13. Forcing Councils to use lower risk investments
than those acceptable under a prudent approach to investments,
set by a treasury management strategy, would inevitably reduce
both council and total public sector income which would increase
Council tax or result in service reductions. The Council would
not be supportive of this approach.
14. Giving Councils the freedom to manage
their treasury activities linked to local resource demands provides
a positive incentive to Councils which will result in proactive
cash management leading to increased income returns (or reduced
borrowing costs). Cash control systems, as used by the NHS, appear
to result in non efficient cash transactions occurring which will
ultimately reduce overall public sector resources. The Council
would strongly oppose any suggestion of central management (ie
central government/Bank of England) of local resources.
Role of Central Government and Other Bodies
15. Central Government working with CIPFA
has provided guidance on Treasury Management to Councils whilst
maintaining the clear advice that Council's are forbidden from
"trading" in this function.
16. An option for central government is
to limit the maximum investment period to say three years, although
Torbay Council believes this is beginning to remove local accountability
and responsibility and therefore would not support such an approach.
17. There are a range of treasury management
advisors offering a range of services to Councils. One further
option that could be considered is that central government contracts
a core treasury management service on behalf of all Councils.
This one provider could supply key economic, counterparty limits
linked to net budget, Fitch and Moody's rating data etc and which
would ensure consistency of advice and application of rating data.
This could result in all Councils operating within the same risk
parameters which can be checked by appointed external auditors.
However Torbay Council would not support any move which forced
the Council to use one specific advisor over another as it is
committed to local choice.
18. Central Government could extend its
range of government backed deposit options (such as the Debt Management
Office) but offer more competitive rates which are more in line
with the higher rated financial institutions.
Central Government Protection
19. If Councils have the freedom to manage
their treasury management requirements and the incentives that
generates, then the risks lie with Councils. Torbay Council believes
this to be a fundamental "given" and totally accepts
this consequence.
20. Central Government could offer a compromise
this by guaranteeing say 50% of each investment thus sharing the
risk or, as mentioned above, provide assurance that capitalisation
directives are available to meet any extraordinary loss. However
Torbay Council believes this could lead to extra risks being taken
by some councils and would not necessarily support such an approach.
21. However the Council fully recognises
that, in some exceptional circumstances where the whole market
could be caught out, there are arguments for granting support
to local councils where losses have be made through no fault of
the council or its officers.
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