Memorandum from Bridgnorth District Council (LAI 01)

 

Summary

 

· The Council has adopted a Treasury Management Strategy that seeks to minimise risk whilst allowing sufficient flexibility to achieve a reasonable return on investment activities. This Strategy has been drawn up with reference to the CIPFA Code of Practice on Treasury Management.

 

 

· The success of the risk minimisation approach is demonstrated in the current circumstances whereby despite the recent collapse of Landsbanki and the subsequent freezing of a £1m investment, the consequences are not catastrophic and the Council remains in a strong financial position and will be able to deliver all commitments in the Revenue and Capital Budgets and remain debt free.

 

 

· The current framework has operated successfully for a number of years and current evidence would reinforce the success of the spread of risk for the majority of Councils affected by the failure of the Icelandic Banks. There is no overwhelming evidence to indicate the need for significant changes to the existing framework.

 

 

· A significant reduction in the level Local Authority investment with Banks and Building Societies for safer and less rewarding alternatives would ultimately have a detrimental impact on the broader economy and the level of Council Tax and/or level of services provided.

 

 

· The Government should consider offering Local Authorities a guaranteed scheme for deposits with the Bank of England at a fair market rate interest

 

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· Consideration should be given to the creation of a Government backed body to provide consistent and relevant investment advice and information to Local Authorities.

 

 

· In the interest of working with Local Authorities to help safeguard public funds there is a case that Central Government should seek ways to protect Local Government Investments where these have been made in accordance with recognised good practice.

 

Specific Issues

 

1. 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?

 

1.1 The Council has an Annual Investment Strategy and this is approved by Full Council each year as part of the annual budget setting process. This Strategy sets out in general terms a number of overall controls such as the Council's upper limits for long-term investments and upper limits for fixed and variable interest rate deposits. A more detailed level of control at the operational level is prescribed in the Counterparty List which is also subject to the approval of Elected Members. The Counterparty List seeks to minimise risk whilst at the same time giving sufficient flexibility to enable a reasonable return on the Council's investments. The document identifies the range of financial institutions with which the Council can place deposits and specifies maximum amounts and duration of investments and the minimum credit ratings. Many of the Council's investments are placed by established brokers who assist with the selection of our deposits. The Council has a list of a small number of selected brokers with whom we have worked for a number of years and who have been issued a copy of our Counterparty List.

 

1.2 The arrangements have been operated successfully for many years and the Council has consistently achieved the required annual level of investment income and sustained no losses until the recent uncertainty concerning a deposit with the Icelandic Bank Landsbanki.

 

1.3 The Council has always recognised the need to minimise risk in our investment decisions and our compliance with this approach means that despite the uncertainty surrounding our current deposit with Landsbanki we remain financially strong and will deliver all commitments in our Revenue and Capital Budgets within our existing reserves and without the need for borrowing.

 

 

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

2.1 The recent events are clearly extraordinary and the speed and severity of developments during the late summer created an unprecedented situation in which the application of recognised controls and procedures would not necessarily guarantee secure investments.

 

2.2 The spread of risk has always been at the heart of our investment strategy and the success of this approach is evident in that this Council is able to withstand the current freezing of our £1m investment with Landsbanki. Evidence from other Councils affected by this issue appears to give a similar message in the majority of cases.

 

2.3 There is no strong evidence to support a need for changes to the existing framework of control for investment decisions.

 

 

3. 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?

3.1 The response to this question will ultimately be influenced by the Government's willingness to support those Councils facing potential losses with Icelandic Banks and the consequential message that will be taken by all Local Authorities. The current framework is drawn up in accordance with Treasury guidance and if the Government is seen to back away and leave Councils exposed and unsupported at this time then it is inevitable that this will influence future Local Authority investment policy.

 

3.2 Individually Councils have little influence, but collectively Local Authorities have significant deposits with Banks and Building Societies and withdrawal of these investments for safer alternatives would impact on the broader economy. An alternative to Government Stock would be a guaranteed scheme for Local Authority deposits with the Bank of England with fair market rate interest.

 

3.3 Income from investments has traditionally been a significant factor in budget setting and the level of Council Tax needed. For this Council, annual interest from investments is equivalent to around 20% of the total Council Tax demand for the District, and the level of Council Tax would need to increase by 19% in the current year to bridge the loss of this income stream.

 

 

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

4.1 Central Government currently has a significant role and influence over Local Authority Treasury Management. The CIPFA Code of Practice, Prudential Code on Borrowing and Pooling of Right to Buy Capital Receipts are major areas of Central Government influence and control.

 

4.2 The events in the financial markets during the late summer of 2008 were global and unprecedented, and the speed and complexity of developments during those weeks was beyond the normal expectations placed on Local Authority fund managers. Under normal circumstances there are no indications that any additional advice is needed from Central Government as a matter of routine. However in the face of these unusual circumstances it is a matter for concern that no Government warnings were issued to Councils prior to the collapse of the Icelandic Banks in October if this event had been predicted.

 

4.3 Many Local Authorities place reliance on advice and information from specialist Treasury Management consultancy firms, Credit Rating Agencies and working relationships with Brokers. It is emerging that there was no consistent advice being given and the absence of warnings from these bodies is also a matter for concern. There is an opportunity an independent Government backed body to provide consistent and timely Investment advice, information and warnings to Local Authorities. Any such service could be supported by a subscription charge.

 

 

5. 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?

 

 

5.1 The General Public and Tax Payers have a right to expect that Central Government and Local Authorities will work together to safeguard public funds and minimise tax levels and to this end there is a role for Government to help ensure that Local Authority investments are protected. Where Councils can demonstrate that they are acing prudently and in accordance with prescribed good practice there is a role for Central Government intervention if exceptional and unforeseen events occur which subsequently put previously considered diligent investments at risk. In undertaking any such intervention the Government should address the issue on a single consistent approach to all affected bodies and not act on a case-by-case basis.

 

 

November 2008