Memorandum from the Society of District Council Treasurers (SDCT) (LAI 05)

 

The SDCT welcomes the opportunity to input into the above Inquiry and being a member of the CIPFA Treasury Management Panel would fully endorse CIPFA's own submission, which is appended also to this submission.

 

However, the SDCT would ask that the following points are also considered:

 

Q1	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?
Response	The arrangements for local authorities' Treasury Management are clearly set out in CIPFA's response. The priorities are security of capital and liquidity of investments balanced with the aim of achieving the optimum return. However, SDCT would suggest that the impact of changes in interest rates is often more acutely felt by District Councils whose gains from investments are often crucial to maintaining service within an affordable level of council tax.   As an example, Canterbury City Council has achieved investment income of over £10.5 million in the last seven years. This has enabled the council to deliver a wide range of services including significant investment in community safety and community development activities, which were not traditionally seen as district council services. If the council had adopted a strategy of only investing in the Debt Management Account Deposit Facility then Canterbury estimates it would have earned around £3 million less over that time.
Q2	In the light of recent events, are any changes needed to the framework for the scale, spread and risk of local government reserves?
Response	Again, SDCT agrees with CIPFA's response that there is no reason to change the framework within which local government reserves are invested. Councils are required to annually approve an Investment Strategy setting out criteria to be used to manage investments. There is always some risk to any investment but local authorities will attempt to minimise this by spreading its investments. The SDCT considers that the global events of recent months are outside the risks that local authorities can be expected to manage.   Councils have not become caught up in the current crisis because they were seeking inflated returns. They were investing in such banks in order to spread investments. Often it is difficult to find enough counter parties, this is particularly so for districts, who often have parcels of money which are too small for the AAA+ rated banks to be interested in. The rates offered by the Icelandic banks were not significantly above market rates.   As noted in Annex A to the CIPFA response, a large number of local authorities hold investments and debts. Many are in this position because the cost of repaying debt and Housing Revenue Account financing determinations act as a discouragement to the repayment of debt. A temporary relaxation in PWLB repayment rules would help local authorities reduce investments and hence the risks which come with investments.
Q3	Should local authority money be invested in Government stock, with lower risks, but with a low return? What effect would this have on UK banks and on council taxes?
Response	Such a move would have an impact on all local authorities but would be of particular concern to District Council where investment income contributes to providing quality services within affordable council tax.   Canterbury City Council has estimated that such an approach would cost it between £660,000 and £1 million per year. A 1% increase in council tax brings in £86,000 so Canterbury's council tax would need to increase by between 7.6% and 11.6% just to cover this "loss". With council tax capping this would be impossible so services would need to be cut back significantly, at a time when it is already anticipating having to make £2.6 million of savings in 2009/10.
Q4	What is the role of central government in providing financial advice and guidance to local authorities? Should any other bodies have a role?
Response	SDCT see no reason why central government should provide further investment advice to authorities. However, there is perhaps a case for the Financial Services Authority to consider further regulation of the credit agencies upon whom councils have to place a good deal of reliance. Councils do not have the resources available to do otherwise. The Audit Commission also has an existing role in supporting local authorities and advising best practice.

 

Q5	Should the Government protect local authorities' investments in the same way that it is protecting personal assets? What consequence does this have for the relationships between local and central government?
Response	These are complex issues. Certainly Treasury officials believe that if government were to give that sort of guarantee councils would be able to pursue reckless investment strategies in order to gain the highest returns, knowing that the capital would be protected. Of course, anyone taking the time to reflect and understand the situation would recognise that would not be the case as it ignores the professionalism of local government. The CIPFA Treasury Code of Practice will govern the approach councils can take. In addition, professional bodies codes, such as CIPFA's Statement of Professional Practice and the Section 151 responsibilities will ensure proper professional behaviour by individuals.   Government has also said that it will not provide guarantees to local authorities because they as seen as informed investors. Generally that may be a valid position to adopt but in extreme circumstances there ought to be some protection as there has been for personal investors in extreme circumstances. The approach adopted so far suggests that had Treasury officials and Met Office officials been on Thailand's beaches at the time of the Tsunami the Treasury officials would have stood by and watched Met Office officials drown because they were "informed" weather professionals.   The events in the banking system have been global and unprecedented. In these circumstances the government should protect local authority investments. The taxpayers who ultimately suffer are the same taxpayers the government says it is protecting.   It has been reported that government were aware that Iceland's economy might fail well before credit ratings were altered. In those circumstances should the government have advised the wider public sector or could it not because that would have precipitated the problem. If it could not warn councils then it should take on the guarantee role.   The SDCT believes there is a strong argument for central government to protect local government investments in situations similar to those that have occurred recently as ultimately any losses will be met by the tax payer whether that is at a national or local level. Should such protection not be possible, then central government should help local government minimise the impact by giving blanket approval to capitalisation of any losses.   General Comment   Whilst the Select Committee study will be of value in drawing out lessons there is the need for a study into the causes rather than the symptoms. The causes were the activities within global banking, which were not properly understood or regulated by those charged with those responsibilities.

 

November 2008