Memorandum
from 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 4 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 £170m (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:
CIPFA
Audit Commission
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
December 2008
