Council Investments Explained
South Lakeland council taxpayers will be well
aware of the difficulties affecting the international financial
markets. This note explains how the council’s investments are
managed and provides re-assurance that all transactions are carried
out within agreed council policy, with professional advice and with
the aim of ensuring that security of the amounts invested is of
paramount importance.
The council holds funds which it is able to
invest on a daily basis. For example, it collects council tax,
business rates and council house rents which are banked until
needed to pay for salaries and running costs. Some of these
monies are later paid over to Cumbria County Council, Cumbria
Police and central government. Similarly it has reserves
which it has set aside for use in the future.
Interest from investments is important to the
council’s budget of £14.6m. Last year we earned £650,000
(after interest was paid on long term loans). This money, which is
equivalent to £14 on individual annual council taxes, was used to
provide council services. A separate account for the
management of council houses earned £200,000, equivalent to £63
annually per home; this money was used to maintain services to
rentpayers.
The council lends money to other organisations
(counterparties) in strict accordance with its Treasury Management
Strategy which was approved by Council in March 2008. It
provides the framework and safeguards within which treasury
management activities operate. In particular, the Strategy
sets out the types of lending that the council will undertake, the
organisations that it will lend to and the limits (amounts or time
periods) that it will apply to individual investments.
The underlying principle
is that security of investments is more important than the returns
earned on those funds. The council does not have the power to
invest in equities (shares in companies) so is not exposed to
possible losses in such investments.
Core investments are placed with an external
fund manager who has the expertise to invest in cash instruments
and government stock. As well as earning interest, these
investments have a value which can go up or down. Typical
counterparties for cash instruments are UK and European banks.
The council’s cash flow is managed by finance
staff on a day to day basis. This occasionally involves
borrowing but more usually lending on the money market.
Investments are made for short periods (up to a month) with public
authorities, banks and building societies, although monies will be
placed for longer if not required in the short term. Lastly,
the council has deposit accounts in its own name with three
banks.
In all instances, investments are spread
across a range of financial institutions that have the highest
credit ratings set by an external professional rating agency.
Notification of changes to ratings are received on a daily basis
and the council employs a treasury consultant to advise on all
aspects of investments. Individual in-house investments are
limited to £3m in clearing banks and the largest building
societies.
The council has no investments with Icelandic
banks. Recent difficulties follow very sudden reductions in
these banks’ credit ratings, the speed of which overtook trading
conditions. As at 9 October, the council’s investments with its
fund manager totalled £13.4m. Most of this was invested in UK
banks, with a further £3m waiting to be placed with
counterparties. Investments managed in-house totalled £5.6m,
placed with several local authorities and building societies.
A further £4.8m is held in bank deposit accounts.
All investments are monitored daily and moved
as necessary to reflect risk. The Strategy includes a list of
suitable counterparties for in-house investments in accordance with
its lending criteria. The Strategic Director (Resources)
maintains this list and makes any necessary changes.
Jack
Jones
Strategic Director
(Resources)
October 2008