Councils play safe over savings after Icelandic bank crash
CAUTIOUS council chiefs are lending tens of millions to the Government rather than gambling with public money on the volatile financial markets.
Stoke-on-Trent City Council has tightened its investment regulations in the wake of last year's Icelandic bank collapse.
The city lost £5 million it had invested with Landsbanki, although most of the money is now expected to be repaid.
The council, which has about £70 million to invest at any one time, has ruled out overseas banking and will only trust UK finance firms which have a spotless triple-A credit score.
Other curbs include limiting the amount of cash which can be deposited with banks belonging to the same finance group.
But the cautious approach means the council's income from investments will be hit even harder than expected this year, leading to a shortfall of millions of pounds.
Councils routinely invest money that they do not immediately need to spend on services or projects in order to boost their income.
Funding such as Government grants can often earn thousands of pounds in extra income if they are invested for a few days or weeks instead of left in the council's bank account.
The dwindling number of safe banking opportunities has prompted the council's director of central services, Paul Simpson, to raise the limit for investments in the Debt Management Office, which manages the Government's borrowing and lending activities.
The council's DMO investment limit, which was recently raised from £15 million to £25 million, has now been removed completely.
Cabinet member for resources, Councillor Kieran Clarke, pictured below, admitted that the safeguards will have a serious impact on the council's income.
But he said that it could not afford to risk public money on higher-interest investments.
He said: "We are basically lending our money to the Government because that is the safest place at the moment.
"The interest we get is terrible, but we are guaranteed to get our money back.
"If we have £50 million pounds hanging around for a few weeks then it makes sense to invest it somewhere, but some of the banks and building societies are not seen as safe opportunities at the moment."
He added: "Because we are being cautious, our income from investments is probably going to be even worse than the £2 million shortfall we were expecting this year."
A report published this week shows that the authority now has almost half of all its investment funds, £34.2 million, invested with the DMO.
But the cash is earning just 0.3 per cent in interest, compared to up to 1.5 per cent being offered by some banks and building societies.
A report to next week's audit committee meeting on the investment situation said: "Members should be aware that investment returns will be lower; with lower risk comes lower interest rates."
Local Government Association vice-chairman Richard Kemp said: "It is in everyone's interests that councils continue to invest and do so prudently."
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8 Comments
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by Bert, Newcastle
Monday, June 29 2009, 7:46PM
“Whether I work for the Council or not is irrelevant.
The facts are important, however. What is wrong is people posting inaccuracies on this website with no regard to the truth or facts.
Councils invest the cash that is earmarked for future use to get a return for the taxpayer.
Richard obviously understands how it works but others post ridiculous, inaccurate, headline grabbing claims with no foundation.
The fact that Council make choices about where to spend money is bound to cause healthy debate. It is irrelevant in this case, however because the cash that is invested cannot be spent because it is earmarked for something else.
As always, I hope that my post is helpful.”
by Richard, Stafford
Monday, June 29 2009, 11:59AM
“The money which is invested is not "spare money" but rather money which is committed to be spent later in the year. For example if you employ a member of staff on £24,000 a year the Council will only pay £2,000 in April, the remaining £22,000 can be invested until it is needed in the following 11 months. Seems pretty simple to me.”
by Frustrated, Stoke
Monday, June 29 2009, 11:39AM
“Bert, your replies make me wonder whether you work for the council?
"Voter" did not leave his original comments as a plea for your financial advice.
Our roads are full of potholes, school buildings are literally falling to pieces, councils, both local and county, are closing care homes left, right & centre, every time we have a large amount of rain some people in some areas are flooded out of their homes due to inadequate drainage.
What are the council doing about these (and other) issues? Looking for places to salt money away, thats what!”
by Voter, Staffordshire Moorlands
Sunday, June 28 2009, 12:27PM
“Bert,
Thanks for your reply. You say that the reason why councils need to invest this money is that they get large amounts of cash up front, before they need to spend it.
I would suggest that they need to spend it now, you don't have to look too hard to see things that need to be put right.”
by Bert, Newcastle
Saturday, June 27 2009, 8:03PM
“Q1. Since when has it been our problem to prop up a failing Government with our money?
A1. The Government pays an interest rate that is commensurate with the market rate so there is no 'propping up'.
Q2. It begs the question why was the council tax raised, or the Lifeline Services cut when we had so much in the bank.
A2. No it doesn't; please take time to read my response. You might learn something.
Q3. Who gave the authority to "lend this money?
A3. The Council will have a 'treasury framework' that has been approved by full Council so it is in effect the full Council. Who else do you want to approve it?
Hope that my accurate representation of the facts helps you understand a complicated matter that seems a beyond your intelligence Mr Cope.”