Council deposits with banks and building societies fell by 18% during the last financial year as authorities drew down on reserves and lent more to other councils.
End-of-year figures released by the Ministry for Housing, Communities and Local Goverment (MHCLG) show that council bank investments stood at £10.3bn at the end of 2017–18, down 14.8% on the previous year, while building society deposits fell 40.3% to £1.1bn.
Meanwhile, the popularity of inter-authority lending continued apace, rising by 30.0% over the year to reach £9.1bn.
Jill Penn, head of finance and revenue services at Broadland District Council, and president of the Society of District Council Treasurers, said the drop in short-term deposits reflected the difficulty many councils face in balancing their budgets.
“More authorities are drawing on their reserves, not just to balance the budget but also some for growth and infrastructure projects. This impacts on the cash available to deposit,” she said.
Despite the drop in bank and building society investments, David Green, strategic director at treasury adviser Arlingclose, said the appetite for inter-authority lending showed there is still a demand from councils for short-term cash.
“The lending authorities are getting a similar or higher rate of return for lower credit risk compared to a bank deposit, while the borrowing authorities are getting a lower cost loan compared to the Public Works Loan Board,” said Green.
The remarkable rise of inter-authority lending has seen six-fold growth from just £1.5bn at the end of 2009–10.
If current trends continue, the it is likely to overtake bank deposits as the favoured destination for short-term council cash by the end of the current financial year.
Overall, total local authority investments, including inter-authority lending, were up 1.7% to £37bn over the year. However, excluding inter-authority loans, the figure was down 5% to £28bn.
Investment in treasury bills fell by 21% while money market funds saw a rise of 13%.
Meanwhile, an overall rise in borrowing hid a bigger move towards shorter term loans than towards longer term debt.
Short-term borrowing jumped 31% to £721m, while long-term borrowing was up a more modest 5.6% to £95bn.
David Green said: “If all your borrowing is long-term fixed rate, you are making a large one-way bet that interest rates will rise faster than the market expects.
“Over the past ten years, local authorities have increasingly come to realise that the market can be wrong the other way — interest rates might be lower than expected.
“It therefore makes perfect sense to have a proportion of your debt at short-term, or variable rates, to take advantage of unexpectedly low interest rates.”
He added that it made sense for councils to adopt an interest rate risk profile that offsets the economic risk from the localisation of business rates and council tax benefits, as well as growing commercial property exposure.
According to Jill Penn, the current uncertainty about the long-term shape of local authority finance was also affecting long-term borrowing decisions.
Penn said the sooner a “reasonable” longer term financial settlement for councils was made available, the more long-term projects can be launched with financial certainty that features “affordable borrowing”.
