The biggest financial risk facing local authority treasurers comes from the rate of inflation outstripping investment returns, Room151’s LATIF North conference heard last week.
Speaking to delegates, Danny Mather, head of corporate finance at Warrington Borough Council, said councils have no option other than looking at more adventurous investments to close the gap.
Warrington has led the way in bringing forward innovative commercial ventures, including large property, solar energy deals and investment in a bank.
Mather said: “In terms of risk facing the sector, the biggest one for me is inflation.
“It is running at about 2.7% at the moment. If you factor in the average returns councils are getting on their treasury portfolios — about half a percent — it means you are losing in the region of 2% a year.
“I think that is one of the reasons that is driving commercialism.”
He said that the government announcement of a pay rise for NHS staff last week would only fuel inflation.
However, Mather welcomed revisions to the investment code which are aimed at bringing greater transparency to how councils make investment and borrowing decisions.
He said: “There is a lot of really good stuff in there.
“I know the guidance came very very late but if you Google local government capital strategies there are not many out there, and that probably tells me that a lot of local authorities, particularly those that are into commercialism, are playing catch up in terms of developing all the due diligence that you really should have in place.
“I think to me, primarily, the emphasis on the new investment guidance is on due diligence.”
He said that in the past, better due diligence from authorities could have protected them from the worst impacts of the Iceland banking and BCCI disasters.
Mather also voiced worries about the amount of internal borrowing and inter-authority lending being undertaken by councils.
He said: “I think it was in Room151 a few weeks ago – that there is £10bn of inter authority lending so a lot of authorities are taking very short term positions instead of investing over the long term to bail out their revenue budget which over time is probably a false economy.”
David Green, strategic director at treasury adviser Arlingclose, played down the risks, saying: “Interest rates are going up in the short term but I think the chances of that are very low. I don’t really see risks in short term or internal borrowing.”
However, he warned that councils borrowing from the Public Works Loan Board (PWLB) to buy property need to be aware of the risks involved.
He said: “If your central case is to pay 3% on borrowing and earn 6% on rental after costs, you might do better or you might do worse. There is not a lot of scope to do better.
“Irrespective of government guidance, have you really understood the risks if you are paying certain interest costs against uncertain rental income?”
Also speaking during the session, Belinda White, treasury management finance adviser at Birmingham City Council, said that Lender Option Borrower Option (LOBO) loans are not among the biggest risks faced by councils.
She said: “They offered very good value compared to the PWLB rates at the time they were taken out.”
