Some councils are failing to comply with revised investment code requirements on proportionality and minimum revenue provision (MRP), according to a senior government official.
Speaking to a session at Room151’s LATIF North last week, Gareth Caller, head of the local government finance unit at the Ministry of Housing, Communities and Local Government, said the government is currently undertaking a review of how councils are interpreting the revised code, released last year.
He said that although the review – covering treasury management strategies and capital strategies – is only a third of the way through, his team has raised concerns about the approach of a number of councils.
“We found some genuine concerns in [relation to] proportionality and MRP guidance,” Caller said.
“There were some strategies that said ‘we disagree with the guidance so we are going to disregard it’ or chose to, particularly on proportionality, select indicators that clearly didn’t align to the intention of introducing the concept of proportionality in the underlying guidance.”
Caller said that it was for every local authority to decide the approach to take and that he was aware that guidance does not have the same force as regulation and legislation.
But he warned that “there is an expectation in law that local authorities will comply with statutory guidance and that if they depart from it they will explain why.
“And those explanations were not always transparent where local authorities had chosen to disregard the guidance.”
During the question and answer session, Caller was asked to explain the ways in which councils had been disregarding guidance on MRP.
He said: “In some cases they have been setting the MRP for longer than 50 years without linking that either to the length of a PFI deal or it being for a service asset.
“There are also cases of over-payment or of payment holidays due to changes in methodology rather than because an over-payment reserve has been built up over previous years.”
Also speaking during the session, David Green, strategic director at treasury adviser Arlingclose said: “We see some people who have bought an asset, and say ‘we intend to sell at a higher price so there will be no cost so we will make no MRP at all’. Most people would agree that is not what the guidance was meant to achieve.”
On proportionality, Caller said the government had considered introducing a limit that councils would be allowed to borrow up to, but had disregarded the idea.
He said: “Fundamentally, we don’t want there to be a level that everyone feels safe to borrow up to.
“We think that each local authority has to decide what is right for them given their risk appetite and risk mitigation strategies and take responsibility for that.”
Caller also raised worries about strategies which contained large sections of text cut and pasted from templates provided by their treasury advisers.
He said: “If someone has used a template, the question is how much thought they have put into it. “They may have done due diligence and made sure everything is covered, but if someone has used a template it is difficult to know if they have done that.”
Caller also said that some of the strategies his team had examined had also been unclear about the transparency of council investments into wholly-owned housing companies.
He said: “We recognise that [housing companies] can serve a dual purpose of income generation and delivery of objectives in relation to service and housing delivery, and therefore a higher degree of risk might be acceptable.
“One of the areas of good practice is to disclose that – but people weren’t always disclosing [that] the investments might have a different risk appetite.”
Caller also said that some strategies were not clear that housing companies were risking money lent to them by their parent authorities.
The department has also discovered big variations in how well councils are presenting their investment and capital strategies online.
He said: “For every capital strategy, for every investment strategy that is really easy to find there is one that is buried either somewhere on page 437 of the budget council papers or in cabinet or executive papers with a summary report presented to cabinet.
“One of the key aims behind the guidance was transparency and [this] was about encouraging local authorities to explain why local authorities were doing what they were doing.”
