Peter Worth: Elected members’ role in treasury management
0
Peter Worth
Members’ responsibilities are clear enough in principle, writes consultant Peter Worth, but can be difficult to achieve in practice.
Section 5 of CIPFA’s Code of Practice on Treasury Management requires that:
– “Full Council receives reports on treasury management policies, practices and activities, including, as a minimum, an annual strategy and plan in advance of the year, a mid-year review and an annual report after its close.
– The Council delegates responsibility for the implementation and regular monitoring of its treasury management policies and practices to a nominated committee, the cabinet or executive.”
Page 11 of CIPFA’s Prudential Code for Capital Finance in Local Authorities goes on to say that the Council’s Prudential Indicators “should be regarded as part of the overall Budget ..and be subject to the same decision making process”.
In principle this seems clear enough. Just like any other key decisions, treasury management activities require elected members to provide strategic direction and approve material transactions. But in one of the most technical areas in local government finance, any real sense of member understanding and engagement can be difficult to achieve. The jargon alone can be difficult (I found myself trying to explain the meaning of a “forward foreign exchange derivative” the other day), never mind the accounting complexities of the Minimum Revenue Provision and premature debt redemption.
Some section 151 officers just gloss over the technicalities, presenting treasury management reports for approval almost as a fait accompli. Others take councillors through the reports very thoroughly, but this can lead to overlong, over-technical presentations with the audience none the wiser.
Room151’s Annual Conference: 9th Local Authority Treasurers Investment Forum & FD’s Summit September 14th, London Stock Exchange
Despite all the difficulties, councils cannot use complexity as an excuse for members to avoid these important responsibilities. My advice on member training would be:
– Little and often – short, practically-based training sessions outside of the formal committee meeting arena work best
– Small numbers and an informal atmosphere will encourage delegate participation
– Focus on underlying principles rather than legal technicalities
– Draw on real life investment and borrowing decisions to illustrate the points you want to get across.
Since the key role for members is helping to set investment and borrowing policies for the forthcoming year, some specific suggestions are set out below:
Investments
Policies should provide a clear steer on what types of investments the Council is keen to pursue or, alternatively, does not intend to engage in. For many residents and stakeholders the process of investing taxpayers’ money has a political and ethical dimension far wider than simply assessing financial risk and return. Members may wish to:
– set parameters, in £ or % terms, for the ratio of cash/non-cash or short/long-term investment;
– restrict activity to “ethical” investments only;
– target investment opportunities towards corporate priorities, e.g. local infrastructure improvements, environmental projects, increased housing provision or venture capital funds aimed at local businesses;
– support specific industries or investment sectors;
– specifically prohibit investing in certain countries or industries, e.g. online gaming, payday loans, adult entertainment sectors or armaments.
Members should also be given the opportunity to influence and approve key governance and decision making policies such as:
– delegation and approval limits for each investment type;
– due diligence processes to be undertaken before investments are made;
– investment monitoring and risk management arrangements;
– format, content and frequency of in-year monitoring reports.
Borrowing
Members are often presented with a list of Prudential Indicators (PIs) for approval but little explanation of what these calculations represent or the purpose they are trying to serve. Members should:
– (a) have a clear understanding of how the PIs are calculated, and the underlying assumptions and key risks that will affect actual vs expected performance. Setting out best/worst case scenarios, and a summary of the risk management arrangements in place, should assist with this.
– (b) be consulted on how they would like to see PI information presented. The Prudential Code requires comparative data but most councils only provide comparisons over time, not comparisons with other authorities, or market averages for interest rates and investment returns.
– (c) be instrumental in setting targets against which key PIs can be measured, especially in relation to borrowing limits, gearing and budget impact.
– (d) be invited to set local indicators for treasury management. These could, for example, consider the “legacy” aspects of borrowing policy, and the desirability of rescheduling or repaying debt now to benefit future generations
A wide-ranging debate on these and other issues could usefully be had in advance of drafting investment and treasury management strategies each year and could even form part of the public consultation on the budget.
CIPFA has recently embarked on a review of the Treasury Management and Prudential Codes with a view to updating these documents later in the year. Changes in financial reporting, on IFRS 16 (leasing) and IFRS 9 (Financial Instruments) are also on the way. In anticipation of these changes, now is a good time to take stock of current arrangements and improve, or reinforce member engagement and understanding in this important area.
Peter Worth is a director at Worth Technical Accounting Solutions.
