Following Cambridge City Council’s October 2008 announcement which revealed it had £9m invested in Icelandic banks which it might have lost the council’s investments have been the focus of a lot of attention from councillors, the press and the public. I have attended some of the recent meetings where the situation has been discussed. I am reporting and commenting on what has been said in this article.
Cambridge City Council’s Strategy and Resources Scrutiny committee meeting on Monday 17th November discussed the Council’s treasury management and investment strategy. The item started with the chair reporting that a member of the public, Dr Charney, who had raised this at an Area Committee had submitted a question to the committee, though he could not attend to put it in person. He was asking why the council had invested in Iceland. Cllr Nimmo-Smith committed to send a written reply to Dr Charney.
David Horspool, the City Council’s Director of Finance gave the committee an update. He said that to-date only one investment had reached its maturity date and not been repaid. The nine million at risk, is broken down as follows, the dates given are the maturity dates on which the Council would have expected the funds returned:
|Heritable Bank Ltd||£1,000,000||9 Oct. 2008|
|Heritable Bank Ltd||£1,000,000||22 Dec. 2008|
|Landsbanki Islands hf||£2,000,000||6 Jan. 2009|
|Heritable Bank Ltd||£2,000,000||5 Mar. 2009|
|Landsbanki Islands hf||£1,000,000||24 Apr. 2009|
|Landsbanki Islands hf||£2,000,000||22 May 2009|
Cllr Herbert questioned why the council had put £9m in what was, he said, effectively one institution. The council’s head of finance put responsibility for this decision squarely back with councillors saying that they had approved the list of institutions. He also explained why he considered the banks independent, as one was regulated by the Icelandic authorities and the other by the UK. He did accept that groupings of banks were now something which had to be given greater consideration, and he noted that at the moment these were changing rapidly.
The council’s head of finance explained why he was recommending the council did not invest in Irish Banks. He said he did: “not regard Ireland’s guarantee as copper bottomed”. (The Irish Government had recently defied other EU members and had gone it alone in underwriting all bank deposits in Ireland, raising questions as to if the Irish state could afford to take such action).
The question of if we are not investing new money in Irish Banks, why do we still have money there was raised, the officer reassured councillors that this was a sensible stance.
Cllr Herbert asked if there had been a “heard mentality” with respect to local authorities investing in Iceland. Officers responded saying no, standard good practice had been followed. On being asked if we were simply chasing the highest rates officers again said no.
Councillor Bick asked if it would be sensible to reduce the duration for which deposits were made. (Presumably he was considering how to increase the council’s flexibility). Officers told the committee that cash flow needs drove the investment periods, and that most investments were made for a period of 12 months, in effect officers said these were all short term investments.
Cllr Dryden asked how much the liquidators (Ernst and Young) were costing the council. I thought this was shocking, clearly liquidators/administrators take their fees from the assets of the institution they have taken on. Officers explained to Cllr Dryden that administrators taking fees in this way was a “standard part of the process in the UK”, and “we don’t pay money to administrators”. I am quite surprised that this exchange made the official minutes, as quite often when councillors make rather odd contributions to meetings such as this they are quietly ignored.
Cllr Dryden was not the only councillor to show a lack of understanding of the situation. Cllr Shah asked why the Cambridge City Council didn’t itself take money from those local authorities looking to invest. He didn’t appear to be aware that the council is significantly in credit and doesn’t need to borrow money. Initially Cllr Shah’s question was ignored by officers, but he persisted and while officers didn’t explain to Cllr Shah that the council did not need to borrow money, they did surprisingly say that a reverse situation exists – Cambridge City Council does lend money to Thurrock and Plymouth councils.
Councillors asked why few institutions which would be recognised by members of the public as high street banks were included on the council’s new list of institutions in which it was prepared to invest the city’s money. Officers explained that the council was investing sums of money which were too small for many banks to be interested in, “too small” refers to the individual tranches of one or two million, not the whole eighty million pot.
Cllr Taylor asked if it would be possible for Local Authorities to get together, using the Local Government Association to pool their money, so that they can broaden the range of financial institutions which they can invest in.
Officers said this was unlikely to be straightforward, due to the differing cash flow requirements of different authorities. Officers suggested that time periods had to be very specific, making money available on particular dates, councillors noted that the fact many investments were for “round” periods such as one or two years (rather than one year, three months and four days) appeared to contradict the officer.
There appears to me to be an opportunity there for someone to create an IT system capable of matching local authorities with other local authorities with compatible investment aims.
There was also a discussion of the City’s Icelandic Investments at the Full Council meeting on the 4th of December 2008.
Cllr Nimmo-Smith spoke to the same report as had been presented to the previous Strategy and Resources Scrutiny Committee he started by saying:
- One investment for £1 million was overdue.
- The council had stopped receiving interest on all its £9 million invested in Iceland.
Cllrs Herbert and Nimmo-Smith repeated the gist of their exchange on if the Icelandic banks in which Cambridge has money invested were one or two institutions. Cllr Herbert described the idea that the two banks were separate institutions as “soft soap”. A question from the member of the public, “Dr Charney” was put to the leader, apparently he had asked why the council had put all this money in a country with an economy the size of Brighton’s.
Cllr Herbert apologised for making a flippant, party political point, before pointing out that the Liberal Democrat’s parliamentary front bench had been saying they knew in August 2008 of the potential problems in the Icelandic banking sector. The question was, if this was true, did they not let the Cambridge Liberal Democrats know?
A popular question from councillors was: “what did the council need £80m for”, a few councillors said they were being asked this question by constituents and wanted to be able to provide an answer.
Cllr Dryden asked at the full council meeting, why given the £80m reserves his constituents were fundraising to raise money for CCTV coverage of Cherry Hinton High Street, they had raised a significant amount of money themselves and were only looking for £3K from the council. It was hard to explain why this could not be found when the council had £80 million in the bank.
Cllr Nimmo-Smith repeatedly suggested councillors, and others who were interested, should look at a document which lists each of the individual amounts deposited, along with the institution name, period of the investment and a description of what the money is intended for (a description he described as being informative in most cases). I have not been able to find such a document on the council’s website and have asked Cllr Nimmo-Smith to point me in the right direction.
Cllr Hipkin said it was: “all too easy to be wise after the event”, he said that Cambridge City Council was fortunate, subject to what subsequently might come out, to have such high quality finance staff. Speaking more generally he said that at this time we ought to be allowing the reserves to run down because we don’t want to see services cut.
Cllr Walker suggested the council consider availing themselves of the services of the CCLA, their website says they “Provide investment and property fund management services to The Church of England, eligible charities in England and Wales and local authorities.” Cllr Walker said that they managed £4-5 billion for charities and local authorities and had not invested in Iceland.
Councillors also suggested now would be a good time for the council to be spending, for example on property, others suggested the reserves ought be invested in the city in other ways. One councillor, Cllr Wright I believe, questioned if the council was being run as a business, and amassing “profit” in the form of reserves was seen as a good thing to those adopting a business mindset. She drew attention to the fact the council was not a business.
Cllr Wright had recently been to Iceland and had participated in a protest (Cllr Nimmo-Smith said she’d join any protest going). She reported that the UK Government’s decision to freeze Icelandic assets in the UK using what have been described as “anti-terror” laws has not gone down well at all in Iceland. She said there were posters up saying “Brown, Darling – Your credit is not welcome here”, a slogan she could not explain. While she had not rescued any of the City’s money, she offered councillors “a few notes as souvenirs”. She noted that Iceland was determined to keep its social security and health services working despite the collapse of the economy, and implicitly drew parallels with what might be facing us here in the UK. Clearly in times of recession it is more important than ever that that the NHS, social security and other key services function as a safety net. Cllr Wright also told the meeting she had read in Private Eye almost a year before the city’s money in Iceland was frozen that saving in Iceland was risky. The leader of the council, Ian Nimmo-Smith suggested to Cllr Wright that she ought to have passed her copy of Private Eye to the council’s director of finance at the time, he said he didn’t think they subscribed.
Cllr Nimmo-Smith concluded the debate, going back to the question of if the Icelandic banks were independent, he repeated that for the council’s purposes they were considered separate, due to the fact they operated under different regulatory regimes. He said he recognised that groupings of banks had become a more important factor.
He also wanted to return to the questions about the size of the reserves. He gave the example of buying new refuse vehicles, or renovating a building as one of the reasons for having reserves. He said that the medium term strategy document made sense, and set out the reasons for the various reserves, though he said that while it makes sense, “it is perhaps not intended for sitting down and having a chat over in the cafes of Cherry Hinton”, referring to Cllr Dryden and his request for something he could pass back to his constituents. Cllr Nimmo-Smith’s comment provoked lots of reaction, (from sedentary positions), in the chamber.
He ended with a comment about this having been the latest chapter in the “saga”, to groans from his fellow councillors.
25 Liberal Democrats voted to accept the Treasury Management and Investment Strategy and the recommendations contained within it, other councillors present abstained.
While Cllr Nimmo-Smith has not yet sent me a link to the list of the council’s investments, I have complied the below breakdown based on the notes to the City Council’s Accounts. The figures are for March 2008.
|Reserve||March 2008 Value||Purpose|
|Collection Fund Surplus||£34,000.00||Holds Council’s share of the Collection Fund balance, this is council tax and rates money yet to be distributed to central government and others such as the police and fire authorities and the county council.|
|Capital Receipts deferred||£179,000.00||Holds balance of capital receipts due to the Council in instalments|
|Capital Receipts||£21,750,000.00||Proceeds of fixed asset sales available to meet future capital investment.|
|Pensions Reserve||£26,287,000.00||Pensions Liability Balance|
|Earmarked Reserves||£13,218,000.00||Asset Repair and Renewal. For
replacement of assets such as vehicles, plant and equipment and for major repairs to council owned premises.
|Earmarked Reserves||£ –||Major Repairs Reserve. For major repairs to Council houses.|
|Earmarked Reserves||£460,000.00||Insurance Fund. Cover for potential losses where it is judged more cost efficient to self-insure rather than take out external insurance with a third party.|
|Earmarked Reserves||£ –||Efficiency Fund|
|Earmarked Reserves||£558,000.00||Technology Investment Fund. To contributre to investment in Information Technology systems and infrastructure.|
|Earmarked Reserves||£300,000.00||Shared Ownership Reserve. To fund the council buying back equity in shared ownership houses.|
|Earmarked Reserves||£887,000.00||Commutation Adjustment. The Commutation Adjustment Reserve is available to assist the financing of any amount required to be set aside from revenue for debt repayment.|
|Earmarked Reserves||£46,000.00||Local Plan Review Reserve. Potential costs of public enquiries into the Local Plan.|
|Earmarked Reserves||£569,000.00||Compulsory Purchase Order Compensation Reserve. Held to meet compensation following the compulsory purchase by the Council of domestic properties in order to bring them back into use.|
|Earmarked Reserves||£38,000.00||Major Planning Appeals Reserve. Held against the possibility of major planning appeals in the City.|
|Earmarked Reserves||£337,000.00||Revenue Contributions to Capital Reserve. Contributions to capital expenditure which have been agreed but not yet spent.|
|Earmarked Reserves||£1,424,000.00||Other Reserves|
|General Fund Itemised||£52,000.00||Toilets|
|General Fund Itemised||£2,005,000.00||Arbury Park|
|General Fund Itemised||£ –||Refuse Collection Vehicles|
|General Fund Itemised||£170,000.00||Cycleways|
|General Fund Itemised||£2,306,000.00||Grafton East Car Park|
|General Fund Itemised||£81,000.00||Customer Access Strategy Accommodation
|General Fund Itemised||£61,000.00||Disabled Facilities Grants|
|General Fund Itemised||£97,000.00||Housing Works|
|General Fund Itemised||£89,000.00||Customer Access IT|
|General Fund Itemised||£122,000.00||Other works|
|General Fund Itemised||£1,354,000.00||Affordable Homes|
|General Fund Non-Itemised||£7,280,000.00|
|Housing Revenue Account Itemised||£1,776,000.00||Decent Homes Capital Programme|
|Housing Revenue Account Itemised||£199,000.00||Disabled Adaptions|
|Housing Revenue Account Itemised||£172,000.00||Talbot House Refurbishment|
|Housing Revenue Account Itemised||£620,000.00||Mansel Court Refurbishment|
|Housing Revenue Account Itemised||£ –||Other Works|
|Housing Revenue Account Non-Itemised||£ 3,824,000.00|
The above approximately balances with the below summary of the Council’s “Current Assets”.
|£358,000.00||Stocks and Work in Progress|
|£336,000.00||Cash in Hand and at Bank|
Hopefully that gives some sense of why the council is holding these reserves. There appear to be significant sums, in the General Reserve and in the Housing Revenue Account which are not linked to specific planned spending.
It is excellent that the council is not in debt, and we in the City of Cambridge benefit from the interest earnt on these investments. I do question why our local council has ammassed quite so much of a cash reserve and would like to see more of it employed, within the city, for the benefit of city residents.