Investments

What are Investments?

Investments are a common area of confusion for local councils. Part of this derives from the imprecise use of the term 'investment' with some Councils using this interchangeably with the term 'reserves'.

It is also unhelpful that some funds held by the Council, such as in bank accounts, are recorded as part of Box 8 Cash and Bank on the Accounting Statements, and other funds held, such as with the CCLA Property fund, are recorded as Fixed Assets in Box 9. The classification of these items into Box 8 or Box 9, which is set out in The Practitioners Guide, does not follow the same logic as the specific guidance on Investments (see below), which applies a different logic.

Guidance

The key guidance on investments is The Statutory Guidance on Local Government Investments (3rd Edition). This guidance states "The definition of an investment covers all of the financial assets of a local authority..".

The Statutory Guidance therefore has one distinct advantage compared to the accounting treatment as it considers all of the Councils funds to be included within the definition of an investment. It should be noted that the guidance also specifically includes 'investment property' within its definition of investments. In practice all of a Councils assets, other than operational property and equipment, fall under the statutory definition of'Investments'.

Scope of the Guidance

The guidance covers all local authorities, including town and parish councils, and it is mandatory for all Councils with investments exceeding £100,000. The previous guidance set the limit much higher, at £500,000, so the practical effect of the 2018 guidance was that it brought a larger number of local councils within the scope of the guidance than previously.

Requirements of the Guidance

Investment Strategy

It is a requirement of the guidance that, each financial year, an authority must prepare an Investment Strategy which must be subject to approval by Full Council. If the strategy is to be subject to 'material change' during the year this must also be subject to approval by Full Council.

The Investment Strategy should be publicly available on the Councils website.

Security, Liquidity and Yield (SLY)

The guidance sets out, very clearly, that a prudent investment strategy has two underlying objectives. These are Security and Liquidity. Security means protecting the investment from loss, Liquidity means ensuring that the funds are available if and when required.

The third element, which should only follow when the first two elements have been considered and addressed , is Yield.

Treasury and Non Treasury Investments

The guide distinguishes between Treasury and non Treasury Investments. Treasury investments are those related to managing the Councils day to day cash flows. For these investments the SLY principles above should be followed. For non-treasury investments the guide states that "local authorities should consider the balance between security, liquidity and yield based on their risk appetite. "

It is important that Councils clearly distinguish between investments that they are holding for treasury management purposes and other investments as the principles governing these investments differ.

Investments and Capital Receipts

An important consideration of a Councils investment strategy is the potential restrictions imposed by the Capital Finance Regulations 2003 which, in simple terms, limit what the income from the sale of investments can be used for.

Capital receipts are normally restricted to either the funding of new capital expenditure or for the repayment of debts and may, generally, not be used to pay for the day to day running costs of a Council.

There are limited dispensations in place, for example to the CCLA property fund, but income from the sale investments held may well become restricted in how they may be used. The Regulations clearly state under regulation 25 (d) that the purchase of any shares will be capital expenditure and therefore the income from their sale will be a capital receipt.

Councils should take particular care that they do not lock up significant amounts in restricted Capital Receipts which they cannot use other than for capital purposes.