Are you holding too much cash? Amar Jandoo

Local authorities often find themselves sitting on piles of cash for a number of reasons. Typically, it comes down to ‘slippage’ in the capital programme, whereby an authority borrows for a particular project, which is then delayed or does not come into fruition as soon as the authority had hoped or planned for.

This funding then needs a home, so officers are challenged with selecting an appropriate counterparty. Given the uncertainty of cashflows, many authorities choose to keep this liquid, either in Money Market Funds or short-term deposits with banks or local authority peers. Of course, this problem has been exacerbated by the COVID-19 pandemic and the increased volatility and uncertainty in cash flows.

This will be very familiar to most authorities, so why are we talking about it now?

The elephant in the room is that the likelihood of more widespread negative interest rates may not be as slim as we think. Interest rates in money markets are already slipping below 0% for central government debt and the Bank of England has not ruled out negative rates in the future.

While authorities seeking a safe haven for short dated cash can do little to change the rates they receive, they can revisit the way they manage liquidity and their level of investment balances:

Investment Strategy - Are your short-term investment balances excessive? Will you be forced to reinvest at negative rates?

Borrowing Strategy – Is your capital programme realistic? Are you sitting on too much fixed rate debt? Can you reduce your debt? Can you reduce investment balances by managing debt in a more flexible way?

The truth is the current pandemic adds significant uncertainty to the above questions. However, there are methods to manage debt, surplus cash, and liquidity in order to avoid receiving less back than you originally invested. Examples include: calculating a more realistic estimate of the core funding requirement, having access to lines of credit (such as overdrafts, revolving credit facilities, short-term local authority funding and variable rate funding), holding longer-term strategic investments or debt repayment and the use of derivatives.