Is Cash the Best Place?

If you had $24,898,443 in cash,  other than spend some, what would you do with it? Chances are you’d not keep it all in cash, but that is what the City of Bayswater has to do. Or does it?

I was interested to read in yesterday’s paper that the City of Subiaco has purchased a $14.5 million industrial property in Kewdale to “subsidise rates and “provide for the long term future of the community””. I’m not sure how Subiaco have managed to abide by the legislation, but I congratulate them on their move.

The City of Bayswater carries a lot of cash. Page 121 of the last Community, Technical, Finance and Corporate Services meeting (19 June 2018) lists $76,357,631. After deducting Aged Care which is really a separate entity and ideally wouldn’t be listed here, there is $46,812,344 remaining. This cash is spread across numerous term deposits earning between circa 2.47% and 2.75%.

Some of this cash may be spent in the next year or two, other amounts won’t for many years. And regardless of when it is spent, there will always be a constant flow of funds coming in and out, and a constant cumulative balance of many millions.

Section 6.14(1) of the Local Government Act ’95 states a local government can invest funds in accordance with Part III of the Trustees Act 1962. That’s all very good and s19(1)(b) of the Trustee Act imposes a “duty to invest trust funds in investments that are not speculative or hazardous” and s20 states trustees must consider things such as diversification, risk of capital or income loss, timing etc.

However section 19C(2) of the Local Government (Financial Management) Regulations 1996 imposes the following restrictions which negate any investment flexibility in the Trustee Act:

This is interpreted as being that a local government can only “invest” money with an authorised deposit taking institution. Ergo, other than government issued bonds, a local government can only use cash or term deposits. And those term deposits can’t be for longer than 12 months.

Yes, I get that we don’t want local governments becoming investment vehicles. And I definitely get that we don’t want local governments to lose ratepayers funds. But surely we want to have the ability to earn more than the cash rate. Surely the City should have the right to, say, purchase a commercial property in Morley with an eye to provide either an income stream or a financial capital gain.

Of the $46,812,344 in cash, $24,679,865 are in reserves for future projects and liabilities.  The City of Subiaco’s new property purchase is on a running yield of 7%; that’s 4.5% more than a 2.5% term deposit, and on $24,679,865 it equates to an extra $1,110,594 – or 2.5% of the rates.

I believe the current review of the Local Government Act should also review section 19C(2) of the Local Government (Financial Management) Regulations 1996.

Power to the People

(Please be aware that these views are my own and have not been endorsed by the City of Bayswater)

3 thoughts on “Is Cash the Best Place?

  1. Kewdale was a good passive investment.
    Long lease to listed engineering company.
    These are good investments for LGA’s, provided council employs the correct people for the job and keeps ANY politics out of it.

    I would agree to development and speculation provided a good return was achieved at the end. Notably, long leased to solid tenancies.

    1. Hi Mike, thanks for your comments. I agree that politics would need to be left out of it; the big risk would be for a LG to buy a property within their boundary and succumb to community pressure to lease it to, say, a community group at less than market rent. If it’s an investment, then it must be commercially driven.

  2. My suggestion is that Council repairs all its pot hours, round abouts, broken curbing and clean up its verges and street signs half of which you cannot read or are not at all there. Only suggestions !

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