Tuesday 28 August 2007

Councils across NSW have risked millions in ratepayer funds because of a State Government loophole that allows investments in bank issued securities regardless of their credit rating, said Shadow Minister for Finance, Mike Baird.

“A review of council portfolios across NSW has revealed councils are investing in lower-tier bank issued securities that are rated BBB- when other types of investments are restricted to a minimum A rating,” said Mr Baird.

“A BBB- rated investment is more than ten times likely to default over a year than those rated AA. In corporate terms, a BBB- is just above junk-bond status.

“Councils are taking these risks because the Iemma Government’s Ministerial Investment Order allows investment in any form of bank issued security regardless of its rating.”

Mr Baird said Burwood, Manly, Tenterfield, Wingecarribee and Woollahra councils were found to have money tied up in subordinated securities in regional banks with lower credit ratings.

“It’s likely most councils would not be aware they are purchasing something that changes in value day to day – they’re not just making a deposit. When you’re talking about ratepayers’ money, it’s a risk that’s probably not worth taking.

“What adds to the concern is that the Investment Order fails to specify a limit to the length of the investment. Clearly the risk of default for a lower-rated investment increases with the tenure. Some councils have money invested for terms in excess of thirty years.”

Mr Baird recommended the following changes to the Ministerial Investment Order:

-         Introduce a diversification principle that limits investments to no more than 20% of council portfolios

-         Ensure the minimum credit rating also applies to banks, building societies and credit unions, and consider increasing the lowest credit rating from A- to AA-

-         Limit the tenure of investments to 10 years

-         Limit councils to take no more than 10% of any single bond or security issue

-         Ensure council investments are approved/monitored by a central panel of experts.

“Unfortunately councils are increasing risks to ratepayer funds because they’re not getting clear direction from the current guidelines. The Government must fix this immediately and not wait for another review.”

MEDIA: Lisa Harrington - 0406 726 880

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