New rule to safeguard council funds

ST Dec 2, 2007
By Tan Hui Yee & Mavis Toh

TOWN councils tempted to play the stock market to increase the returns on their sinking funds will now have to meet a new rule that caps how much they can put into higher-risk investments.
Councils, which have had some leeway when investing their cash, must limit their investments in non-government stocks, funds or securities to 35 per cent of the sinking fund.

This new rule, which kicked in yesterday, applies to more than $1 billion in sinking funds managed by the 16 town councils in Singapore.

The money is collected through monthly service and conservancy charges and government grants and is used for cyclical repairs, such as re-painting or re-roofing.

The Ministry of National Development brought the rule in to strike a balance between councils trying to get good returns on their funds and not taking undue risks with residents' money.
Some council cash has been going into shares and corporate bonds, which are considered riskier than government ones.

The president of the Society of Financial Service Professionals Leong Sze Hian said: 'Corporate bonds are only as good as the company can pay. The risk of a company running out of money is higher than that of the Government.'

Before the new rule, council investments were governed by the Trustees Act, which placed restrictions on some instruments. The new 35 per cent cap is seen as stricter, but no council contacted by The Sunday Times said it would have trouble complying.

The Hong Kah Town Council has about $150 million in its sinking fund, with one-third invested in government bonds returning 2 to 3 per cent. Another third is in short-term fixed deposits with returns of 1.5 to 3 per cent, with the rest handled by fund managers.

The investments can include corporate bonds and stocks, which are riskier. But this portion, handled by fund managers, nets about 8 to 10 per cent in returns a year, said council chairman Ang Mong Seng.

Sinking funds are typically parked in safe investment instruments, such as government bonds and fixed deposits. But a few years ago, many councils felt that they could do better by investing in other instruments, such as shares.

Many then let fund managers invest a bigger portion of their cash and reap better returns.
In light of the recent turmoil in the financial markets, many back the new cap, stressing that their primary goal is to preserve their capital, rather than maximise returns.

Dr Teo Ho Pin, who heads the Holland-Bukit Panjang Town Council and is also the coordinating chairman of the People's Action Party town councils, said: 'Some town councils may have to make some adjustments with this rule.' This includes his council.

The chairman of the Government Parliamentary Committee on National Development and the Environment Charles Chong said that councils have been given five years to bring their investment levels under the cap. This will allow existing debt instruments to mature and reap returns.

But he cautioned town councils against becoming too conservative with their investments: 'Our inflation rate is going up and estimated to hit 5 per cent. If we're getting a yield of 2 or 3 per cent, we are really eroding the value of our reserves.'

tanhy@sph.com.sg
mavistoh@sph.com.sg