The Director of Finance will submit Document “AN” which reports on the Council’s Treasury Management Strategy, Minimum Revenue Provision Policy and Annual Investment Strategy for 2019-20.

Recommended-

That the details in the report be noted and Document “AN” be referred to the 19 March 2019 Council meeting for adoption.

                                                (David Willis/Lynsey Simenton – 01274 432361)

The Director of Finance submitted Document “AN” which reported on the Council’s Treasury Management Strategy, Minimum Revenue Provision Policy and Annual Investment Strategy for 2019-20.

It was reported that the Treasury Management Strategy for 2019-20 covered two main areas:

Capital Issues –

·         The capital expenditure plans and the associated prudential indicators

·         The minimum revenue provision (MRP) policy.

Treasury Management Issues –

·         The current treasury position

·         Treasury indicators which limited the treasury risk and activities of the Council

·         Prospects for interest rates

·         The borrowing strategy

·         Policy on borrowing in advance of need

·         Debt rescheduling

·         The investment strategy

·         Creditworthiness policy; and

·         The policy on use of external service providers

Members were informed that the above elements covered the requirements of the Local Government Act 2003, the CIPFA Prudential Code, Ministry for Housing, Communities and Local Government (MHCLG) MRP Guidance, the CIPFA Treasury Management Code and MHCLG Investment Guide.

It was highlighted that Members of the Committee were provided with training in line with the CIPFA Code which required the Section 151 officer to ensure that members with responsibility for treasury management received adequate training in treasury management. The Council’s Treasury Management Adviser, Link Asset Services provided training to Members of the Committee earlier today.

Members were informed that the table at 2.1 of the report summarised the capital expenditure plans and how they were financed either by capital or revenue resources.  Any shortfall of resources resulted in a funding borrowing need.

It was reported that the capital expenditure plans set out in Section 2 provided details of the service activity of the Council. The treasury management function ensured that the Council’s cash was organised in accordance with the relevant professional codes, so that sufficient cash was available to meet this service activity and the Council’s capital expenditure plans. This would involve both the organisation of the cash flow and, where capital plans require, the organisation of appropriate borrowing facilities. This strategy covered the relevant treasury/prudential indicators, the current and projected debt positions and the annual investment strategy.

The overall treasury management portfolio for borrowing and investments as at 31 March 2018 and 31January 2019 was shown in paragraph 3.1.

Members were informed that within the range of prudential indicators there were a number of key indicators to ensure that the Council operated its activities within well-defined limits.  One of these was that the Council needed to ensure that its gross debt did not, except in the short term, exceed the total of the CFR (Capital Financing Requirement) in the preceding year plus the estimates of the following two financial years.  This allowed some flexibility for limited early borrowing for future years, but ensured that borrowing was not undertaken for revenue or speculative purposes.      

It was reported that the Council complied with this prudential indicator in the current year and did not envisage difficulties for the future.  This view took into account current commitments, existing plans, and the proposals in the budget report. 

Members were informed that the Council was currently maintaining an under-borrowed position.  This meant that the capital borrowing need (the Capital Financing Requirement), had not been fully funded with loan debt as cash supporting the Council’s reserves, balances and cash flow had been used as a temporary measure. This strategy was prudent as investment returns were low and counterparty risk was still an issue that needed to be considered.

It was reported that the Council’s cash balances were expected to reduce since there was a future draw on cash from the Capital Investment Plan. There would be a requirement to borrow in 2019-20. Cash balances and capital spend would be closely monitored and projected forward. As it was felt that cash balances were getting too low or likely to be too low in the future, borrowing would be undertaken in appropriate tranches. In deciding the appropriate tranches of borrowing, caution would be exercised in projecting forward capital spend.

Members were informed that the Director of Finance would monitor interest rates in financial markets and adopt a pragmatic approach to changing circumstances:

·         If it was felt that there was a significant risk of a sharp fall in long and short term rates, then long term borrowings would be postponed, and potential rescheduling from fixed rate funding into short term borrowing would be considered.

·         If it was felt that there was a significant risk of a much sharper rise in long and short term rates than that currently forecasted, perhaps arising from an acceleration in the start date and in the rate of increase in central rates in the USA and UK, an increase in world economic activity or a sudden increase in inflation risks, then the portfolio position would be re-appraised. Most likely, fixed rate funding would be drawn whilst interest rates were lower than they were projected to be in the next few years.

It was reported that any decisions made in relation to the above would be reported to the appropriate decision making body at the next available opportunity.

Members were informed that as short-term borrowing rates would be considerably cheaper than longer term fixed interest rates, there may be potential opportunities to generate savings by switching from long-term debt to short-term debt.  However, these savings would need to be considered in the light of the current treasury position and the size of the cost of debt repayment (premiums incurred).

Members were informed that Legislative change had been put in place by the government aimed at strengthening the financial system. One of these reforms was to separate the retail banking (ringfenced bank) from the investing banking (unringfenced bank) All the four major banks had to go through this process.

It was reported that the schools balances would be in the retail or ringfenced part of the bank for Lloyds, Nat West and HSBC but not for Barclays.

This raised the following issues:

·         The credit rating for the Barclays unringfenced part of the bank was slightly lower than for the ring fenced bank.

·         If the credit rating was to reduce in the future it could be below the Council’s credit limit.

Members were informed that further school conversions to Academies on an on going basis was expected and for cash balances held by schools in their bank accounts to steadily reduce as a result. Once converted to academies their bank balances no longer counted towards the Council Treasury limits.

It was reported that given the above changes in status for the schools and the reduction in school balances, it was proposed that the schools continue to have a temporary exemption from the Treasury Policy until the main conversion process had been finished. The Council would inform the schools of the developments in regards to Barclays.

In response to a Member’s question as to why revenue was being used to finance capital spend it was reported that £1.2m would be used in this way in 2018-19.  This was based on a set of criteria and was a very small element of the revenue budget. Also this avoided generating a borrowing need.

In response to a Member’s question in relation to the flexibility to use capital receipts for transformation projects it was reported that the Authority already used its capital receipts to fund capital budgets; if the authority used capital receipts to fund the revenue budget, it would instead borrow more and incur higher interest costs to the capital budget; using capital receipts flexibly to fund revenue also required the criteria to be met that spend was on one-off projects.

There was a short discussion on the principal risks associated with treasury management and the mitigation of those risks as detailed at section 7.1 of the report. It was emphasised that it was crucial that security of an investment was the top priority when considering risk and return around investments.  

Resolved-

That the details in the report be noted and Document “AN” be referred to the 19 March 2019 Council meeting for adoption.

Action:           Director of Finance