Agenda item

The report set out the Authority’s borrowing and lending activities during 2017/18. 

All borrowing and investment activities undertaken throughout the year were in accordance with the Treasury Management Strategy 2017/18, and were based on anticipated spending and interest rates prevailing at the time. 

In accordance with the updated CIPFA Treasury Management code of practice and to strengthen Members’ oversight of the Authority’s treasury management activities, the Resources Committee received regular updates on treasury management issues including a mid-year report and a final outturn report. Reports on treasury activity were discussed on a quarterly basis with Lancashire County Council Treasury Management Team and the Director of Corporate Services and the content of these reports was used as a basis for this report to the Committee.

Economic Overview

The Director of Corporate Services confirmed that the UK economy showed signs of slowing economic growth with latest estimates showing GDP grew by 1.8% in calendar 2017, the same level as 2016.  Although this was a far better outcome than the majority of forecasts following the EU Referendum in June 2016, it reflected the impact of the international growth momentum generated by the increasingly buoyant US economy and the re-emergence of the Eurozone economies.

The year saw an increase in inflation with the Consumer Prices Index (CPI) rising to 3.1% in November partly due to the impact of the falling exchange rate before falling back to 2.7% in February 2018.  There was a weakness in UK business investment which was not helped by political uncertainty following the surprise General Election in June and by the lack of clarity on Brexit. Although the UK and the EU reached an agreement in March 2018 on a transition which would go up to Q4 2020 there was still significant uncertainty over the long term trade arrangements.

With concerns over inflation being above its target The Bank of England’s Monetary Policy Committee (MPC) increased the Bank Rate by 0.25% in November 2017. This was the first rate hike in ten years, although in essence the MPC reversed its August 2016 cut following the referendum result. The February Inflation Report indicated the MPC was keen to return inflation to the 2% target over a more conventional (18-24 months) horizon and indicated there would be ‘gradual’ and ‘limited’ increases in rates.

Credit background

The rules for UK banks’ ring-fencing were finalised by the Prudential Regulation Authority and banks began the complex implementation process ahead of the statutory deadline of 1st January 2019. Under these rules the largest UK banks would be required to separate their retail banking services to individuals and small businesses from their investment banking activities with the retail bank being referred to as the ring fenced bank.  As there was some uncertainty surrounding which banking entities the Authority would  be dealing with once ring-fencing was implemented and what the balance sheets of the ring-fenced and non ring-fenced entities would actually look like, in May 2017 Arlingclose advised adjusting downwards the maturity limit for unsecured investments to a maximum of 6 months.  The rating agencies had slightly varying views on the creditworthiness of the restructured entities.

Barclays was the first to complete its ring-fence restructure over the 2018 Easter weekend; wholesale deposits including local authority deposits will henceforth be accepted by Barclays Bank plc (branded Barclays International), which is the non-ring-fenced bank.

Credit Rating developments

The most significant change was the downgrade by Moody’s to the UK sovereign rating in September from Aa1 to Aa2 which resulted in subsequent downgrades to sub-sovereign entities including local authorities.

Interest Rate Environment

Short term interest rates continued to be at historically very low levels. 2017/18 saw the first increase in interest rates for a decade when in November the base rate was increased to 0.5% from 0.25%.  The expectation during the year was that interest rates would remain low for the rest of the financial year and beyond. It was anticipated that although rates may increase they would remain at low levels. Lancashire County Council's Treasury Management advisors, Arlingclose Treasury Consultants, were forecasting two small increases in 2018/19 with base rates being at 1% in March 2019.

Cash Flow

Cash flow predictions were made on a rolling basis in order to ensure that the Authority had sufficient funds to meet its day to day requirements and also inform investment and borrowing decisions.

The cash flow position, along with the interest rate environment, formed part of the regular discussions between the Director of Corporate Services and the Lancashire County Council Treasury Management Team, in order to inform future decisions on borrowing and investments.

Borrowing

All of the Fire Authority's debt was held with the Public Works Loans Board (PWLB). The Fire Authority had had a policy setting aside monies in the form of statutory and voluntary minimum revenue provision (MRP) in order to repay debt as it matured or to make an early repayment. Early repayments would be made only if it was deemed to be a financially prudent decision after taking into account the penalties incurred from an early repayment. In line with this policy £0.3m of debt was repaid on maturity and a further £3.2m of debt was repaid early following a report to the resources committee on the 27 September 2017. The early repayment of the loans incurred a penalty of £0.636m which was financed from the earmarked reserve. No new borrowing was undertaken in the year.  As at 31 March the Authority had £2.0m of outstanding borrowing.  Total interest paid was £0.2m which equated to an average interest rate of 4.5% which included the interest paid on the debt repaid during the year.  A further review of the remaining debt was undertaken February 2018.  At the time it was concluded that the penalty charge was too high to justify paying off the loan or restructuring it.  The position would continue to be reviewed.

Investments

Both the CIPFA Code and the DCLG Guidance required the Authority to invest its funds prudently, and to have regard to the security and liquidity of its investments before seeking the highest rate of return, or yield. Throughout the year when investing money the key aim was to strike an appropriate balance between risk and return.

In order to reduce credit risk to the Authority, Lancashire County Council (credit rating by Moodys Aa3) was the main counterparty for the Authority's investments via the operation of a call account. However the Treasury Management Strategy did include other high quality counterparties. In accordance with this policy, long term investments with other UK local authorities had been held. In July 2017 a 3 year investment matured while at year end a long-term investment of £5.0m was still held.  The call account provided by Lancashire County Council paid the base rate throughout 2017/18.  As at 31 March the Authority had £28.6m in the call account, with an average balance during the year of £34.2m earning interest of £0.1m.  The overall interest earned during this period was £0.2m at a rate of 0.61% which compared favourably with the benchmark 7 day notice index which averaged 0.35% over the same period.

All of the investments were made in accordance with the current Treasury Management Strategy and the CIPFA treasury management code of practice.

In order to control and monitor the Authority’s treasury management functions, a number of prudential indicators had been determined against which performance could be measured.  The revised indicators for 2017/18 were presented alongside the actual outturn position.

RESOLVED: - That the Committee noted and endorsed the outturn position report.