Agenda item

The report set out the Authority's borrowing and lending activities during 2018/19, which were in line with decisions taken in accordance with the Treasury Management Strategy 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 Authority's Director of Corporate Services and the content of these reports was used as a basis for this report to the Committee.

Economic Overview

During the period, economic growth had continued to be positive, albeit at historically low levels and unemployment was low with the Bank of England projecting that it would fall a little further.  At the same time inflation had remained above the Bank of England’s 2% target rate.  In august the Consumer Price Inflation (CPI) index rose to 2.7%.  As a consequence of these economic factors, in August the Bank of England’s Monetary Policy Committee (MPC) voted unanimously to increase Bank Rate by 0.25% from 0.5% to 0.75%.

Internationally, the US economy had continued to grow and at their meeting in September the central bank increased interest rates for the third time in 2018. In Europe the level of growth had moderated after a period of strong growth. 

There was still a lot of uncertainty over the economy much of it arising from political factors. Domestically, the progress and unknown impact of the UK's withdrawal from the European Union continued to dampen investment. On the world economy the period had seen an increase in the potential for a trade war between the USA and China.

Outlook for Interest Rates

The Bank of England had raised expectations of gradual increases in interest rates and the increase in August was part of this. It was expected that this trend would continue. This was reflected in the County Council's Treasury advisers Arlingclose forecast for interest rates. Their central forecast saw a further 0.25% increase in March and September 2019 which would take the bank rate to 1.25%. They anticipated the rate would then stay constant up to September 2021 which was the end of the forecast period. However, with the current economic data and the risks in the economy they considered there were also downside risks to the forecast.  Key rates were forecast for the period Q4 2018 – Q4 2021 as now considered by Members.

Treasury Management position and Policy

The underlying need to borrow for capital purposes was measured by the Capital Financing Requirement (CFR), while usable reserves and working capital were the underlying resources available for investment. The treasury management activity was influenced both by the position at the beginning of the year and the plans in year. The position at the start of the financial year was summarised as detailed below:

The table showed that the level of loans was above the CFR at 31.3.18. This was the result of the Authority adopting a policy of setting aside additional Minimum Revenue Provision (MRP) in order to generate the cash to repay loans either on maturity or as an early repayment.

It was not anticipated that the new capital expenditure would be funded from borrowing in the year while it was anticipated that there might be some reduction in the level of reserves held.

Borrowing

There had been no new borrowing undertaken in the first six months of the financial year. This was consistent with the position that the current borrowing was above the CFR and there were no plans that required the need to borrow.

All the Fire Authority’s existing borrowing was from the Public Works Loan Board.  The long term debt outstanding at the beginning of the year was £2m which had remained unchanged up to 30^th September.  The report detailed the maturity profile of the Authority’s borrowings along with an interest rate paid.  Consideration was given to the early repayment of the loans; however these would be subject to an early repayment (premium) charge.  The Authority did repay debt in 2017/18 but at the time it was considered that the premium on these loans was such that it was not financially beneficial to repay the loans.  This was still considered to be the case with the estimated premium charge to repay the 3 loans being £0.855m.

Investments

Both the CIPFA Code and the MHCLG 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. The Authority’s objective when investing money was to strike an appropriate balance between risk and return, minimising the risk of incurring losses from defaults and the risk of receiving low investment returns and having the value of reserves eroded by inflation.

The Authority principally invested in a call account provided by Lancashire County Council which paid the base rate. Each working day the balance on the Authority's Current Account was invested in this to ensure that the interest received on surplus balances was maximised. During the period any new investments were placed with the County Council via this arrangement. At 30th September there was a balance of £37.970m with the average balance invested in LCC for the period was £32.202m.

In addition the Authority still had a long term investment that had been placed with UK local authority as outlined below. 

Therefore the total investment held at 30 September was £42.970m.

The overall rate of interest earned during this period was 0.84% which compared favourably with the benchmark 7 day index which averaged 0.56% over the same period. In order to increase the rate earned on current balances, the Authority would need to place fixed investments for a longer period of time.  Members considered a forecast cash flow for the year which showed that further sums could be placed on fixed term investments However, to obtain a better interest rate return than the call account would involve fixing investment for at least 3 months.  The possibility for longer term investments was kept under constant review and suitable opportunities would be taken.  Therefore, to increase yield while maintaining security the following fixed rate deals with other local authorities had been arranged:

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

Prudential Indicators

In order to control and monitor the Authority’s treasury management functions a number of prudential indicators were determined against which performance may be measured.  At its meeting on 19 February 2018 the Authority approved the indicators for 2018/19 which were detailed in the report alongside the current actual.

Regulatory Updates

CIPFA had introduced updated versions of the Prudential and Treasury Management Codes. In addition the MHCLG had re-written its Investment Guidance, in which the definition of investments was further broadened to also include all such assets held partially for financial return. This would cover loans to employees. It was noted that the Authority would need to produce a Capital Strategy and an Investment Strategy.  

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