Agenda item

In accordance with the CIPFA Treasury Management Code of Practice and to strengthen Members’ oversight of the Authority’s treasury management activities, the Resources Committee received a treasury management 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 were used as a basis for this report to the Committee.

Economic Overview

The economic situation continued to be dominated by the uncertainty arising from the unknown impact of the UK's withdrawal from the European Union and the trade dispute between the worlds' two largest economies namely the USA and China. Despite this, the first quarter of 2019 showed relatively strong growth of 0.5% (1.8% year on year). However, it was considered that this was partly due to stockpiling ahead of the expected date for leaving the European Union and was followed by a contraction of 0.2% in the second quarter.

Outlook for Interest Rates

Arlinglose, Lancashire County Council's treasury advisers, were forecasting no change in the Bank Rate for the foreseeable future. However, there were risks to this forecast which could see rates moving in either direction. 

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 in the report as now considered, this showed that the Authority had a net borrowing requirement of £197k, which was below its actual borrowing of £2.0m, and reflected the additional voluntary MRP contributions that the Authority had made in order to generate cash to repay loans either on maturity or as an early repayment.  Members considered the proposed further voluntary MRP contribution of £187k, in addition to the planned £10k which would reduce the borrowing requirement to zero, fully providing for existing loan repayment or to offset future loan drawdowns.  (It was noted that the Authority was not anticipating in year capital expenditure being funded from borrowing, but this depended on the agreed 5 year programme currently being developed and some borrowing may be required in future years).  In terms of investments it was anticipated that there may be some reduction in the level of reserves held, dependent upon the level of in-year capital expenditure which, given slippage in the programme this looked less likely at the present time.

Borrowing

There had been no new borrowing in the first six months of the financial year. This was consistent with the position that the current borrowing was already above the CFR and that the capital programme did not include any expenditure to be financed from borrowing.

The long term debt outstanding of £2m was from the Public Works Loan Board. 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 is still considered to be the case with the estimated premium charge to repay the three loans being £1.074m.

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 interest was received on surplus balances within an acceptable risk framework. During the period all new investments were placed with the County Council via this arrangement. At 30^th September there was a balance of £33.670m invested in LCC while the average for the period was £21.663m.

In addition, in order to increase the rate earned on current balances, the Authority had placed fixed investments with other local authorities. To attract a higher rate of interest than was available on the call account these investments needed to be fixed for a longer period of time. The report identified the investments that had been in place during the year.  At 30 September there was £10m fixed term investment in place therefore the total investment held at 30 September was £43.670m. The overall the rate of interest earned during the period was 0.96% which compared favourably with the benchmark 7 day index which averaged 0.69% over the same period.  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 18 February 2019 the Authority approved the indicators for 2019/20 which were detailed in the report alongside the current actual.

Revenue Budget Implications

The 2019/20 revenue budget for treasury management activity showed that anticipated income exceeded expenditure by £0.252m. Taking into account the activity for the first six months of the year and estimated cash-flow for the remainder of the year the latest forecast was considered:

The variation on the MRP reflected the additional contribution proposed whilst interest receivable was slightly below budget as the anticipated increase in the interest rates in the last quarter of the financial year looked unlikely.

Regulatory Updates

A key source for long term borrowing was the PWLB. The PWLB lending was offered at a fixed rate above the gilt yields. For most authorities that qualified for the certainty rate, including the Lancashire Combined Fire Authority, this rate was 0.8%.  In recent months gilt yields and therefore loan rates had fallen to record low levels and as a result local authority borrowing from the PWLB had risen. In response to this HM Treasury announced on the 9^th October that it was increasing the margin above gilts by 1%. Therefore for an authority which qualified for the certainty rate then the interest rate on any new PWLB loan was 1.8% above the gilt yield rather than 0.8%. 

This change did not have an immediate impact for the Authority as it was not seeking new loans. However, should the capital financing position change then consideration would have to be given as to whether there were suitable alternatives to PWLB financing.

RESOLVED: That the report be noted and endorsed and that an additional MRP contribution of £187k was agreed.