Agenda item

The report set out the Authority’s borrowing and lending activities during 2020/21. All borrowing and investment activities undertaken throughout the year were in accordance with the Treasury Management Strategy 2020/21.

Economic Overview

The coronavirus pandemic dominated 2020/21.  The start of the financial year saw lockdowns which caused economic activity to grind to a halt in many countries including the UK. The Bank of England cut Bank Rate from 0.75% to 0.10% in March 2020 and it remained at this level throughout the 2020/21 financial year. The UK government also provided a range of fiscal stimulus measures, the size of which had not been seen in peacetime.  GDP figures for the financial year were detailed in the report.  In its March 2021 interest rate announcement, the Bank of England noted that while GDP would remain low in the near-term due to Covid-19 lockdown restrictions, the easing of these measures meant growth was expected to recover strongly later in the year.  The UK government's response included the furlough scheme which had protected many jobs. Despite this unemployment still rose. Labour market data showed that in the three months to January 2021 the unemployment rate was 5.0%, in contrast to 3.9% recorded for the same period 12 months ago.

The year also saw an agreement on a Brexit trade deal.

Inflation remained low over the 12-month period. Latest figures showed the annual headline rate of UK Consumer Price Inflation (CPI) fell to 0.4% year/year in February, below expectations (0.8%) and still well below the Bank of England’s 2% target. A similar economic picture had occurred in various economies. The gilt yields (which were a key determinant of borrowing costs for local authorities) fluctuated in line with the economic conditions.

Borrowing

The borrowing of the Fire Authority had remained unchanged at £2m in 2020/21. The current capital programme had no requirement to be financed from borrowing until 2025/26 and the debt related to earlier years' capital programmes.  While the borrowing was above its Capital Financing Requirement (CFR), the underlying need to borrow for capital purposes, this was because the Fire Authority had a policy of 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.  Consideration had been given to repaying the £2m but the penalties incurred on repaying the loans early would incur significant costs currently estimated at £0.967m.  Also, any early repayment meant that cash balances available for investment would be reduced and hence interest receivable would also be reduced.  It was estimated that if interest rates on investments were at 1.4% over the remaining period of the loan, then repaying the loans during 2020/21 would be broadly neutral.  It was concluded that the repayment was not considered to be financially beneficial at the time. However, the situation was periodically reviewed by the Director of Corporate Services. 

Investments

Both the Chartered Institute of Public Finance and Accountancy (CIPFA) Code and the  Ministry of Housing, Communities and Local Government (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. 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 (LCC) (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 permit investment with other high-quality counterparties including other local authorities. During the year the cash held by the Authority had been positive with the highest balance being £52.1m and the lowest £34.0m. The monies invested with Lancashire County Council ranged between £34.2m to £14.0m.  Therefore, given that the expectation was that interest rates would remain low the opportunity was taken to undertake some fixed term investments with other local authorities rather than keeping all the monies in the call account. This aimed to enhance the investment return while keeping the credit risk low.  At the year-end, fixed investments of £15m were in place.  However, during the year one fixed term investment had matured.

The table on page 15 of the agenda pack showed the interest earned on fixed term investments.  Investing in these fixed term deposits, rather than leaving the money in the call account had increased the interest received in 2020/21, although having fixed term deals did reduce the liquidity of the investments. 

The call account provided by LCC paid the base rate throughout 2020/21.  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.  The average balance in this account during the year was £24.7m earning interest of £0.025m.

The overall interest earned during this period was £0.253m at a rate of 0.60% which compared favourably with the benchmark 7-day index (Sterling Overnight rate 7 day rate) which averaged 0.17% over the same period.

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

Cash flow and interest rates continued to be monitored by the Director of Corporate Services and the County Council's treasury management team, and when rates were felt to be at appropriate levels further term deposits would be placed.

County Councillor O’Toole stated that the Authority was in a very fortunate position in relation to its level of reserves.  The Authority’s borrowing as set out on page 15 of the agenda pack was at an average interest rate of 4.49% with the return on investments between 1.15% to 1.45%.  County Councillor O’Toole proposed that a report be brought to a future meeting for consideration as to whether it was sensible to continue to pay the interest on the Authority’s borrowing; this proposal was seconded by Councillor Williams.

Prudential Indicators

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 2020/21 were presented alongside the actual outturn position.

RESOLVED: - That the Committee: i) noted and endorsed the outturn position report; and, ii) agreed that a report would be brought to a future meeting on whether repayment of the Authority’s borrowing would be financially beneficial.