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 recovery from the coronavirus pandemic continued to dominate the first half of the financial year both in the UK and many other parts of the world. However, in its September 2021 policy announcement, the Bank of England (BoE) noted it now expected the UK economy to grow at a slower pace than was predicted in August, as the pace of the global recovery had shown signs of slowing and there were concerns inflationary pressures may be more persistent. Bank expectations for GDP growth for the third (calendar) quarter were revised down to 2.1% (from 2.9%), in part reflecting tighter supply conditions.

The BoE held Bank Rate at 0.1% and maintained its Quantitative Easing programme at £895 billion throughout the first half of the year. However, there were some concerns around inflation with the CPI inflation now expected to rise slightly above 4% in the last three months of 2021, due to higher energy prices and core goods inflation. Therefore, although policy rates had remained unchanged there was a greater expectation that rates may increase in late 2021 or early 2022.

An increase in gas prices in the UK and EU, supply shortages and a dearth of HGV and lorry drivers with companies willing to pay more to secure their services, had caused problems for a range of industries and, in some instance, will likely lead to higher prices.

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 indicating that the level of loans was above the borrowing requirement. 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. This had resulted in the CFR being reduced but due to early repayment charges it had not been financially beneficial to repay the existing loans.

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

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. The maturity profile of the Authority's borrowings, along with the interest rate paid was summarised in the report.  It was noted that consideration had been given to the early repayment of the loans. However, these would be subject to an early repayment (premium) charge. It was not considered to be financially beneficial to repay the loans with the estimated premium charge to repay the three loans being £1.180m.

Whilst there was no need to borrow at the present time it was worth highlighting that a key source for long term borrowing was the PWLB. The PWLB lending was offered at a fixed rate of 1% above the gilt yields. For most authorities which qualify for the certainty rate, including the Lancashire Combined Fire Authority, this meant a 0.2% reduction on these standard rates so equated to 0.80% above the gilt yields.

Current PWLB maturity loan rates were at extremely low levels of 1.81% for 10 years, 2.19% for 25 years and 2.06% for 40 years.

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 £31.900m invested in LCC while the average for the period was £26.115m.

In addition, in order to increase the rate earned on current balances, the authority have placed fixed investments with other local authorities. To attract a higher rate of interest than is available on the call account these investments will need 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 £41.900m. The overall the rate of interest earned during this period was 0.51% which compared favourably with the benchmark 7 day index which averaged 0.14% 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 22 February 2021 the Authority approved the indicators for 2021/22 which were detailed in the report alongside the current actual.

Revenue Budget Implications

The 2021/22 revenue budget for treasury management activity showed that anticipated income exceeded expenditure by £36k. 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 as shown below:

The interest receivable was above budget as the balances were slightly higher than anticipated when setting the budget. The forecast assumed interest rates remained constant for the remainder of the financial year.

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