Agenda item

The Director of Corporate Services / Treasurer advised that the following 4 items on the agenda were linked, with changes in one impacting on the others: i) the Treasury Management Strategy set out investment, borrowing, repayment and how money was set aside to repay borrowing, ii) the Reserves and Balances Policy set out savings and how they were planned to be used over the next 5 years; iii) the Capital Strategy and Budget set out major expenditure for investment within the Service and iv) the Revenue Budget was for the day to day running of the Service.

 

The Director of Corporate Services / Treasurer presented the report that set out the Treasury Management Policy and Strategy for 2023/24.

 

Treasury Management Strategy for 2023/24

 

The Strategy Statement had been prepared in accordance with the CIPFA Treasury Management Code of Practice.  Accordingly, the Lancashire Combined Fire Authority's Treasury Management Strategy would be approved by the full Authority, and there would also be a mid-year and a year-end outturn report presented to the Resources Committee. In addition, there would be monitoring and review reports to Members in the event of any changes to Treasury Management policies or practices.  The aim of these reporting arrangements was to ensure that those with ultimate responsibility for the treasury management function appreciated fully the implications of treasury management policies and activities, and that those implementing policies and executing transactions had properly fulfilled their responsibilities with regard to delegation and reporting.

 

The Authority had adopted reporting arrangements in accordance with the requirements of the Code as set out in the report.

 

The Treasury Management Strategy covered the following aspects of the Treasury Management function: -

 

•        Prudential Indicators which would provide a controlling framework for the capital expenditure and treasury management activities of the Authority;

•        Current Long-term debt and investments;

•        Prospects for interest rates;

•        The Borrowing Strategy;

•        The Investment Strategy;

•        Policy on borrowing in advance of need.

 

Setting the Treasury Management Strategy for 2023/24

 

In setting the treasury management strategy the: economic position and forecasts, interest rate forecasts, the current structure of the investment and debt portfolio and the future capital programme and underlying cash forecasts were considered.

 

Economic background

 

Key factors to consider when assessing the impact on the Strategy were the expectation for economic growth, inflation and the possible impact on interest rates.  CPI inflation was expected to have peaked in the last calendar quarter of 2022 and then fall from early in 2023 partly as a result of previous increases in energy prices dropped out of the annual comparison. The Bank of England forecast that inflation would fall sharply and be below the 2% target, in two years’ time and to fall further below the target in three years’ time.

 

Arlingclose Forecast

 

The Bank of England increased Bank Rate by 0.5% to 3.5% in December 2022.  This followed a 0.75% rise in November which was the largest single rate hike since 1989 and the ninth successive rise since December 2021.

 

The Authority’s treasury management adviser Arlingclose in its latest forecast estimated that Bank Rate would continue to rise in 2023 as the Bank of England attempted to subdue inflation which was significantly above its 2% target.  The expectation was that there would be further interest rate rises over the forecast horizon despite looming recession.  Bank Rate was forecast to rise to 4.25% by June 2023.  (Subsequent to the forecast being produced the base rate was increased to 4% in February 2023.) 

 

Details of the latest forecast interest rates were shown in the report. 

 

Current Treasury Portfolio Position

 

At the 31 December 2022 the debt and investments balances were: -

 

Debt	Principal £m	%
Fixed rate loans from the Public Works Loan Board	2.000	100
Variable rate loans		-
	2.000	100
Investments
Variable rate investments with Lancashire County Council	20.730	58
Fixed rate investments	15.000	42
	35.730	100

 

The level of investment represented the Authority’s cumulative surplus on the General Fund, the balances on other cash-backed earmarked reserves and a cash-flow balance generated by a surplus of creditors over debtors and by grant receipts in advance of payments. There was a net investment figure of £34m.

 

Borrowing and Investment Requirement

 

In the medium term the Authority borrowed for capital purposes only. 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 CFR forecast included the impact of the latest forecast of the funding of the Capital Programme which currently assumed there would be no borrowing until 2026/27.  A voluntary MRP was made in 2019/20 to take the future loans element of the MRP to nil.

 

CIPFA’s Prudential Code for Capital Finance in Local Authorities recommended that the Authority’s total debt should be lower than its highest forecast CFR over the next three years. However, the table in the report showed that the level of loans was above the CFR at 31/3/22. 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.   The table indicated that rather than having a need for borrowing it was estimated that the Authority had an underlying need to invest although the available balances were forecast to reduce.

 

Although the Authority did not have plans for new borrowing until 2026/27 it currently held £2.0m of loans as part of its strategy for funding previous years' capital programmes.

 

Liability Benchmark

 

The liability benchmark was an indicator required by the CIPFA Code. It looked to compare the Authority’s actual borrowing requirements against an alternative strategy, a liability benchmark, which showed the minimum level of borrowing. This assumed the same forecasts as in the table in the previous section of the report, but that cash and investment balances were kept to a minimum level of £10m at each year-end to maintain sufficient liquidity but minimised credit risk. In addition, it reflected the latest Capital Programme information which showed a borrowing requirement in 2026/27 and 2027/28.  

The benchmark showed that from 2026/27 there was likely to be a long-term requirement to borrow but that this did not necessarily have to be at the level of the loans CFR, which represented the maximum borrowing. The borrowing requirement was also reducing over time which may influence the length and type of borrowing to be taken.

 

Borrowing Strategy

 

The draft Capital Programme implied there may be a requirement to use borrowing to fund the capital programme in the later years. At this stage it was extremely unlikely that borrowing would be required in 2023/24. However, it was still best practice to approve a borrowing strategy and a policy on borrowing in advance of need.  In considering a borrowing strategy the Authority needed to make provision to borrow short term to cover unexpected cash flow shortages or to cover any change in the financing of its Capital Programme.

 

The approved sources of long-term and short-term borrowing were: Public Works Loan Board, UK local authorities, any institution approved for investments, any other bank or building society authorised by the Prudential Regulation Authority to operate in the UK and UK public and private sector pension funds.

 

Policy on Borrowing in Advance of Need

 

In line with the prudential Code, the Authority would not borrow purely in order to profit from the investment of the extra sums borrowed. However advance borrowing may be taken if it was considered that current rates were more favourable than future rates and that this advantage outweighed the cost of carrying advance borrowing. Any decision to borrow in advance would be considered carefully to ensure value for money could be demonstrated and that the Authority could ensure the security of such funds and relationships.

 

Debt Restructuring

 

The Authority’s debt had arisen as a result of prior years' capital investment decisions. It had not taken any new borrowing out since 2007 as it has been utilising cash balances to pay off debt as it matured, or when deemed appropriate with the Authority making early payment of debt. The anticipated holding of debt at 31 March 2023 was £2.0m. All the debt was from the Public Works Loans Board (PWLB) and was all at fixed rates of interest and was repayable on maturity. This debt was taken out in 2007 when the base rate was 5.75% and when the Authority was earning 5.84% return on its investments.  Given the change in interest rates, the opportunities for debt repayment/restructuring had again been reviewed.

 

The level of penalty applicable on early repayment of loans now stood at £0.199m.  Outstanding interest payable between now and maturity was £1.228m. 

 

Any early repayment meant that cash balances available for investment would be reduced and hence interest receivable would also be reduced. The extent of which was dependent upon future interest rates. It was estimated that if interest rates on investments were at 3.43% over the remaining period of the loan, then repaying the loans now would be broadly neutral.  It was also noted that the capital budget allowed for additional borrowing within the next 5 years. Current borrowing rates were 4.85% for a 2—year loan and 4.46% for a 50-year loan, both of which exceed the breakeven position noted above. Hence given the penalties it was considered beneficial to retain these loans.

 

Investment Strategy

 

At 31 December 2022 the Authority held £35.7m invested funds, representing income received in advance of expenditure plus existing balances and reserves.  During the year the Authority’s investment balance had ranged between £26.7m and £46.9m. The variation arose principally due to the timing of the receipt of government grants. It was anticipated that would be reduced cash levels in the forthcoming year, due to a drawdown in reserves to finance capital expenditure.

 

Both the CIPFA Code and government 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 receiving unsuitably low investment income.  Therefore, in line with the guidance the Treasury Management Strategy was developed to ensure the Fire Authority would only use very high-quality counterparties for investments.

 

The Authority may invest its surplus funds with any of the counterparties as set out in the report.

 

Whilst the investment strategy had been amended to allow greater flexibility with investments, any decision as to whether to utilise this facility would be made based on an assessment of risk and reward undertaken jointly between the Director of Corporate Services and LCC Treasury Management Team, and consideration of this formed part of the ongoing meetings that took place throughout the year.

 

The Authority currently had access to a call (instant access) account with a local authority, which paid bank base rate, this was currently 3.5%. Each working day the balance on the Authority's current account was invested to ensure that the interest received on surplus balances was maximised. 

 

In addition, longer term loans had been placed with UK local authorities to enhance the interest earned, the Authority currently held £15m of investments with other local authorities, as set out in the report.

 

Consideration was given to fixing further investments if the maturity fit with estimated cash flows and the rate was considered to be attractive. This would continue to be reviewed.

 

The overall combined amount of interest earned on Fixed/Call balances as at 31 December 2022 was £0.5m on an average balance of £37m at an annualised rate of 1.91%. This compared favourably with the benchmark 7?day LIBID rate which averaged a yield of 1.81% over the same period.  In addition, the Authority used NatWest for its operational banking.   Balances retained in NatWest were very low, usually less than £5,000.  However, if required monies were retained at NatWest this would be in addition to the limits set out.

 

Minimum Revenue Provision (MRP)

 

Under Local Authority Accounting arrangements, the Authority was required to set aside a sum of money each year to reduce the overall level of debt. This sum was known as the minimum revenue provision (MRP).

 

The Authority assessed their MRP for 2023/24 in accordance with guidance issued by the Secretary of State under section 21(1A) of the Local Government Act 2003.  

 

The Authority made a voluntary MRP in 2019/20 and it was anticipated that the MRP on loans would be nil in 2023/24; this would be the case until capital expenditure was financed by borrowing.

 

Whilst the Authority had no unsupported borrowing, nor had any plans to take out any unsupported borrowing in 2023/24 it was prudent to approve a policy relating to the MRP that would apply if circumstances changed. As such in accordance with guidelines, the MRP on any future unsupported borrowing would be calculated using the Asset Life Method. This would be based on a straightforward straight – line calculation to set an equal charge to revenue over the estimated life of the asset. Estimated life periods would be determined under delegated powers.  However, the Authority reserved the right to determine useful life periods and prudent MRP in exceptional circumstances where the recommendations of the guidance would not be appropriate. 

 

Assets held under PFI contracts and finance leases formed part of the Balance Sheet. This had increased the overall capital financing requirement and resulted in an MRP charge being required.  The government guidance permitted a prudent MRP to equate to the amount charged to revenue under the contract to repay the liability. In terms of the PFI schemes this charge formed part of the payment due to the PFI contractor.

 

Revenue Budget

 

The capital financing budget currently showed that income received exceeded expenditure. This excluded the PFI and Finance lease payments, which were included in other budgets. Based on the Strategy outlined above then the proposed budget for capital financing was:

 

	2022/23	2023/24	2024/25	2025/26
	£m	£m	£m	£m
Interest payable	0.090	0.090	0.090	0.090
MRP	0.010	-	-	-
Interest receivable	(0.770)	(1.300)	(1.000)	(0.650)
Net budget	(0.680)	(1.210)	(0.910)	(0.560)

 

Prudential Indicators for 2022/23 to 2025/26 in respect of the Combined Fire Authority's Treasury Management Activities

 

In accordance with its statutory duty and with the requirements of the Prudential Code for Capital Finance and the CIPFA Code for Treasury Management, the Combined Fire Authority produced each year a set of prudential indicators which regulated and controlled its treasury management activities.

 

The table in the report set out the debt and investment-related indicators which provided the framework for the Authority’s proposed borrowing and lending activities over the coming three years.  These indicators would also be approved by Members as part of the Capital Programme approval process along with other capital expenditure-related indicators but needed to be reaffirmed and approved as part of this Treasury Management Strategy.

 

It was noted that contained within the external debt limits, there were allowances for outstanding liabilities in respect of the PFI schemes and leases. However, accounting standards were likely to change in relation to recording leases. In effect, more leases were likely to be included on the balance sheet and therefore would be included against the other long-term liabilities’ indicators. At this stage work was ongoing to quantify the impact of the change and therefore the other long-term liabilities limits may be subject to change.

 

Resolved:That the Authority:

 

i)       Approved the revised Treasury Management Strategy, including the Prudential Indicators as now presented;

ii)      Agreed the Minimum Revenue Provision calculation as now presented; and,

iii)    Agreed the Treasury Management Policy Statement, as now presented.