Agenda item

The Director of Corporate Services presented the report.  In accordance with the Chartered Institute of Public Finance and Accountancy (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 the content of these reports was used as a basis for this report to the Committee.

Economic Overview

Treasury management activity was taken within the context of prevailing and forecasted economic conditions. The first half of the year saw the continuation of high levels of inflation. As measured by the CPI, inflation was 10.1% in March 2023. Although the rates had fallen during the year to a level of 6.7% in September this was still above the Bank of England Monetary Policy Committee (MPC) target for inflation of 2%. In addition to high inflation there continued to be strong wage growth. As a consequence, the MPC raised the Base rate several times in the year. The rate on the 1 April was 4.25% which had increased to 5.25% in August.

Many economic forecasters considered that interest rates had reached a peak with the economy showing signs of low growth and the potential of a recession increasing. However, despite this and the Bank of England's expectation that inflation would continue to fall during the year it was not anticipated that there would be a fall in the Base rates in this financial year with the Bank stating that "we will keep interest rates high enough for long enough to ensure that we achieve our goal" (of meeting its 2% target).

A table in the report, now considered by Members showed the latest forecast for interest rates from Arlingclose.

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 three loans.

It was not anticipated that the new capital expenditure would be funded from borrowing in the year while it was anticipated that there would 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 had been borrowed from the Public Works Loan Board. A table in the report showed the maturity profile of the Authority's borrowings, along with an interest rate paid.

If the loans were to be repaid early there would be an early repayment (premium) charge.  Previous reports on treasury management activities had reported that the premium and the potential loss of investment income had been greater than the savings made on the interest payments therefore it had not been considered financially beneficial to repay the loans especially with the potential for increased interest rates. However, on 30 September 2023 the estimated premium charge to repay the three loans was minimal although rates and the premium changed on a daily basis. To offset the net savings on repaying the loans it was estimated that future interest on investments over the remaining period of the loans would need to be 4.5%. If it was estimated that investment interest rates would be lower than this figure, then it may be beneficial to repay the loans.

Investments

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 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 surplus balances were placed with the County Council via this arrangement. At 30^th September there was a balance of £24.970m invested in LCC while the average for the period was £20.080m. The current rate for these investments was 5.25% in line with the increase in the Base Rate in August 2023. At the beginning of the financial year the rate was 4.25%.

In order to increase the rate earned on current balances, the Authority had placed fixed term investments with other local authorities. To attract a higher rate of interest than was available on the call account these investments would 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 £15m fixed term investment in place, therefore the total investment held at 30 September was £39.970m.

The overall rate of interest earned during this period was 4.06% which was less favourable when compared with the benchmark 7-day index which averaged 4.73% over the same period.

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

Members noted that there had been a further three fixed term investments taken out with other Local Authorities during the period which only started later in the financial year as follows: -

Current interest rates available for lending to other Local Authorities were: -

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. The indicators for 2023/24 were approved by the Authority on 20 February 2023 which were detailed in the report alongside the current actual.

Revenue Budget Implications

The 2022/23 revenue budget for treasury management activity showed that anticipated income exceeded expenditure by £105k. 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 below:

The interest receivable was above budget as the balances and interest rates were higher than anticipated when setting the budget. The forecast assumed interest rates on the call account averaged 5.25% for the remainder of the financial year.

Further to a comment from CC O’Toole regarding the difficulties to accurately forecast interest rates, Cllr Baker requested information which set out the Authority’s level of investment and borrowing for the previous five years.  The Director of Corporate Services agreed that this would be included in the next Treasury Management report.

Resolved: that the Committee noted and endorsed the report.