Agenda item

The report set out the Treasury Management Strategy for 2017/18, which was in line with the Chartered Institute of Public Finance and Accountancy (CIPFA)'s revised Code of Practice and tied into the capital and revenue budgets, reported elsewhere on the agenda.

 

Statutory requirements 

The Local Government Act 2003 and supporting Regulations required the Authority to “have regard to” the CIPFA Prudential Code and the CIPFA Treasury Management Code of Practice to set Prudential and Treasury Indicators for the next three years to ensure that the Authority’s capital investment plans were affordable, prudent and sustainable.  This report fulfilled the Authority's legal obligation under the Local Government Act 2003 to have regard to both the CIPFA Code and the Communities and Local Government (CLG) Guidance.

 

Treasury Management Strategy for 2017/18

The Strategy Statement had been prepared in accordance with the CIPFA Treasury Management Code of Practice (2011).  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 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 2017/18

In setting the Treasury Management Strategy, the following factors had been considered as they might have a strong influence over the strategy adopted: economic forecasts, the level of the approved Capital Programme which generated the borrowing requirement; the current structure of the Authority’s debt portfolio and prospects for interest rates and market liquidity.

 

Economic Context

The major external influence on the Authority’s treasury management strategy for 2017/18 would be the UK’s progress in negotiating a smooth exit from the European Union. Financial markets, wrong-footed by the referendum outcome, had since been weighed down by uncertainty over whether leaving the Union also meant leaving the single market. In January The Prime Minister made a speech indicating that Brexit meant an exit from the Single Market and the Customs Union however the government would seek a trade deal with the EU for the greatest possible access with full reciprocity.  Negotiations were expected to start once the UK formally triggers exit in early 2017 and last for at least two years. Uncertainty over future economic prospects would therefore remain throughout 2017/18.

 

Interest Rate Forecasts

The prevailing and forecast interest rate situation would be monitored to ensure that opportunities for debt restructuring were maximised.  Regular forecasts of interest rates were provided by Arlingclose Ltd, treasury management advisers to Lancashire County Council.  At this stage they did not see any increase in the base rate before December 2019.  The latest forecast was considered by Members. 

 

Current Treasury Portfolio Position

At 31 December 2016 the debt outstanding was £5.514m with investments of £42.205m.  The level of investments 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 £36.7m.

 

Borrowing Requirement and Strategy

CIPFA’s Prudential Code for Capital Finance in Local Authorities permitted authorities to borrow for capital purposes. Although the Authority did not have plans for new borrowing it did currently hold £5.514m of loans as part of its strategy for funding previous years' capital programmes.

 

The Authority’s underlying need to borrow for capital purposes was measured by the Capital Financing Requirement (CFR). 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 Authority had adopted 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 effect of this policy was that the current level of loans outstanding exceeded the CFR, with the surplus cash forming part of the investment portfolio. This could be expressed as a negative borrowing requirement in year with the cash being available for an early repayment if it was seen advantageous.

 

Borrowing Strategy

Although it was unlikely that borrowing would be required in 2017/18 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.

 

Therefore 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;

•          UK public and private sector pension funds. 

 

In the past the Authority had raised all of its long-term borrowing from the Public Works Loan Board, but it continued to investigate other sources of finance, such as local authority loans, the Municipal Bond Agency set up recently by the Local Government Association and bank loans, that may be available at more favourable rates.

 

Policy on Borrowing in Advance of Need

In line with the existing policy the Authority would not borrow more than or in advance of need purely in order to profit from the investment of the extra sums borrowed. However advance borrowing might 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

Although the Authority did not need to borrow for new capital expenditure it did have £5m of existing debt as a result of prior years' capital investment. As part of the Strategy adopted in 2014/15 additional MRP payments had been made which would enable loans to be repaid on maturity without the need to replace them or if advantageous to repay loans early.

 

As part of the Treasury Management function the Director of Corporate Services, in combination with the County Council's treasury management team, reviewed the policy put in place in 2014/15 and the opportunities to repay debt early.

 

A reworking of the debt restructuring exercise in February 2017 indicated that the cost of repaying the loans in the year would be in the region of £1.6m. This would result in lower interest payments over the period of the loans of £2.7m a net gain over the period of the loans of £1.1m. However, paying the loans early would result in a loss of investment income. Once this was taken into consideration then it was estimated that the repayment of the loans would cost rather than save the Authority money. Whilst there was no guarantee of future interest rates on investments and hence the extent of lost investment income it was recommended that debt restructuring was not undertaken at the current time. The situation would be reviewed again as part of the mid-year update.

 

Investment Strategy

At 31 December 2016 the Authority held £32.2m invested funds, representing income received in advance of expenditure plus existing balances and reserves.  In the past 12 months, the Authority’s investment balance had ranged between £41.2m and £22.8m. The variation arose principally due to the timing of the receipt of government grants. It was anticipated that similar levels would be maintained in the forthcoming year.

 

Both the CIPFA Code and the CLG 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 outlined in the report, subject to the cash and time limits identified. 

 

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 on-going meetings that took place throughout the year.

 

Currently all of the Authority's investments were with other local authorities.

 

The Authority currently had access to a call (instant access) account with a local authority, which paid bank rate, which was currently 0.25%. 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 two long term loans had been placed with UK local authorities as outlined in the report.

 

The overall combined amount of interest earned on Fixed/Call balances as at 31st December 2016 was £0.285m on an average balance of £42.632m at an annualised rate of 0.74%. This compared favourably with the benchmark 7 day LIBID which averaged 0.24% over the same period, and was 0.49% above the current bank rate.

 

Specified and Non-specified investments

The legislative and regulatory background to treasury management activities required the Authority to set out its use of “specified” and “non-specified” investments. 

 

Specified Investments as defined by the CLG Guidance was those:-

 

•              denominated in pound sterling;

•              due to be repaid within 12 months of arrangement;

•             not defined as capital expenditure by legislation, and invested with one of:

•     the UK Government;

•     a UK local authority, parish council or community council, or;

•     a body or investment scheme of “high credit quality”.

 

Any investment not meeting the definition of a specified investment was classed as non-specified.  The Authority did not intend to make any investments denominated in foreign currencies, nor any that were defined as capital expenditure by legislation, such as company shares.  Non-specified investments would therefore be limited to long-term investments, i.e. those that were due to mature 12 months or longer from the date of arrangement, and investments with bodies and schemes not meeting the definition on high credit quality.

 

The Authority may lend or invest money using any of the following instruments:-

 

•        interest-bearing bank accounts;

•        fixed term deposits and loans;

•        callable deposits where the Authority may demand repayment at any time (with or without notice);

•        certificates of deposit;

•        bonds, notes, bills, commercial paper and other marketable instruments, and

 

Investments may be made at either a fixed rate of interest, or at a variable rate linked to a market interest rate, such as LIBOR, subject to the limits on interest rate exposures.

 

The Authority prepared daily cash flow forecasts to determine the maximum period for which funds might prudently be committed.  The forecast was compiled on a pessimistic basis, with receipts under-estimated and payments over-estimated to minimise the risk of the Authority being forced to borrow on unfavourable terms to meet its financial commitments. Limits on long-term investments were set by reference to the Authority’s medium term financial plan and cash flow forecast.

 

Minimum Revenue Provision (MRP)

The Authority implemented the new Minimum Revenue Provision (MRP) guidance in 2008/09and would assess their MRP for 2017/18 in accordance with the main recommendations contained within the guidance issued by the Secretary of State under section 21(1A) of the Local Government Act 2003.  

 

It was proposed to continue to utilise the Capital Financing Requirement (CFR) Method. This provided for a charge of 4% of the value of fixed assets, as measured on the balance sheet, for which financing provision had not already been made.  It was currently estimated that this had a nil value for capital expenditure financed by borrowing.

 

In addition the Authority had previously agreed additional voluntary MRP contributions in order to reduce current and future borrowing requirements and to provide scope to pay off debt as it matured. This was still considered a prudent approach.

 

Whilst the Authority had no unsupported borrowing, nor had any plans to take out any unsupported borrowing it needed to approve a policy relating to the MRP that would apply if this were not the case. As such in accordance with the Local Government Act 2003, 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. To the extent that expenditure was not on the creation of an asset and was of a type that was subject to estimated life periods that were referred to in the guidance, these periods would generally be adopted by the Authority.  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. 

 

As some types of capital expenditure incurred by the Authority were not capable of being related to an individual asset, asset lives would be assessed on a basis which most reasonably reflected the anticipated period of benefit that arose from the expenditure.  Also, whatever type of expenditure was involved, it would be grouped together in a manner which reflected the nature of the main component of expenditure and would only be divided up in cases where there were two or more major components with substantially different useful economic lives.

 

Assets held under a PFI contracts and finance leases formed part of the Balance Sheet. This had increased the overall capital financing requirement and on a 4% basis the potential charge to revenue. To prevent the increase the 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.

 

Prudential Indicators for 2016/17 to 2019/20 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 regulate and control its treasury management activities.

 

RESOLVED:- That the Authority:-

 

i)    Approve the revised Treasury Management Strategy, including the Prudential Indicators, as set out in the report now presented.

ii)   Agree the Minimum Revenue Provision calculation as set out in the report now presented.

iii)  Agree the Treasury Management Policy Statement as presented.