Agenda item

The report set out the Authority's borrowing and lending activities during 2017/18, which were in line with decisions taken in accordance with the Treasury Management Strategy and were based on anticipated spending and interest rates prevailing at the time.

In accordance with the updated CIPFA Treasury Management Code of Practice (2011) and to strengthen Members’ oversight of the Authority’s treasury management activities, the Resources Committee received regular updates on treasury management issues including a 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

The key economic messages in the period were the increasing inflation, falling unemployment but reductions in the real wages. The Consumer Price Inflation (CPI) index rose in August to 2.9%, its highest since June 2013. This increase was largely due to the fall in the value of sterling following the June 2016 referendum which had led to higher import prices.  The new inflation measure CPIH, which included owner occupiers’ housing costs, was at 2.7%.

The Bank of England made no change to monetary policy at its meetings in the first half of the financial year. The vote to keep Bank Rate at 0.25% narrowed to 5-3 in June highlighting that some MPC members were more concerned about rising inflation than the risks to growth. Although at September’s meeting the Committee voted 7-2 in favour of keeping Bank Rate unchanged, the MPC changed their rhetoric, implying a rise in Bank Rate in "the coming months". Subsequently at the MPC meeting of the 2^nd November the base rate was increased to 0.5%.

In the face of a struggling economy and Brexit-related uncertainty, Arlingclose expected the Bank of England to take only a very measured approach to any monetary policy tightening, any increase would be gradual and limited as the interest rate backdrop would have to provide substantial support to the UK economy through the Brexit transition.

Interest Rate Environment

Short term interest rates continued at the very low levels with the Bank of England maintaining the base rate to 0.25% throughout the first half of the financial year.  However as noted above the base rate was increased to 0.5% in November.

Outlook for Interest Rates

Treasury Consultants Arlingclose Ltd forecast for interest rates issued in November took into account the increase in November. They stated that "The MPC had increased Bank Rate, largely to meet expectations they themselves created. Future expectations for higher short term interest rates were subdued. On-going decisions remained data dependant and negotiations on exiting the EU cast a shadow over monetary policy decisions. Our central case for Bank Rate was 0.5% over the medium term. The risks to the forecast were broadly balanced on both sides".

Borrowing

There had been no new borrowing undertaken in the first six months of the year. This was in line with the continuation of the policy of using cash balances to fund capital expenditure which had resulted in no new borrowing being undertaken since 2007.

All the Fire Authority’s existing borrowing was from the Public Works Loan Board.  The long term debt outstanding at the beginning of the year was £5.514m which had remained unchanged up to 30^th September.

However, the viability of repaying the PWLB loans was reviewed on a regular basis. As a result a report was submitted to the Resources Committee on 27 September which provided information on the impact of repaying the loans. As a result the Committee agreed to pay off all loans that matured in the next 10 years. Subsequently on 5 October loans of £3.184m were repaid which incurred a premium charge of £0.636m. Therefore the outstanding PWLB balance was reduced to £2.330m. Of this £0.330m was due to mature in December 2017 and was not repaid as PWLB do not normally accept repayments for loans with less than one year to maturity. Therefore the estimated balance at the end of the financial year was £2m.  

Investments

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 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 the interest received on surplus balances was maximised. During the period all new investments were placed with the County Council via this arrangement. At 30th September there was a balance of £41.081m with the average balance invested in LCC for the period was £33.951m.

In addition the Authority still had a long term investment that had been placed with UK local authority as outlined below.  Another £5m investment matured in July and had been repaid.

Therefore the total investment held at 30 September was £46.081m. As a result of the repayment of loans mentioned earlier the total level of investments reduced to £43.2m at 31^st October 2017.

The overall rate of interest earned during this period was 0.61% which compared favourably with the benchmark 7 day index which averaged 0.24% over the same period. In order to increase the rate earned on current balances, the Authority would need to place fixed investments for a longer period of time.  This would involve fixing investment for at least 6 months.  This position was kept under constant review and suitable opportunities would be taken.

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. The indicators for 2017/18 were approved by the Authority on 20^th February 2017.  An update on performance to date was provided to the meeting.

With the repayment of the PWLB loans the current maturity structure of the debt  was:

Under 12 months        14.2%

Over   10 years           85.8%

Although these were within the current Prudential Indicators once the maturing loan was repaid in December then 100% of the debt would be over 10 years. Therefore it was recommended that approval was given to increase the Prudential Indicator for the upper limit for debt in excess of 10 years to 100%.

Regulatory Updates

An update was provided on two relevant areas, namely moves towards the implementation of MiFID II and CIPFA consulting on changes to the Prudential and Treasury Management Codes.

CC O’Toole asked for an updated report on the debt restructuring to be presented at the next CFA December meeting.

RESOLVED: -That the Committee

(i)            Noted and endorsed the report and;

(ii)          Approved an amended Prudential Indicator to allow 100% debt to mature over 10 years.