MIDDLESBROUGH COUNCIL
AGENDA ITEM 10
Annual Report on Treasury Management
Executive Member - Finance and Governance - Councillor Nicky Walker
Strategic Director – Finance, Governance & Support – James Bromiley
6 December 2016
PURPOSE OF THE REPORT
- To present to Members the Annual Report on Treasury Management.
SUMMARY OF RECOMMENDATIONS
- This report is for information only.
IF THIS IS A KEY DECISION WHICH KEY DECISION TEST APPLIES?
3. / It is over the financial threshold (£150,000)It has a significant impact on 2 or more wards
Non Key / X
DECISION IMPLEMENTATION DEADLINE
4. For the purposes of the scrutiny call in procedure this report is
Non-urgent / XUrgent report
If urgent please give full reasons
EXECUTIVE SUMMARY
5. The Treasury Management Code of Practice requires that an Annual Report is made to Members each year. This report contains details of the previous year’s activity, information on performance against agreed targets and an update on progress towards the current year’s Capital Financing programme.
PREVIOUS YEAR’S ACTIVITY (2015/16)
6. The previous year’s activity compared to the financial year 2014/15 is summarised as follows:
2014/15 / 2015/16 / ChangeTotal loans outstanding / 78.8 m / 100.8 m / é / +22.0m
Long-term loans maturing / 7.7 m / 3.2 m / ê / -4.5 m
Restructured loans / 0.0 m / 0.0 m / çè / -
Average long-term borrowing rate / 4.77% / 4.78% / é / +0.01%
Interest from investments / 0.12m / 0.39m / é / +0.27m
Average gross interest rate earned / 0.429% / 0.351% / ê / -0.078%
PERFORMANCE AGAINST BENCHMARKS
7. The performance against benchmarks is summarised as follows:
Actual / B’mark / VarianceNew loans v. PWLB rate / n/a / n/a / No new loans
Interest earned v. LIBID +0.075% / 0.352% / 0.436% / 0.084%
CURRENT YEAR CAPITAL FINANCING
8. As reported in the second quarter 2016/17 Budget and Balanced Scorecard Report a pressure of £814k is forecast due to savings that have now been assessed as not being achievable set in the 2016/17 budget. This has been addressed in the MTFP for future years. A further pressure of £517k is expected as a result of the need to borrow an additional £10m, (following a further review and re-assessment of the short term/long term borrowing portfolio), paying a higher interest on borrowing than forecast, (owing to the interest rate changes prior to the BREXIT referendum), additional minimum revenue provision (MRP) costs, budgeting errors, and lower than expected income from Street Lighting Invest to Save scheme. However as part of an on-going review into the profiling of MRP costs, it has been calculated that the council can reduce the MRP charge in 2016/17 by (£1.5m). Detail on the revised approach to the Minimum Revenue Provision will be brought forward as part of the Prudential Indicators report to Council on 1 March 2017.
BACKGROUND AND EXTERNAL CONSULTATION
- The Treasury Management Code of Practice recognises the importance of Members understanding what is being done in the name of the Authority and the financial implications. Central to such understanding is the need for responsible officers to report to Members.
- Members should have regard to the budgetary impact on the Authority of effective treasury management, in particular with regard to:
a) the impact on the budget of any restructuring of debt;
b) effective management of short-term cash balances; and
c) timing of long-term borrowing decisions.
Code of Practice
11. The objective of Treasury Management is to control the Authority’s cashflow, its borrowings and investments, in such a way as to manage the associated risks and to achieve a high level of performance or return consistent with those risks.
12. The Executive, on 23rd April 2002, approved the adoption of a Code of Practice for Treasury Management in the Public Services, as recommended by the Chartered Institute of Public Finance and Accountancy (CIPFA).
13. The Code requires that an Annual Report is made to Members. This report should contain details of the previous year’s activity, information on performance against agreed targets and an update on progress towards the current year’s Capital Financing programme.
Capital Financing 2015/16
14. Capital Financing is the term used to describe long-term (i.e. one year or longer) borrowing, to finance the acquisition of assets which fall within the definition of capital or to meet the repayment costs of maturing loans.
15. Members approved, on 4th March 2015, an Authorised Limit of £199.9m during 2015/16. This allowed for up to £30.0m of new long-term borrowing. The Authorised Limit is the maximum permitted level of external borrowing. The actual borrowing peaked at £142.8m, during July 2015, therefore the Authorised Limit was not exceeded during 2015/16.
16. The level of external borrowing during the year is measured against the Operational Boundary, which is set at a lower level than the Authorised Limit and acts as a warning indicator that the Authorised Limit is being approached. At no time during the year was the Operational Boundary of £178.7m exceeded.
17. £3m of maturing loans were repaid on 25th November.
18. As was explained to Members in last year’s report, in an attempt to minimise costs in 2015/16 Capital Financing was funded from the Council’s cashflow. Accordingly there were no new loans taken during the financial year. The total value of outstanding long-term loans has therefore reduced from £78.8m to £75.6m over the year.
19. As a result of the loan repayments, the average borrowing rate, for all Council long-term loans, for 2015/16, was 4.78%. This is an increase of 0.01% when compared to the average rate in 2014/15 of 4.77%, as a result of lower than average rate loans being repaid and no new loans being taken during the year.
20. The maturity profile of the Councils long-term loans, as at 31st March 2016, is illustrated in Appendix 1. This shows the sum totals of long-term loans requiring repayment in the current and future years.
21. These actions produced an underspend of £45,817 during 2015/16. This has previously been reported to Members as part of the 2015/16 Revenue Budget Outturn report, and presented to Executive on 05 July 2016.
Performance Measurement
22. The Code of Practice, as adopted, requires that certain performance measures are reported:
a) There were no new long-term loans taken during 2015/16, so no comparison can be made to the Public Works Loans Board (PWLB) rates. (NB. PWLB is the central government body that lends to Local Authorities.)
b) The average rate of interest earned on all short-term deposits, during 2015/16, was 0.352%. This compares with the average seven-day rate of 0.361%, and the benchmark rate (LIBID + 0.075%) of 0.436%. As cash balances were at low levels over 2015/16, most cash investments were of short duration, which attract lower interest rates, or held in low interest bearing instant access/call accounts.
Capital Financing 2016/17
23. The Annual Borrowing Strategy, approved by the Council on 2 March 2016, gave approval for new long-term borrowing during 2016/17 as follows:-
New loans to finance capital expenditure and maturing long-term loans £40.0m
Finance restructuring of long-term loans £20.0m
New long-term loans approved for 2016/17 £60.0m
24. Since 2011 the Council’s Treasury Management strategy was to run cash balances down to fund the capital investment programme without the need for further long-term borrowing. The Council’s cash balances were reduced to a level which required short-term borrowing (i.e. loans which require repayment in full in less than one year) of £22 million during 2015/16. The current balance of short-term borrowing is £25 million, which is all due for repayment in early 2017/18 (see chart below).
25. Given the scale of short-term borrowings required and the speed this cash was required, a revised cash management policy of holding sufficient cash to cover emergency reserves and potential cash flow requirements was introduced in 2016/17 to stabilise the Council’s financial position. Six, long-term maturity loans totalling £30 million (£5 million each) were drawn down in June 2016 from the PWLB, ahead of the EU Referendum while there was certainty over the Bank of England interest rate policy. These loans mature between 2060 and 2066, at rates between 2.72% and 2.74%, resulting in the average borrowing rate reducing to 4.39% as at September 2016. The revised maturity profile for long-term loans, as at 30 September 2016, is illustrated in Appendix 2.
26. There is currently sufficient cash to meet the above revised cash management policy and meet payments required from borrowings for the capital programme to the end of 2016/17. The graph below illustrates the change in the Council’s cash and loan position of recent years.
27. On occasion it is possible to repay or restructure a loan before it matures. This is only done where there is a saving to the Authority, either by deleting the loan altogether or replacing the loan with another loan on better terms, and where both the Authority and the lender agree to the early repayment terms. There have been no loan restructuring opportunities so far this year, but this situation will continue to be closely monitored.
28. As reported in the second quarter 2016/17 Budget and Balanced Scorecard Report a pressure of £814k is forecast due to savings that have now been assessed as not being achievable set in the 2016/17 budget. This has been addressed in the MTFP for future years. A further pressure of £517k is expected as a result of the need to borrow an additional £10m, (following a further review and re-assessment of the short term/long term borrowing portfolio), paying a higher interest on borrowing than forecast, (owing to the interest rate changes prior to the BREXIT referendum), additional minimum revenue provision (MRP) costs, budgeting errors, and lower than expected income from Street Lighting Invest to Save scheme. However as part of an on-going review into the profiling of MRP costs, it has been calculated that the council can reduce the MRP charge in 2016/17 by (£1.5m). Detail on the revised approach to the Minimum Revenue Provision will be brought forward as part of the Prudential Indicators report to Council on 1 March 2017.
TREASURY MANAGEMENT PRACTICES: APPROVED INVESTMENT POLICY
29. The way in which the Treasury Management operation is controlled is set out in the Treasury Management Practices (TMPs) policy document. TMPs were approved by Members on the basis that, in certain circumstances, the officer charged with Section 151 responsibilities (Strategic Director – Finance, Governance and Support) can vary them, providing that such variations are subsequently reported.
30. In response to the instabilities in the Money Markets, and market concern about all financial institutions the TMP’s are reviewed frequently, to try to control the levels of risk in borrowing and short-term cash investments. There have not been any changes to the counterparties, or their limits, in the TMP’s, since the last Annual Report on Treasury Management.
31. The situation will continue to be kept under review by the Strategic Director – Finance, Governance and Support.
IMPACT ASSESSMENT (IA)
32. Having considered the requirements of the impact assessment process and the requirements of the public sector equality duty it is judged that an impact assessment on this report is not required.
OPTION APPRAISAL/RISK ASSESSMENT
33. None required, this item is for information only.
FINANCIAL, LEGAL AND WARD IMPLICATIONS
34. Financial Implications – In 2015/16 Middlesbrough Council paid interest totalling approximately £3.9 million on its long-term borrowings. The interest received on short-term cash balances was approximately £40,000. The proper control and monitoring of the treasury management function has a significant bearing on the amounts of interest paid out and received.
35. Ward Implications – None.
RECOMMENDATIONS
36. The Annual Report on Treasury Management is accepted.
REASONS
37. The Treasury Management Code of Practice requires officers to provide regular information to Members, to allow Members to understand what is being done in the name of the Authority and the financial implications.
BACKGROUND PAPERS
38. No background papers were used in the preparation of this report.
CONTACT OFFICER: Paul Campbell, Head of Investments Treasury Management
TEL NO: (01642) 729024
______
Address:
Website: http://www.middlesbrough.gov.uk
Appendix 1
Appendix 2