ANNUAL TREASURY MANAGEMENT REVIEW 2016/17

 

 

Meeting                                   Governance & Audit Committee – 28 June 2017

 

Report Author                         Tim Willis, Section 151 Officer

 

Portfolio Holder                       Portfolio Holder for Financial Services and Estates

 

Status                                      For Decision

 

Classification:                          Unrestricted

 

Key Decision                           No

 

Reasons for Key                     N/A                                                                                               

(if appropriate)

 

Previously Considered by      N/A

                                     

Ward:                                      N/A

 

 

 

 

Executive Summary:

 

This report summarises treasury management activity and prudential/ treasury indicators for 2016/17.

 

 

Recommendation(s):

 

That the Governance & Audit Committee:

 

·                    Notes the actual 2016/17 prudential and treasury indicators in this report.

·                    Approves the Annual Treasury Management report for 2016/17.

·                    Recommends this report to Cabinet.

 

 

 

CORPORATE IMPLICATIONS

Financial and Value for Money

The financial implications are highlighted in this report.

Legal

Section 151 of the 1972 Local Government Act requires a suitably qualified named officer to keep control of the Council’s finances. For this Council, this is the Director of Corporate Resources, Tim Willis, and this report is helping to carry out that function.

Corporate

Failure to undertake this process will impact on the Council’s compliance with the Treasury Management Code of Practice.

 

Equalities Act 2010 & Public Sector Equality Duty

There are no equity and equalities implications arising directly from this report, but the Council needs to retain a strong focus and understanding on issues of diversity amongst the local community and ensure service delivery matches these.

 

It is important to be aware of the Council’s responsibility under the Public Sector Equality Duty (PSED) and show evidence that due consideration had been given to the equalities impact that may be brought upon communities by the decisions made by Council.

 

 

 

CORPORATE PRIORITIES (tick those relevant)ü

 

 

CORPORATE VALUES (tick those relevant)ü

 

A clean and welcoming Environment 

 

 

Delivering value for money

ü

Promoting inward investment and job creation

 

 

Supporting the Workforce

 

Supporting neighbourhoods

 

 

Promoting open communications

 

 

 

1.0       Introduction and Background

 

1.1       This Council is required by regulations issued under the Local Government Finance Act 2003 to produce an annual treasury management review of activities and the actual prudential and treasury indicators for 2016/17. This report meets the requirements of both the Chartered Institute of Public Finance & Accountancy (CIPFA)Code of Practice on Treasury Management (the Code) and the CIPFA Prudential Code for Capital Finance in Local Authorities (the Prudential Code).

 

1.2       During 2016/17 the minimum reporting requirements were that the full Council should receive the following reports:

·                      an annual treasury strategy in advance of the year (Council 04/02/2016)

·                      a mid-year treasury update report (Council 09/02/2017)

·                      an annual review following the end of the year describing the activity compared to the strategy (this report)

1.3       The regulatory environment places responsibility on members for the review and scrutiny of treasury management policy and activities.  This report is, therefore, important in that respect, as it provides details of the outturn position for treasury activities and highlights compliance with the Council’s policies previously approved by members. 

 

1.4       This Council confirms that it has complied with the requirement under the Code to give prior scrutiny to all of the above treasury management reports by the Governance and Audit Committee before they were reported to the full Council.  Member training on treasury management issues was last undertaken on 21/09/2015 in order to support members’ scrutiny role. The Council’s external treasury management advisor is Capita Asset Services (Capita).

 

1.5       The Council’s 2016/17 accounts have not yet been audited and hence the figures in this report are subject to change.


 

2.0       Capita’s Review of the Economy and Interest Rates (issued by Capita in April 2017)

2.1       The two major landmark events that had a significant influence on financial markets in the 2016/17 financial year were the UK EU referendum on 23 June and the election of President Trump in the USA on 9 November.  The first event had an immediate impact in terms of market expectations of when the first increase in Bank Rate would happen, pushing it back from quarter 3 2018 to quarter 4 2019.  At its 4 August meeting, the Monetary Policy Committee (MPC) cut Bank Rate from 0.5% to 0.25% and the Bank of England’s Inflation Report produced forecasts warning of a major shock to economic activity in the UK, which would cause economic growth to fall almost to zero in the second half of 2016. The MPC also warned that it would be considering cutting Bank Rate again towards the end of 2016 in order to support growth. In addition, it restarted quantitative easing with purchases of £60bn of gilts and £10bn of corporate bonds, and also introduced the Term Funding Scheme whereby potentially £100bn of cheap financing was made available to banks.  

 

2.2       In the second half of 2016, the UK economy confounded the Bank’s pessimistic forecasts of August.  After a disappointing quarter 1 of only +0.2% GDP growth, the three subsequent quarters of 2016 came in at +0.6%, +0.5% and +0.7% to produce an annual growth for 2016 overall, compared to 2015, of no less than 1.8%, which was very nearly the fastest rate of growth of any of the G7 countries. Needless to say, this meant that the MPC did not cut Bank Rate again after August but, since then, inflation has risen rapidly due to the effects of the sharp devaluation of sterling after the referendum. 

 

3.0          Overall Treasury Position as at 31 March 2017

 

 

31 March 2016 Principal

Rate/ Return

Average Life

31 March 2017 Principal

Rate/ Return

Average Life

 

£’000

 

Years

£’000

 

Years

General Fund (GF) debt

9,179

3.26%

13.8

11,629

3.14%

14.2

Housing Revenue Account (HRA)  debt

20,041

4.03%

9.7

20,040

4.03%

8.9

Total debt

29,220

3.78%

11.0

31,669

3.71%

10.8

GF CFR

27,067

 

 

26,706

 

 

HRA CFR

20,241

 

 

20,377

 

 

Total CFR

47,308

 

 

47,083

 

 

Over / (under) borrowing

(18,088)

 

 

(15,414)

 

 

Total investments

28,612

0.55%

 

37,988

0.49%

 

Net debt / (investment)

608

 

 

(6,319)

 

 

3.1       At the beginning and the end of 2016/17 the Council‘s treasury (excluding borrowing by private finance initiatives (PFI) and finance leases) position is outlined in Table 1.

           

Table 1 - Overall Treasury Position as at 31 March 2017

 

 

 

 

 

 

 

 

 

 

 

 


4.0       The Strategy for 2016/17

 

4.1       The expectation for interest rates within the treasury management strategy for 2016/17 anticipated low but rising Bank Rate,(starting in quarter 2 of 2016), and gradual rises in medium and longer term fixed borrowing rates during 2016/17.  Variable, or short-term rates, were expected to be the cheaper form of borrowing over the period. Continued uncertainty in the aftermath of the 2008 financial crisis promoted a cautious approach, whereby investments would continue to be dominated by low counterparty risk considerations, resulting in relatively low returns compared to borrowing rates.

 

4.2       In this scenario, the treasury strategy was to postpone borrowing to avoid the cost of holding higher levels of investments and to reduce counterparty risk. 

 

4.3       During 2016/17 there was major volatility in PWLB rates with rates falling during quarters 1 and 2 to reach historically very low levels in July and August, before rising significantly during quarter 3, and then partially easing back towards the end of the year.

 

4.4       Change in strategy during the year – the strategy adopted in the original Treasury Management Strategy Report for 2016/17 approved by the Council on 04/02/16 was not revised during 2016/17.

 

5.0       The Borrowing Requirement and Debt

5.1       The Council’s underlying need to borrow to finance capital expenditure is termed the Capital Financing Requirement (CFR) is shown in Table 2

 

            Table 2 - Council’s Capital Financing Requirement

 

31 March 2016

Actual

£’000

31 March 2017

Budget

£’000

31 March 2017

Actual

£’000

CFR General Fund (GF)

27,067

29,189

26,706

CFR  Housing Revenue Account (HRA)

20,241

27,477

20,377

Total CFR

47,308

56,666

47,083

 

 

The 2016/17 HRA capital expenditure budget included £14.5m subsequently re-profiled to 2017/18 in the Budget and Medium Term Financial Strategy 2017/21. This re-profiled amount was due to increase the HRA Capital Financing Requirement by £6.7m.

 

6.0       Borrowing Rates in 2016/17

 

6.1       Public Works Loan Board (PWLB) certainty maturity borrowing rates - the graph in Table 3 shows how PWLB certainty rates have fallen to historically very low levels during the year.

 

 

 


Table 3 – PWLB Certainty Rates

 

 

7.0          Borrowing Outturn for 2016/17

7.1        Borrowing – Table 4 outlines the General Fund loans drawn from the PWLB to fund net unfinanced capital expenditure and any naturally maturing debt:

 

Table 4 –General Fund Loans from PWLB in 2016/17

Principal

£000

Type

Interest Rate

Maturity

GF Average Interest Rate for 2016/17

2,000

Fixed interest rate - Maturity

3.09%

18/10/2038

3.14%

1,000

Fixed interest rate - EIP

1.28%

20/06/2023

3.14%

 

This compares with a budget assumption of borrowing at an interest rate of 5% for the £2m loan and 4% for the £1m loan.

 

7.2       Rescheduling – No rescheduling was done during the year as the average 1% differential between PWLB new borrowing rates and premature repayment rates made rescheduling unviable.

 

7.3       Repayments – The Council repaid £550k of maturing debt using investment balances. Details of these are outlined in Table 5.


          Table 5 – PWLB Maturing Debt Paid in 2016/17

Lender

Principal

£’000

Interest Rate

Repayment Date

PWLB

43

3.08%

23/04/16

PWLB

50

2.48%

27/05/16

PWLB

146

1.97%

27/05/16

PWLB

43

3.08%

23/10/16

PWLB

50

2.48%

27/11/16

PWLB

146

1.97%

27/11/16

PWLB

72

1.28%

20/12/16

Total

550

 

 

 

 

7.4       Summary of debt transactions – The above changes in the debt portfolio resulted in a decrease in the average interest rate of 0.07%, representing an interest saving of £22k on the weighted average of the 2016/17 debt principal.

8.0          Investment Rates in 2016/17

Table 6 – Investment Rates

 

 

8.1       After the EU referendum, the Bank of England Base Rate was cut from 0.5% to 0.25% on 4 August and remained at that level for the rest of the year.  Market expectations as to the timing of the start of monetary tightening started the year at quarter 3, 2018, but then moved back to around the end of 2019 in early August before finishing the year back at quarter 3, 2018.   Deposit rates continued into the start of 2016/17 at previous depressed levels but then fell during the first two quarters and fell even further after the 4 August MPC meeting resulted in a large tranche of cheap financing being made available to the banking sector by the Bank of England.  Rates made a weak recovery towards the end of 2016 but then fell to fresh lows in March 2017.

 

9.0        Investment Outturn for 2016/17

9.1       Investment Policy – the Council’s investment policy is governed by Department for Communities and Local Government (CLG) guidance, which has been implemented in the annual investment strategy approved by the Council on 4 February 2016.  This policy sets out the approach for choosing investment counterparties, and is based on credit ratings provided by the three main credit rating agencies, supplemented by additional market data (such as rating outlooks, credit default swaps, bank share prices etc.).

 

9.2       The investment activity during the year conformed to the approved strategy, apart from exceeding the £0.5m bank overdraft benchmark for one day only. This was a technical breach and the Council had no liquidity difficulties during the year.

 

9.3       Investments held by the Council - the Council maintained an average balance of £43.47m of internally managed funds.  The internally managed funds earned an average rate of return of 0.49%.The comparable performance indicator is the average 7-day London Interbank Bid Rate (LIBID) rate, which was 0.20%. This compares with a budget assumption of £20m investment balances earning an average rate of 0.90%.

 

9.4       Investments held by fund managers – the Council does not use external fund managers.

 

10.0       Investment risk benchmarking

 

10.1     The following investment benchmarks were set in the Council’s 2016/17 annual treasury strategy:

 

10.2    Security - The Council’s maximum security risk benchmark for the current portfolio, when compared to historic default tables, is:

·         0.05% historic risk of default when compared to the whole portfolio.

10.3     Liquidity – in respect of this area the Council seeks to maintain:

·         Bank overdraft - £0.5m

·         Liquid short term deposits of at least £10m available with a week’s notice.

·         Weighted average life benchmark is expected to be 0.5 years, with a maximum of 1.0 year.

10.4     Yield - local measures of yield benchmarks are:

·         Investments – internal returns above the 7 day LIBID rate

 

10.5     The Council kept to the above benchmarks during 2016/17 apart from exceeding the bank overdraft benchmark as referred to in section 9.2 above.


 

11.0     Options

 

11.1     The recommended option (to ensure regulatory compliance as set out in section 1 of this report) is that the Governance & Audit Committee:

 

·                Notes the actual 2016/17 prudential and treasury indicators in this report.

·                Approves the Annual Treasury Management report for 2016/17.

·                Recommends this report to Cabinet.

 

11.2     Alternatively, the Governance & Audit Committee may decide not to do this and provide reason(s) why.

 

12.0     Next Steps

 

12.1     This report is to go to Cabinet and then Council for approval. The next Cabinet meeting is on 27 July 2017.

 

13.0     Disclaimer  

 

13.1     This report is a technical document focussing on public sector investments and borrowings and, as such, readers should not use the information contained within the report to inform personal investment or borrowing decisions. Neither Thanet District Council nor any of its officers or employees makes any representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein (such information being subject to change without notice) and shall not be in any way responsible or liable for the contents hereof and no reliance should be placed on the accuracy, fairness or completeness of the information contained in this document. Any opinions, forecasts or estimates herein constitute a judgement and there can be no assurance that they will be consistent with future results or events.  No person accepts any liability whatsoever for any loss howsoever arising from any use of this document or its contents or otherwise in connection therewith.

 

Contact Officer:

Tim Willis, Director of Corporate Resources and Section 151 Officer, ext: 7617

Reporting to:

Madeline Homer, Chief Executive

 

Annex List

 

Annex 1

Prudential and Treasury Indicators

Annex 2

Report Guidance

Annex 3

Abbreviations and Definitions

 

Corporate Consultation Undertaken

 

Finance

Ramesh Prashar, Head of Financial Services

Legal

Tim Howes, Director of Corporate Governance & Monitoring Officer