MID YEAR REVIEW 2018-19: TREASURY MANAGEMENT AND ANNUAL INVESTMENT STRATEGY

 

 

Cabinet                                    15 January 2019

 

Report Author                         Tim Willis, Deputy Chief Executive & Section 151 Officer

 

Portfolio Holder                       Councillor Ian Gregory, Cabinet Member for Financial Services and Estates

 

Status                                      For Decision

 

Classification:                          Unrestricted

 

Key Decision                           No

 

 

Executive Summary:

 

This report summarises treasury management activity and prudential/ treasury indicators for the first half of 2018-19.

 

 

Recommendation(s):

 

That Cabinet:

                   Approves this report and the prudential and treasury indicators that are shown.

                   Recommends this report to council.

 

 

 

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 Deputy Chief Executive, 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)

 

 

CORPORATE VALUES (tick those relevant)✓

 

A clean and welcoming Environment 

 

 

Delivering value for money

Promoting inward investment and job creation

 

 

Supporting the Workforce

 

Supporting neighbourhoods

 

 

Promoting open communications

 

 

1          Introduction and Background

1.1       This report has been written in accordance with the requirements of the Chartered Institute of Public Finance and Accountancy (CIPFA) Code of Practice on Treasury Management (revised 2017).

1.2       Treasury management is defined as:


“The management of the local authority’s borrowing, investments and cash flows, its banking, money market and capital market transactions; the effective control of the risks associated with those activities; and the pursuit of optimum performance consistent with those risks.”          

 

1.3       The primary requirements of the Code include receipt by the full council of an annual Treasury Management Strategy Statement (including the Annual Investment Strategy and Minimum Revenue Provision Policy) for the year ahead, a Mid-year Review Report and an Annual Report (stewardship report) covering activities during the previous year.

 

1.4                   This mid-year report has been prepared in compliance with CIPFA’s Code of Practice on Treasury Management, and covers the following:

 

                     An economic update for the first half of the 2018-19 financial year;

                     A review of the Treasury Management Strategy Statement and Annual Investment Strategy;

                    The council’s capital expenditure (see also the Capital Strategy) and prudential indicators;

                     A review of the council’s investment portfolio for 2018-19;

                     A review of the council’s borrowing strategy for 2018-19;

                     A review of any debt rescheduling undertaken during 2018-19;

                    A review of compliance with Treasury and Prudential Limits for    2018-19.

 

1.5       The Treasury Management Strategy was agreed by council on 8 February 2018, and the Capital Strategy and Non-Treasury Investment Report were both agreed by Cabinet on 18 September 2018. As at 30 September 2018, there have been no key changes to these documents.

 

2          Treasury Management Strategy Statement and Annual Investment Strategy Update

2.1       The Treasury Management Strategy Statement (TMSS) for 2018-19, which includes the Annual Investment Strategy, was approved by the council on 8 February 2018. There are no policy changes to the TMSS; the details in this report update the position in the light of the updated economic position and budgetary changes already approved. 

 

3          The Council’s Capital Position (Prudential Indicators)

3.1       This part of the report is structured to update:

                     The council’s capital expenditure plans;

                     How these plans are being financed;

                     The impact of the changes in the capital expenditure plans on the prudential indicators and the underlying need to borrow; and

                     Compliance with the limits in place for borrowing activity.

3.2       Prudential Indicator for Capital Expenditure

This table shows the revised estimates for capital expenditure and the changes since the capital programme was agreed at the Budget. 

The revised estimate includes net reprofiling of £7.2m General Fund and £3.5m HRA.

 

Capital Expenditure

2018-19

Original

Estimate

£m

Current Position – Actual at

30-09-18

£m

2018-19

Revised

Estimate

£m

General Fund

4.689

5.974

13.512

HRA

4.484

2.218

7.408

Total

9.173

8.192

20.920

 

3.3       Changes to the Financing of the Capital Programme 

The table below draws together the main strategy elements of the capital expenditure plans (above), highlighting the original supported and unsupported elements of the capital programme, and the expected financing arrangements of this capital expenditure.  The borrowing element of the table increases the underlying indebtedness of the council by way of the Capital Financing Requirement (CFR), although this will be reduced in part by revenue charges for the repayment of debt (the Minimum Revenue Provision).  This direct borrowing need may also be supplemented by maturing debt and other treasury requirements.

 

 

Capital Expenditure

2018-19

Original

Estimate

£m

Total

Current Position – Actual at 30-09-18

£m

2018-19

Revised

Estimate

£m

GF

2018-19

Revised

Estimate

£m

HRA

2018-19

Revised

Estimate

£m

Total

Total spend

9.173

 

13.512

7.408

20.920

Financed by:

 

 

 

 

 

Capital receipts

0.941

 

4.161

0.655

4.816

Capital grants

3.425

 

4.511

1.857

6.368

Reserves

4.257

 

0.202

4.486

4.688

Revenue

0.300

 

0.006

0.410

0.416

Total financing

8.923

 

8.880

7.408

16.288

Borrowing need

0.250

 

4.632

0.000

4.632

 

3.4       Changes to the Prudential Indicators for the Capital Financing Requirement, External Debt and the Operational Boundary

The table shows the CFR, which is the underlying external need to incur borrowing for a capital purpose.  It also shows the expected debt position over the period, which is termed the Operational Boundary.

Prudential Indicator – Capital Financing Requirement

We are on target to achieve the forecast Capital Financing Requirement.

Prudential Indicator – the Operational Boundary for external debt

 

 

2018-19

Original

Estimate

£m

Current Position – Actual at

30-09-18

£m

2018-19

Revised

Estimate

£m

Prudential Indicator – Capital Financing Requirement

CFR – non housing

29.850

 

27.086

CFR – housing

26.321

 

20.786

Total CFR

56.171

 

47.872

Net movement in CFR

11.572

 

3.273

 

2018-19

Original

Indicator

£m

Current Position – Actual at

30-09-18

£m

2018-19

Revised

Indicator

£m

Prudential Indicator - the Operational Boundary for External Debt

Borrowing

55.000

30.771

55.000

Other long term liabilities*

22.000

2.447

22.000

Total debt

77.000

33.218

77.000

 

* Any ‘on balance sheet’ PFI schemes and finance leases etc (including the leisure centre deferred credit). Both the Operational Boundary and Authorised Limit Indicators include an estimate for the recognition of leases under International Financial Reporting 16 (IFRS 16). The impact of IFRS 16 has not been reflected in the Actual or elsewhere in this report, pending further information from CIPFA.

3.5       Limits to Borrowing Activity

The first key control over the treasury activity is a prudential indicator to ensure that over the medium term, borrowing will only be for a capital purpose.  Gross external borrowing should not, except in the short term, exceed the total of CFR in the preceding year plus the estimates of any additional CFR for 2018-19 and next two financial years. This allows some flexibility for limited early borrowing for future years.  The council has approved a policy for borrowing in advance of need which will be adhered to if this proves prudent. 

 

 

2018-19

Original

Estimate

£m

Current Position – Actual at

30-09-18

£m

2018-19

Revised

Estimate

£m

Gross borrowing

41.274

30.771

35.133

Plus other long term liabilities*

2.290

2.447

2.277

Total gross borrowing

43.564

33.218

37.410

CFR (year end position)

56.171

 

47.872

The Section 151 Officer reports that no difficulties are envisaged for the current or future years in complying with this prudential indicator. 

A further prudential indicator controls the overall level of borrowing.  This is the Authorised Limit which represents the limit beyond which borrowing is prohibited, and needs to be set and revised by Members.  It reflects the level of borrowing which, while not desired, could be afforded in the short term, but is not sustainable in the longer term.  It is the expected maximum borrowing need with some headroom for unexpected movements. This is the statutory limit determined under section 3 (1) of the Local Government Act 2003.

 

Authorised limit for external debt

2018-19

Original

Indicator

£m

Current Position – Actual at

30-09-18

£m

2018-19

Revised

Indicator

£m

Borrowing

60.000

30.771

60.000

Other long term liabilities*

27.000

2.447

27.000

Total

87.000

33.218

87.000

 

 

* Any ‘on balance sheet’ PFI schemes and finance leases etc (including the leisure centre deferred credit). Both the Operational Boundary and Authorised Limit Indicators include an estimate for the recognition of leases under International Financial Reporting 16 (IFRS 16). The impact of IFRS 16 has not been reflected in the Actual or elsewhere in this report, pending further information from CIPFA.

4          Investment Portfolio 2018-19

4.1       In accordance with the Code, it is the council’s priority to ensure security of capital and liquidity, and to obtain an appropriate level of return which is consistent with the council’s risk appetite.  As shown by forecasts in Annex 1, it is a very difficult investment market in terms of earning the level of interest rates commonly seen in previous decades as rates are very low and in line with the current 0.75% Bank Rate. The continuing potential for a re-emergence of a Eurozone sovereign debt crisis, and its impact on banks, prompts a low risk and short term strategy.  Given this risk environment and the fact that increases in Bank Rate are likely to be gradual and unlikely to return to the levels seen in previous decades, investment returns are likely to remain low.

4.2       The council held £47.497m of investments as at 30 September 2018 (£40.882m at 31 March 2018) and the investment portfolio yield for the first six months of the year is 0.60% against a benchmark (average 7-day LIBID rate) of 0.44%. The constituent investments are:

 

Sector

Country

Up to 1 year

 

£m

1 year – 370 days £m

Total

 

£m

Banks

UK

13.771

0.000

13.771

Banks

Sweden

4.516

0.000

4.516

Money Market Funds

UK

29.210

0.000

29.210

Total

 

47.497

0.000

47.497

           

4.3       The Section 151 Officer confirms that the approved limits within the Annual Investment Strategy were not breached during the first six months of 2018-19.

 

4.4       The council’s budgeted investment return for 2018-19 is £0.062m and performance for the first half of the financial year is above budget at £0.136m.

 

4.5       Investment Risk Benchmarking

Investment risk benchmarks were set in the 2018-19 Treasury Management Strategy Statement (TMSS) for security, liquidity and yield. The mid-year position against these benchmarks is given below.

4.5.1    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.

 

 

 

The security benchmark for each individual period is:

 

 

370 days

2 years

3 years

4 years

5 years

Maximum

0.05%

0.00%

0.00%

0.00%

0.00%

Note: This benchmark is an average risk of default measure, and would not constitute an expectation of loss against a particular investment. 

The Section 151 Officer can report that the investment portfolio was maintained within this overall benchmark for the first half of this financial year.

 

4.5.2    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.

The Section 151 Officer can report that liquidity arrangements were adequate for the first half of this financial year.

This authority does not currently place investments for more than 370 days due to the credit, security and counterparty risks of placing such investments.

4.5.3    Yield

 

Local measures of yield benchmarks are:

 

        Investments – Internal returns above the 7 day LIBID rate

The Section 151 Officer can report that the yield on deposits for the first half of the financial year is 0.60% against a benchmark (average 7-day LIBID rate) of 0.44%.

4.6       Investment Counterparty criteria

The current investment counterparty criteria selection approved in the TMSS is meeting the requirement of the treasury management function.

5          Borrowing

5.1       The council’s capital financing requirement (CFR) original estimate for 2018-19 is £56.171m. The CFR denotes the council’s underlying need to borrow for capital purposes.  If the CFR is positive the council may borrow from the PWLB or the market (external borrowing) or from internal balances on a temporary basis (internal borrowing). The balance of external and internal borrowing is generally driven by market conditions. The council has borrowings of £30.771m (table 3.5) and has utilised an estimated £25.400m of cash flow funds in lieu of borrowing.  This is a prudent and cost effective approach in the current economic climate but will require ongoing monitoring in the event that upside risk to gilt yields prevails.

 

5.2       No new external borrowing was undertaken from the PWLB during the first half of this financial year.

 

5.3       Borrowing may be undertaken during the second half of this financial year and options will be reviewed in due course in line with market conditions.

 

5.4       The graph and table below show the movement in PWLB certainty rates for the first six months of the year to 30 September 2018. 

 

5.5       PWLB certainty rates, half year ended 30th September 2018

 

 

 

5.6       Debt rescheduling opportunities have been very limited in the current economic climate given the consequent structure of interest rates, and following the increase in the margin added to gilt yields which has impacted PWLB new borrowing rates since October 2010.  No debt rescheduling has therefore been  undertaken to date in the current financial year. The council is currently under-borrowed to address investment counterparty risk and the differential between borrowing and investment interest rates. This position is carefully monitored.

5.7       The council’s budgeted debt interest payable for 2018-19 is £1.507m and performance for the first half of the financial year is below budget at £0.576m. The revised estimate for 2018-19 is £1.206m.

6       Treasury Management Indicators

6.1       Ratio of financing costs to net revenue stream

This indicator identifies the trend in the cost of capital (borrowing and other long term obligation costs net of investment income) against the net revenue stream.

 

 

%

2018-19

Original Indicator

2018-19

Revised Indicator

Non-HRA

10.5%

8.6%

HRA

7.6%

6.0%

 

6.2       Upper Limits on Variable Rate Exposure – This identifies a maximum limit for variable interest rates based upon the debt position net of investments.

Upper Limits on Fixed Rate Exposure – Similar to the previous indicator, this covers a maximum limit on fixed interest rates.

Both of these are shown in the below table:

 

 

2018-19

Original

Indicator

£m

Current Position – Actual at

30-09-18

£m

2018-19

Revised

Indicator

£m

Upper limits on fixed interest rates

Debt only

87.000

30.771

87.000

Investments only

45.000

13.381

45.000

Upper limits on variable interest rates

Debt only

87.000

0.000

87.000

Investments only

50.000

34.116

50.000

 

6.3       Maturity Structures of Borrowing

These gross limits are set to reduce the council’s exposure to large fixed rate sums falling due for refinancing.

 

 

2018-19

Original

Upper Limit

Current Position – Actual at 30-09-18

2018-19

Revised

Upper Limit

Maturity structure of fixed rate borrowing

Under 12 months

50%

20%

50%

1 year to under 2 years

50%

15%

50%

2 years to under 5 years

50%

16%

50%

5 years to under 10 years

55%

9%

55%

10 years to under 20 years

50%

21%

50%

20 years to under 30 years

50%

10%

50%

30 years to under 40 years

50%

6%

50%

40 years to under 50 years

50%

3%

50%

50 years and above

50%

0%

50%

 

The current position shows the actual percentage of fixed rate debt the authority has within each maturity span. None of the upper limits have been breached.

7          UK Banks - Ring Fencing

7.1       The largest UK banks, (those with more than £25bn of retail / Small and  Medium-sized Enterprise (SME) deposits), are required, by UK law, to separate core retail banking services from their investment and international banking activities by 1st January 2019. This is known as “ring-fencing”. Whilst smaller banks with less than £25bn in deposits are exempt, they can choose to opt up. Several banks are very close to the threshold already and so may come into scope in the future regardless.

 

7.2       Ring-fencing is a regulatory initiative created in response to the global financial crisis. It mandates the separation of retail and SME deposits from investment banking, in order to improve the resilience and resolvability of banks by changing their structure. In general, simpler, activities offered from within a ring-fenced bank, (RFB), will be focused on lower risk, day-to-day core transactions, whilst more complex and “riskier” activities are required to be housed in a separate entity, a non-ring-fenced bank, (NRFB). This is intended to ensure that an entity’s core activities are not adversely affected by the acts or omissions of other members of its group.

 

7.3       While the structure of the banks included within this process may have changed, the fundamentals of credit assessment have not. The council will continue to assess the new-formed entities in the same way that it does others and those with sufficiently high ratings, (and any other metrics considered), will be considered for investment purposes.

 

8          Options

 

8.1       The recommended option (to ensure regulatory compliance as set out in section 1 of this report) is that Cabinet:

                    Approves this report and the prudential and treasury indicators that are shown.

                    Recommends this report to council.

 

8.2       Alternatively, Cabinet may decide not to do this and advise the reason(s) why.

9          Next Steps

 

9.1       This report is to go to council for approval.

 

10        Disclaimer

10.1     This report (including annexes) 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, Deputy Chief Executive & Section 151 Officer

Reporting to:

Madeline Homer, Chief Executive

 

Annex List

 

Annex 1

Economic Update, Interest Rate Forecast and Debt Maturity

Annex 2

Guidance on the Treasury Management Strategy Statement and Annual Investment Strategy – Mid Year Review Report 2018-19

 

 

Corporate Consultation Undertaken

 

Finance

Gary Whittaker, Interim Head of Financial Services

Legal

Tim Howes, Director of Corporate Governance & Monitoring Officer