Meeting documents

Councillor Mordue

Cabinet Member for Resources, Governance and Compliance

To consider the attached report.

Contact Officer:  Andrew Small (01296) 585507

(a)          Decision(s)

(1)  That the performance against the Treasury Management Action Plan for 2016/17 be noted.

(2)   That the performance against the Treasury Management Action Plan for 2017/18 be noted also.

(3)  That the Council’s thanks be extended to the in-house team for the efficient manner in which they had manged the Council’s capital funds.

(b)       Reason(s) for Decision(s)

The Council’s Treasury Management Strategy requires that an annual report be brought to Council after each year end and that a mid-year report for the current year is also brought to Council.

(c)        Alternative Options Considered

None.

(d)       Relevant Scrutiny Committee

A similar report had been submitted to the Finance and Services Scrutiny Committee on 5 September, 2017 and that Committee had no substantive comments.  The report would now be submitted to full Council and as such, this matter is not subject to call-in.

(e)        Conflicts of Interest / Dispensation(s)

None.

The Authority’s Treasury Management Policy required that an annual report be brought to Council each year end and also a mid-year report for the current year.  Cabinet received reports on both.

The objectives of the Treasury Management Team had been set out in the Action Plan agreed by Council in May, 2016.  The main activities continued to be:-

·         Foremost to maintain the security of the Council’s deposits by only depositing with trusted financial institutions and limiting the size and length of deposit with each organisation.

·         To directly manage a range of deposits in order to provide sufficient flexibility to meet day to day operational needs and with the aim of equalling the Local Authority Average 7 Day Rate for the rate of interest earned.

·         To only undertake new long term borrowing where the business case justified it.

It was reported that actual performance had been in line with the plan.  The Council had placed deposits in a decreasing market by spreading its deposits thinly across many trusted institutions in accordance with its policy.  The Authority had not taken any new long term borrowing and the in-house team had achieved interest rates above the 7 day LIBOR rate.

The report contained charts showing the monthly balances deposited by the in-house team and the monthly interest rates achieved during the year compared with the 7 day LIBOR rate.

When managing the Council’s deposits the primary consideration had been to protect capital rather than to maximise return.  This reflected the fact that the deposited sums were public money and therefore, any loss of capital should be avoided at all costs.  The Treasury Management Team continued to invest money in line with its list of approved (safe) institutions, varying the amounts and length of deposit according to the institution and cash flow requirements at the time.

Although a safe list of institutions was maintained, major unexpected events or sudden loss of confidence in the banking sector could not always be predicted.  Historically, the majority of the Council’s lending had been with building societies, but over the last year the Council had invested with some of the major banks in order to spread the risk of its portfolio.  The lending list was monitored throughout the year to take account of any changes within the sector i.e. building society mergers/conversions to banks.  During 2016/17 there had been no mergers that had affected the Council’s lending list.

Within the constraints of the lending list the objective of the in-house team remained to at least equal the Local Authority 7 Day Rate of Interest (LIBOR), whilst ensuring that money was always available to meet the Council’s day to day operational needs.

With interest rates still at their lowest level, the actual amount of deposit income generated had exceeded expectations by £84,763.  This had been due to the high level of money available for deposit from unspent reserves and balances held to meet capital programme needs.  The amount of interest received had been £344,763.  With the prevailing low rates the likelihood of an increase in the interest generated remained low, especially if the Capital Programme started to pick up.

The Council continued to operate two money market funds to give the in-house team easy access to surplus funds.  Whilst money market funds had the highest credit ratings, the interest rates offered during the year had reduced and this had meant that the returns had been lower than had been expected.  Although the returns had reduced the money market funds were required to manage the daily cash flow as they offered daily access without any loss of interest.

No new borrowing had been taken out during the year.  Any borrowing that the Council undertook had to be within the Authority’s authorised limit and operational boundary.  It was a requirement of the code that any deviations from these limits, approved or otherwise, should be reported to Council.  The Council did not use fund managers to assist with its investment decisions.

At the time of writing the Cabinet report, no new borrowing had been taken out, leaving the balance outstanding at £23.5 million.  Members considered later during the meeting a proposal to create a Property Investment Strategy, financed by up to £100 million of prudential borrowing.  If approved by Council, the borrowing limits would need to be revised.  In practice, it was likely that the need to borrow this sum would be phased over a number of years, as the acquisition of suitable property was likely to take some time.  However so as not to prevent opportunities being taken to acquire suitable property earlier, should they present themselves, it was proposed that the limits be increased to their maximum amounts as soon as the policy was agreed in order to provide maximum flexibility.  The Council’s current authorised and operational limits were set out for Cabinet as explained below.  Should the Property and Investment Strategy be approved, then these amounts would both need to be increased by £100 million:-

Authorised limit - £70 million – the combined maximum amount the Authority could take in borrowing to finance its capital expenditure plans and its day to day cash flow purposes.

Operational limit - £50 million – the amount the Authority realistically expected to borrow and represented the figure that the Authority would not expect to exceed on a day to day basis.

The amount of money deposited with banks and building societies at the end of July was £50 million, with another £8.8 million held in the two money market funds.

The Council still had the option to place some deposits with foreign banks and during the year it had reviewed its accounts with Handelsbanken, the Swedish bank, so that money had been transferred from a 90 day notice account to a 30 day notice account, the balance currently on deposit being £2 million.  Apart from Handelsbanken, the Council had deposited funds with the Sumitomo Mitsui Bank of Japan.  This had been done after consultation with the Council’s treasury management advisors, Capita Asset Services.  The balance currently on deposit was £1 million.

Property funds still offered some of the best returns on capital and investing in a property fund was within the strategy but as yet the Council had decided not to invest.  Current returns on investment were between 4.5% and 5%.  However as investments in property were tied to property value, there remained the risk that investing in this sector could result in reductions in property value.  For this reason any investment would have to be for a minimum of 5 years in order to smooth out fluctuations in the property sector and maximise the return.  If there was any change in investment strategy and an investment was being considered, then a report would be brought to Council for consideration.  The Finance and Services Scrutiny Committee had also received a copy of the Cabinet report.  The Chairman of that Committee attended Cabinet and advised that the Committee had noted the report without the need to make any substantive comments.

The Authority continued to operate an interest equalisation reserve to smooth out fluctuations in interest rates.  As a result of the increase in the level of sums managed by the Council during 2016/17, and despite the reduced interest rates available, the interest generated, although low compared with the previous year, had exceeded expectations.  This had meant that at the end of 2016/17, the interest equalisation reserve stood at £2.897 million.  The phased use of the balance on the reserve formed part of the annual budget setting exercise.  Following the last budget round, it had been agreed that the current balance on the reserve was a prudent amount to hold in the light of there being no expected change in interest rates in the medium term.

The Medium Term Financial Plan also recognised the Council’s use of capital and other balances in delivering its plans and the impact that this would have on interest earnings.  The plan was therefore gradually reducing the Council’s reliance on interest earnings over time, so as to manage the remaining balance on the interest equalisation reserve.

RESOLVED –

That Council be recommended to note:-

·         the performance against the Treasury Management Action Plan for 2016/17, and

·         the performance against the Treasury Management Acton Plan for 2017/18.