Meeting documents

To consider the attached report.

Contact Officer:  Nuala Donnelly (01296) 585164

The Committee received a report on the Treasury Management Strategy for 2018/19.  The Treasury Management Statement, Treasury Management Strategy Statement and the Annual Investment Strategy, attached as appendices to the Committee report, would be reported to full Council on 22 February, 2018, for approval.

The annual Treasury Management Strategy included Prudential Indicators that were used as part of the self governance framework.  The Committee report provided supplementary background information to the Strategy and summarised a number of issues.  The key messages were:-

·                    Investments – the primary governing principle would remain with security over return and this was reflected in the criteria for selecting counterparties.

·                    Borrowing – overall, this remained fairly constant over the period covered by this report and the Council would remain under-borrowed against its borrowing requirement due to the higher cost of carrying debt.

·                    Governance – strategies were reviewed by the Audit Committee with continuous monitoring which included Mid-Year and Year End reporting.

The Prudential Code for Capital Finance in Local Authorities (the Code) was a professional Code that set out a framework for self-regulation of capital spending; in effect allowing councils to invest in capital projects which best met their service delivery objectives as long as they were affordable, prudent and sustainable, subject to Government reserve powers to restrict borrowing for national economic reasons.

The Code required the Council to agree and monitor a number of prudential indicators covering affordability, prudence, capital expenditure, debt levels and treasury management.  The indicators also formed the basis for in-year monitoring and reporting.

Thelimitsand indicatorsthat the Authority were requiredtodetermineby the code were:-

Capital and Debt Indicators

·                    Capital Expenditure – representedtheagreedCapital Programmeand set out the plannedcapital expenditureoverthenext three years.

·                    Capital Financing Requirement – theamount the Authorityneeded toborrowinorder to deliveritsCapitalExpenditureplans.

·                    Affordability Index – this was the proportion of the Authority’sincomethat was takenup by loanrepaymentsand interest.  The moretheAuthorityborrowed thelesswasavailablefor deliveringservices.

Treasury Management Indicators

·                    Exposure to Interest Rate Risk – themaximum proportionor borrowingwhichcould be on eitherfixedor variableinterest rates.  Bysettinga maximumproportiona limit was placedon theamount bywhich theAuthority’sfinancescould beaffectedby movements inbase rates.

·                    Maturity Profile – the maximum lengthoftimeoverwhichborrowing couldbe taken.  Authoritiescould borrowforany length providingtheycould affordtodo so.

·                    Authority Limit – 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 – 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 Strategy had been drawn up in association with the Council’s treasury management advisors, Link Asset Services and reflected up to date information and advice.  There had been no significant changes to the 2018/19 strategy.

The Committee was informed that the Council’s capital expenditure plans were the key driver of treasury management activity.  The Capital Programme for 2018/19 had been approved by Council on 31 January, 2018 and provided forecasts of receipts and the position with regards to current and future major investment projects.  A total capital spend of £10.85m had been approved for 2018/19.

A number of changes in respect of anticipated resources have been factored into the programme and were detailed in the report.  While there were no explicit requirements for further loans or borrowings the report explained that borrowing decisions were made on a case by case risk assessment basis.  The reduced borrowing costs for 2018/19 was a direct result of decisions to borrow less against agreed plans.

Other matters covered in the report including:-

·                     that the strategy had been updated in 2017/18 toallowtheCouncil to lendtoparishcouncils, if the opportunity arose (a £500,000and sixmonthlimit had been set).

·                     a Commercial Property Strategy which included a capital fund of £100m to be met from borrowing from the Public Works Loans Board, and a revenue budget of £100K from the New Homes Bonus (NHB) Fund had been agreed by Council in 2017 although no draw down had taken place, and was unlikely until 2018/19.

·                     that in December 2017, CIPFA had issued a revised Treasury Management Code of Practice and a revised Prudential Code which focused on non-treasury investments and especially on the purchase of property with a view to generating income.  CIPFA had issued a statement that accepted that revising codes at this late stage for the current 2018-19 budget cycle would be difficult.  The codes required all local authorities to produce detailed Capital Strategies, though CIPFA accepted that authorities may not be able to implement this in the 2018-19 budget cycle.

·                     that the Council was waiting on the of a DCLG consultation undertaken in December 2017, which had focussed particularly on non-financial asset investments.The Government believed that local authorities needed to demonstrate more transparency and openness in relation to investment activities.  The DCLG were looking to extend the principle of Security, Liquidity and yield to non-financial investments.

·                     information on the Minimum Revenue provision (MRP), including that the Government had launched a consultation suggesting four key changes to the current MRP.  It was anticipated that revised guidance would come into force from 1 April 2018.

·                     information in relation to IFRS arising from the 2018/19 Accounting Code of Practice proposals for financial assets.

·                     on the difficult investment environment which impacted on the Council’s ability to get material returns from investments.  The Council’s treasury advisor, Link Asset Services, as part of their service had provided a view on the future forecast rates for Base Rate and PWLB up until March 2021.

·                     that, from 3 January 2018, the EU had introduced a "Markets in Financial Instruments Directive" (MIFIS 2) to regulate firms who provided services to clients linked to financial instruments and the way they were traded.  Under MiFID II, all local authorities were classified as retail counterparties and had to consider whether to opt up to professional status to be able to invest in certain funds and products.  This would impact on AVDC who would be opting in to it.

·                     information on investments and loans as at 31 December 2017, as follows:-

o        Borrowings – Fixed Rate Funding - £22.886m at an average rate of 3.545%

o        Investments – Fixed Rate and Notice Account Investments - £56.129m at an average rate of 0.518%.

·                     that the Council operated an Interest Equalisation Reserve for a number of years to smooth out fluctuations in interest rates.  At the end of 2017/18, the reserve was estimated to be £2.718m.

·                     that the Credit Quality/Rating table in the Creditworthiness policy (Banks) should be updated with points 1.2 to 1.4 inclusive combined into a point 1.2, to indicate that these all referred to non UK banks.

Members requested further information and were informed:-

(i)            that the Council had agreed in September 2017 to set up a Commercial Property Strategy which included a capital fund of £100m.  However, the Council was still awaiting clarification as the Government had introduced additional controls for Council borrowings for such Strategies.  It was confirmed that although there had been no borrowings made to date (or any borrowning costs incurred), a Panel still needed to be established that would approve expenditure within the overall limit of the Strategy, subject to agreement on satisfactory business case / risk assessment proposals.

(ii)           that any proposals that required borrowings above the authorised borrowing limits would be considered by scrutiny before being submitted to full Council for approval.

(iii)          that the training needs of Members and Treasury Management Officers would be reviewed in 2018/19, in line with the CIPFA Code requirement.

(iv)         that the Council was complying with all investment rules and guidance relating to the introduction of the MiFID II legislation.

(v)          that further consideration could be given to managing investments through the Public Sector Deposit Fund managed by CCLA Investment Management Limited.

(vi)         with an explanation of the average rate (3.545%) for borrowings made by the Council.  It was explained that this was an overall blended rate comprising both long-term and short-term borrowings.

RESOLVED –

(1)          That Council be recommended to approve the Treasury Management Strategy for 2018/2019, along with the Prudential Indicators and Minimum Revenue Provision policy provision, as detailed in the appendices to the report.

(2)          That the Committee’s concerns regarding the delay in establishing the Panel that could approve investment proposals under the Commercial Property Strategy, and regarding borrowings above the authorised borrowing limits be mentioned in the report to full Council.