Meeting documents

To consider the attached report.

Contact Officer:  Nuala Donnelly (01296) 585164

The Committee received a report on the Treasury Management Strategy for 2019/20.  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 in February 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.

The Committee was informed that the Council’s capital expenditure plans were the key driver of treasury management activity.  The Capital Programme for 2019/20 had been considered separately at the meeting and provided forecasts of receipts and the position with regards to current and future major investment projects.  A total capital spend of £22.12m had been proposed for 2019/20.

A number of changes in respect of anticipated resources have been factored into the programme and were detailed in the report.  These included a planned contribution from revenue, the use of reserves and also Lottery, Grants and Section 106 which related to external resources not related to asset sales.

Borrowing would be required to support the capital programme.  The plan included £9.28m of borrowing to support spend on Silverstone and Westcott Enterprise Zones and also on Pembroke Road.  The revenue costs of the borrowing were included in the agreed business plans.    The level of borrowing would be managed in-year and only actioned after cash balances had been utilised.

All decisions to borrow were made against a background of existing resource availability and minimising costs and maximising returns.  Where possible, decisions to borrow were avoided with the use of the Council’s capital receipts being a preferred methodology to fund capital development.  The reduced borrowing costs for 2019/20 were a direct result of decisions to borrow less against agreed plans.

The Council had 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 £100,000 from the New Homes Bonus (NHB) Fund.  As yet no draw down has taken place, and this was increasingly unlikely to be actioned in  2019/20.  The objective of the scheme was to generate new streams of income to help offset the significant cuts in Government funding and to ensure sufficient finance was available to support the continued delivery of and investment in services to the local community.

In December 2017, CIPFA had issued a revised Treasury Management Code of Practice and a revised Prudential Code.  These revisions had particularly focused on non-treasury investments and especially on the purchase of property with a view to generating income.

The treasury management reports for 2019/20 take account of the CIPFA Code of Practice on Treasury Management 2017 and the CIPFA Prudential Code 2017.  The Prudential Code 2017 introduced a new requirement for local authorities to produce an annual capital strategy.

There were also proposals in relation to IFRS arising from the 2018/19 Accounting Code of Practice proposals for financial assets.  Whilst for many this was not a significant issue, there were technical changes in relation to expected Credit Loss Model and also equity related to the "commercialism" agenda, property funds, equity that needed to be considered..

As a result of the change in accounting standards for 2018/19 under IFRS 9, the Council would consider the implications of investment instruments which could result in an adverse movement in the value of the amount invested and resultant charges at the end of the year to the General Fund.  IFRS 16 replaced IAS 17 Leases and its related interpretations.  It would apply to the 2019/20 financial statements subject to the consultation process and CIPFA/LASAAC’s decisions for adoption in the 2019/20 Code.  The changes introduced by the standard would have substantial practical implications for local authorities that currently had material operating leases, and were also likely to have an effect on capital financing arrangements.

Other matters covered in the report included:-

·                     that the Council’s investment priorities would be security first, portfolio liquidity second and then yield (return).

·                     the Council’s investment policy had regard to the following:-

o        MHCLG’s Guidance on Local Government Investments ("the Guidance").

o        CIPFA Treasury Management in Public Services Code of Practice and Cross Sectoral Guidance Notes 2017 ("the Code").

o        CIPFA Treasury Management Guidance Notes 2018.

·                     A number of changes were proposed for the 2019-20 Investment Strategy that was included at Appendix A-4 to the Committee report:-

o        changes to the counterparty limits for banks so that A rated banks were also available for deposits up to 1 year.  Individual limits had also been increased so that A rated was £5m, AA rated was £7.5m and AAA rated was £10m.

o        this could be justified as recent changes to the stress testing that banks went through had become far more stringent.  To qualify as an A rated entity, banks needed to be far more secure and have many more liquid assets than previously rated at AA or even AAA.

·                     The CIPFA revised 2017 Prudential and Treasury Management Codes require, for 2019-20, all local authorities to prepare an additional report setting out the Council’s Capital Strategy that was included at Appendix A-7 to the Committee report.  While the Capital Strategy was meant to drive capital investment ambition over a 2-30 year period, it was overshadowed by the unitary decision which only gave the Council the ability to plan for a single year.

·                     an update on the current economic background including for the UK economy.  It was currently forecast that the Monetary Policy Committee would increase the Bank Rate twice more by 0.25% each time by 2020 to end at 1.50%.

·                     that last year the use of Property Funds had been included within the Strategy as an alternative long term deposit to the use of Fund Managers.  However, the use of Property Funds for investment had not been engaged for 2018-19.

·                     information on investments and loans as at 31 December 2018, as follows:-

o        Borrowings – Fixed Rate Funding - £17.694m at an average rate of 4.114%

o        Investments – Fixed Rate and Notice Account Investments - £44.694m at an average rate of 0.803%.

·                     that the authority has previously operated an InterestEqualisationReserve tosmoothout fluctuations in interest rates.  With returns on investment higher than budget, by the end of 2018/19, the interestequalisationreservewas estimatedtobe £2.053million.  Cabinet had now agreed that the reserve could be utilised to support the transitional costs of the unitary decision.

Members requested further information and were informed:-

(i)            that the Council hoped not to have to borrow for the Pembroke Road Depot scheme as the Council was currently underborrowed, although it was acknowledged that interest rates for long term borrowing were still at near to historic low levels.

(ii)           that it was not the Council’s practice to borrow monies just for investment.

(iii)          an explanation was provided on the Annual Investment Strategy (Appendix A4).

Members also commented that it would be sensible in advance of the establishment of the new Buckinghamshire Council for AVDC not to draw down and commit to investments via the Commercial Property Investment Strategy.

RESOLVED –

(1)          That Council be recommended to approve the Treasury Management Strategy for 2019/2020, along with the Prudential Indicators, the Minimum Revenue Provision policy provision and the Capital Strategy 2019-20, as detailed in the appendices to the report.