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Agenda Item No

 

The Vale of Glamorgan Council

 

Cabinet Meeting: 17 November, 2014

 

Report of the Leader

 

Treasury Management

 

Purpose of the Report

1.         To provide a mid year report on the Authority's treasury management operations for the period 1st April 2014 to 30th September 2014 which is a requirement of the 2011 edition of the CIPFA Treasury Management in the Public Services :Code of Practice.

Recommendations

1.         That the Treasury Management mid year report for the period 1st April 2014 to 30th September 2014 be noted.

2.         That approval be given to replace the second bullet point in paragraph 8.6 of the current Treasury Management and Investment Strategy with the following:

'The monies can be placed with the Council's Bankers even though the Bank may not meet the minimum credit rating criteria shown above. There would be no maximum on the amount deposited. Any such deposit must be withdrawn from the account and invested on the money market in the usual manner at the earliest opportunity'.

3.         The latest Treasury Management Indicators be noted.

4.         That this report be referred to Council for approval.

Reasons for the Recommendations

1.         To present the Treasury Management mid year report as required by the CIPFA Treasury Management in the Public Services: Code of Practice.

2.         To amend some of the details in respect of overnight deposits in particular circumstances.

3.         To present an update of the Treasury Management Indicators which are included in the treasury management strategy.

4.         To allow Council to consider the report.

Background

2.         On 7th March 2012, Council adopted the 2011 edition of the CIPFA Treasury Management in the Public Services: Code of Practice, which requires the Authority to approve a treasury management strategy before the start of each financial year, a mid year report and an annual report after the end of each financial year.

3.         In addition, Welsh Government Guidance on Local Government Investments recommends that local authorities consider and amend where necessary their investment strategies in light of changing internal or external circumstances. This report therefore meets the requirements of both sets of guidance.

 

Treasury Management Strategy 2014/15

4.         Council approved the 2014/2015 treasury management strategy at its meeting on 5th March 2014.

5.         The Authority's investment strategy is to secure the best return on its investments whilst having regard to capital security within the parameters laid down.

6.         The Authority's existing borrowing strategy estimated that it will borrow £15,195,000 of new loans to support the capital programme for 2014-2015. The council officers in conjunction with the treasury advisors have and will continually monitor the prevailing interest rates and the market forecasts and adopt a pragmatic approach to changing circumstances in respect of its borrowing needs.

7.         The Head of Finance (Section 151 Officer) is pleased to report that all treasury management activity undertaken during the period complied with the approved strategy, the CIPFA Code of Practice, and the relevant legislative provisions.

 

Economic Review / Interest Rate Prospects

 

8.         This section of the report has been provided by the Councils Treasury advisors:-

9.         Growth and Inflation: The recent strong performance of the UK economy continued with output growing at 0.8% in Q1 2014 and at 0.9% in Q2. The services sector once again grew strongly. On the back of strong consumption growth, business investment appeared to be recovering quickly, albeit from a low base. The annual Consumer Price Index (CPI) inflation rate fell to 1.2% year-on-year in September. 

10.      Revisions to the Gross Domestic Product (GDP) methodology, now compliant with the European System of Accounting 2010, mean that growth is now estimated to be 2.7% above its pre-recession peak in Q1 2008 rather than just 0.2% higher, the general theme being that the recession was not as deep and the recovery was earlier than initially estimated.  In anticipation of these revisions, the Monetary Policy Committee (MPC) has forecast growth at 3.4% in 2014. 

11.      Unemployment: The labour market continued to improve, with strong employment gains and the headline unemployment rate falling to 6.2%. However, earnings growth remained very weak, rising just 0.6% for the three months May-July 2014 when compared to the same period a year earlier. The growth in employment was masked by a large number of zero-hour contracts and involuntary part-time working.

12.      UK Monetary Policy: The MPC made no change to the Bank Rate of 0.5% and maintained asset purchases at £375bn.The MPC emphasised that when Bank Rate did begin to rise, it was expected to do so only gradually and would likely remain below average historical levels for some time to come.

13.      In the Bank of England’s August Inflation Report the Bank forecast growth to be around 3½% in 2014, easing back thereafter to around its pre-crisis historical average rate. Inflation was forecast to remain at, or slightly below, 2% before reaching the target at the end of the 2-year forecast period.

14.      The Bank’s Financial Policy Committee also announced a range of measures to cool the UK’s housing market to avert the potential of spiralling house prices derailing a sustainable economic recovery. The Prudential Regulation Authority also announced that it intends to consult on capital requirements for mortgages.

15.      Eurozone inflation continued to fall towards zero and there was mounting evidence that the already feeble recovery was losing pace. The unemployment rate remained stubbornly high at 11.5%. The European Central Bank lowered its official benchmark interest rate from 0.15% to 0.05%.The minutes of the Bank of England’s MPC meeting in September noted that weakness in the euro area had been the most significant development during the month and that, if it led once again to uncertainty about the sustainability of euro-area public and external debt, it could damage confidence and disrupt financial markets

16.      There was no change from the US Federal Reserve as the central bank kept policy on its current track. The US economy rebounded strongly in Q2 with annualised growth of 4.6%.

17.      Market reaction: Gilt yields have continued to decline and hit a financial year low at the end of August. What has driven yields lower is a combination of factors one of which is the slide towards deflation within the Eurozone (EZ).

18.      Outlook for Q3 and Q4 2014/15 - The stronger economic growth seen in the UK over the past six months is likely to use up spare capacity more quickly than previously assumed. Arlingclose has brought forward the timing for the first rise in Bank Rate to Q3 2015.

19.      The near-term risk is that the Bank Rate could rise sooner than anticipated, which is captured in the 'upside risk’ range of our forecast table below.

20.      The focus is now on the rate of increase and the medium-term peak and, in this respect, expectations are that rates will rise slowly and to a lower level than in the past.

 

 

 

 

 

 

 

 

 

 

Interim Report

 

21.      The following tables summarise the treasury management transactions undertaken by the Authority during the first half of this financial year. All activities were in accordance with the Authority’s approved strategy on Treasury Management. The following table sets out the monies borrowed / repaid during the period.

 

Loan Type

Opening Balance

Received

Repaid

Closing Balance

 

01/04/2014

 

 

30/09/2014

 

£’000

£’000

£’000

£’000

 

 

 

 

 

PWLB

89,267

0

(132)

89,135

 

 

 

 

 

Other Long Term Loans

6,002

0

0

6,002

 

 

 

 

 

Temporary Loans

100

0

0

100

 

 

 

 

 

Totals

95,369

0

(132)

 

95,237

 

 

 

 

 

 

 

·               Loans borrowed from the PWLB are intended to assist Local Authorities in meeting their longer term borrowing requirements.  The above loans are all at fixed rates of interest. The rate paid on each loan is largely dependent upon the original duration of the loan and date taken out.

 

·               Other Long term loans represent those non-PWLB loans that are repayable at least 1 year or more from the date they are advanced.  The bulk of this debt is represented by two market loans of £2,000,000 and £4,000,000. The balance of this debt is local bonds. These total £2,000 and are made up of small individual sums that are invested with the Authority for a number of years by members of the public.  

 

·               Temporary Loans represent those loans that are borrowed for a period of less than 1 year. They are borrowed on 7 day notice.

 

22.      External interest at an average rate of 5.60% and amounting to £2,671,254 has been accrued on these loans for the first 6 months of 2014/2015.

 

23.      The Authority has made the following investments for the period 1st April 2014 to 30th September 2014  as set out below:-  

 

Borrowing

Institution

Opening Balance

Invested

Returned

Closing Balance

 

01/04/2014

 

 

30/09/2014

 

£’000

£’000

£’000

£’000

 

 

 

 

 

UK Local Authorities

 

 

24,000

16,000

(22,000)

18,000

Debt Management Office

71,550

734,000

(736,550)

69,000

 

 

 

 

 

Totals

95,550

750,000

(758,550)

87,000

 

 

 

 

 

 

 

 

 

 

24.      Interest, at an average rate of 0.284% and amounting to £145,024 has been earned from these investments for the first 6 months of 2014/2015.

 

 Investment Strategy

 

25.      As can be seen from the table above the Authority has invested with the Debt Management Office (DMO) or UK Local Authorities. This strategy is considered prudent considering the continuing pressures in the financial markets. The Head of Finance (Section 151 Officer) will always have regard to the security and liquidity of the investments before seeking the highest rate of return, or yield.

26.      The Authority has appointed new Banker's - Lloyds Bank. The new banking arrangements are likely to go 'live' during November. However there will be a period of parallel running with the Co-op Bank, until all banking arrangements have been successfully transferred to Lloyds.

27.      Due to the change in Bank it is necessary to amend the Treasury Management and Investment Strategy 2014/15.

28.      It is proposed to replace the second bullet point in paragraph 8.6 with the following :

29.      'The monies can be placed with the Council's Bankers even though the Bank may not meet the minimum credit rating criteria shown above. There would be no maximum on the amount deposited. Any such deposit must be withdrawn from the account and invested on the money market in the usual manner at the earliest opportunity'.

 

 

Debt Management Strategy

 

30.      In light of the very low level of short term investment interest rates currently available, internal funds have been used to finance capital expenditure and no external loans have been borrowed to date this year.

 

Treasury Management Indicators

 

31.      The Authority measures its exposure to treasury management risks using the following indicators. Council is asked to note the following indicators as at 30th September 2014.

Interest Rate Exposure

·               This indicator is set to control the Authority's exposure to interest rate risk. The exposures  to fixed and variable rate interest rates, expressed as an amount of net principal borrowed were:

 

Limit

Actual

Met

Upper limit on fixed rate exposures

      152m

89,269

ü

Upper limit on variable rate exposures

+/- 154m

-106,650

ü

 

Fixed rate investments and borrowings are those where the rate of interest is fixed for the whole financial year.  Instruments that either mature during the financial year or have a floating interest rate are classed as variable rate.

Maturity Structure of Borrowing

·               This indicator is set to control the Authority's exposure to refinancing risk. The maturity date of borrowing is the earliest date on which the lender can demand repayment. The maturity structure of fixed rate borrowing as at 30th September 2014 was:

 

Upper Limit

Lower Limit

Actual

Met

Under 12 months

20%

0%

3.14%

ü

12 months and within 24 months

20%

0%

2.27%

ü

24 months and within five years

30%

0%

4.74%

ü

Five years and within 10 years

30%

0%

26.40%

ü

10 years and above

100%

0%

63.45%

ü

 

Principal Sums Invested for Periods Longer than 364 Days

·               This indicator is to control the Council’s exposure to the risk of incurring losses by seeking early repayment of its long term investments.  The total principal sums invested to final maturities beyond the period end were:

 

 

2014/15

2015/16

2016/17

Limit on principal invested beyond year end

£30M

£30M

£30M

Actual principal invested beyond year end

0

0

0

Within limit?

ü

ü

ü

Resource Implications (Financial and Employment)

32.      Money is borrowed for capital purposes and interest is charged to revenue accounts.

Sustainability and Climate Change Implications

33.      There are no direct implications arising from the report.

Legal Implications (to Include Human Rights Implications)

34.      Compliance with the Local Government Act 2003 and CIPFA’s Code of Practice for Treasury Management in the Public Services is mandatory.  

Crime and Disorder Implications

35.      There are no crime and disorder implications resulting from this report

Equal Opportunities Implications (to include Welsh Language issues)

36.      There are no equality implications resulting from this report.

Corporate/Service Objectives

37.      This meets the objective to provide effective treasury management. This is linked to the corporate objectives generally in that any savings made can be used to assist other services in meeting their objectives

Policy Framework and Budget

38.      This report needs to be referred to Council for approval.

Consultation (including Ward Member Consultation)

39.      None.

Relevant Scrutiny Committee

40.      Corporate Resources.

Background Papers

CIPFA’s  Code of Practice for Treasury Management in the Public Services,  The Prudential Code and WG guidance on local authority investments

Contact Officer

Robert Ingram, Principal Accountant.

Tel (01446 709252)

 

Responsible Officer:

Alan Jenkins

Section 151 Officer