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Agenda Item No

The Vale of Glamorgan Council

Cabinet Meeting: 23 February, 2015

Report of the Leader

Treasury Management

 

Purpose of the Report

1. To provide an interim report on the Council’s treasury management operations for the period 1st April 2014 to 31st December 2014 and to submit for consideration the proposed 2015/16 Treasury Management and Annual Investment Strategy.

Recommendations

1. That the Treasury Management interim report for the period 1st April to 31st December 2014 be endorsed and referred to Council for approval.

 

2. That the borrowing figure for the Authorised Limit for External Debt for 2014/15 included in the current Treasury Management and Investment Strategy be amended to £262,000,000. Cabinet is requested to endorse the amendment and refer the change to Council for approval.

 

3. That the borrowing figure for the Operational Boundary for External Debt for 2014/15 included in the current Treasury Management and Investment Strategy be amended to £244,000,000. Cabinet is requested to endorse the amendment and refer the change to Council for approval.

 

4. The proposed 2015/16 Treasury Management and Investment Strategy be endorsed and referred to Council for approval including the following specific resolutions as set out in the Strategy Action Plan:

  • The Authorised Limit for External Debt be set at £262,000,000 for 2014/15, £280,000,000 for 2015/16, £296,000,000 for 2016/17 and £300,000,000 for 2017/18.
  • The Operational Boundary for External Debt be set at £244,000,000 for 2014/15, £262,000,000 for 2015/16, £277,000,000 for 2016/17 and £281,000,000 for 2017/18.
  • The Section 151 Officer be given delegated authority within the total Authorised Limit and Operational Boundary as estimated for individual years to effect movement between the separately agreed limits for borrowing and other long term liabilities.
  • An upper limit is set on its fixed interest rate exposures for 2014/15 of £143,000,000, for 2015/16 of £251,000,000, for 2016/17 of £266,000,000 and for 2017/18 of £269,000,000 of its net outstanding principal sum on its borrowings / investments.
  • An upper limit is set on its variable interest rate exposures as an absolute value for 2014/15 of +/-£149,000,000, for 2015/16 of +/- £146,000,000, for 2016/17 of +/- £142,000,000 and for 2017/18 of +/- £138,000,000 of its net outstanding principal sums on its borrowings / investments.
  • An upper limit of £30,000,000 is set for total principal sums invested for over 364 days for 2014/15, 2015/16, 2016/17 and 2017/18.
  • The amount of projected borrowing that is fixed rate maturing in each period as a percentage of total projected borrowing that is fixed rate for 2015/16 be set as below:

 

 

 



Upper Limit

Lower Limit

Under 12 months

20%

0%

12 months and within 24 months

20%

0%

24 months and within 5 years

30%

0%

5 years and within 10 years

40%

0%

10 years and above

100%

0%

 

 

  • The Prudential Indicators set out in paragraph 4.1 and 4.2 in this Strategy be approved.

Reasons for the Recommendations

1. To present the Treasury Management Interim Report.

 

2. To amend the 2014/15 figure for Authorised Limit for External Debt.

 

3. To amend the 2014/15 figure for Operational Boundary for External Debt.

 

4. The Treasury Management and Annual Investment Strategy is prepared as required by the Local Government Act 2003.

 

 

Background

2. The Welsh Government (WG) provides the Council with a General Capital Funding grant and the Authority is also advised of a level of borrowing that WG is prepared to fund via the Revenue Support Grant Settlement.  If the Council wishes to borrow in excess of this level to increase its capital expenditure, then it can. However, it will either have to find the additional costs of borrowing through savings in other services or increases in council tax.

 

3. In order to manage this increased flexibility, Part1 of the Local Government Act 2003 requires local authorities to have regard to the Prudential Code, which has been developed by the Chartered Institute of Public Finance and Accountancy (CIPFA) as a professional code of practice.

 

4. The key objectives of the fully revised Prudential Code are to ensure that the capital investment plans of local authorities:

  • Are affordable;
  • all external borrowing and other long term liabilities are within prudent and sustainable levels;
  • the treasury management decisions are taken in accordance with professional good practice.

5. In March 2012 the Council adopted the CIPFA Treasury Management in the Public Services: Code of Practice 2011 Edition (the CIPFA Code), which requires the Council to approve a treasury management strategy before the start of each financial year.

 

6. The Code of Practice and legislation requires the Council to set out its Treasury Management Strategy and to prepare an Investment Strategy. The WG issued revised Guidance on Local Authority Investments in April 2010 that requires the Council to approve an investment strategy before the start of each financial year and states that authorities may produce a single strategy document, covering both the requirements of the CIPFA Treasury Management Code and WG's guidance.

 

7. The Authority together with the other Welsh Councils who continue to retain their Council Housing stock are in the process of buying themselves out of the Housing Revenue Account (HRA) Subsidy arrangements. An estimated settlement value (buy out) required to be borrowed by the Authority from the Public Works Loans Board (PWLB) of £90 million has been used in determining the new Authorised Limit for External Debt and Operational Boundary for External Debt for 2014/15 and in the compilation of the proposed 2015/16 Treasury Management and Investment Strategy. The Authority will be advised of the actual settlement value by WG on the 31st March 2015 whereupon it will arrange the loan from the PWLB. The loan will be actually received by the Authority on the 2nd April 2015. 

 

8. The proposed Treasury Management and Investment Strategy for 2015/16, is attached at Appendix 1. The Treasury Management Strategy itself covers a rolling period of three years and is intended to link in to the Medium Term Financial Planning process. The Investment Strategy covers the next financial year. The document also includes a number of statutory Prudential Indicators that may be used to support and record local decision-making.

Proposed Strategy 2015/16

9. As at the 31st December 2014 the Authority has placed the majority of its investments with the 'Debt Management Account Deposit Facility' (DMADF) of the Bank of England. The DMADF deposits are guaranteed by the UK Government.

 

10. The Financial Services (Banking Reform) Act 2013 introduced investors bail-ins which will now replace government bail-outs in the UK. This change would leave Local Authorities and other large depositors as one of the few categories able to take losses. Such investments are therefore subject to the risk of credit loss via a bail in should the regulator determine that the bank / building society is failing or likely to fail. The current credit rating criteria of financial institutions used by the Authority for investment purposes are considered robust in determining whether a body is of high credit quality. It is therefore considered prudent at this time to make no changes to the existing investment counter parties / credit rating limits. Although it is proposed to increase the maximum total amount that can be invested with Local Authorities for 2015/16 to £50 million (currently £40 million), which will allow increased flexibility. This approach is likely to result in the Authority's investment options for 2015/16 being with UK Government which includes DMADF, Treasury Bills and Other Local Authorities. As always priority will be given firstly to the security and liquidity of the investment. 

 

11. The Authority will continue to use credit ratings from the three main rating agencies Fitch Ratings Ltd, Moody’s Investors Service and Standard & Poor’s to assess the risk of loss of investments. The lowest available credit rating will be used to determine credit quality. In addition regard will be given to other available information on the credit quality of banks and building societies.

Interim Report

12. In so far as the Council’s treasury management operations entered into for the period 1st April 2014 to 31st December 2014 are concerned, all activities were in accordance with the Council’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



31/12/2014


£’000

£’000

£’000

£’000

PWLB

89,267

0

1,600

87,667

Other Long Term Loans

6,002

0

0

6,002

Temporary Loans

100

0

0

100

Totals

95,369

0

1,600

93,769

 

 

 

  • Loans borrowed from the Public Works Loan Board (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 £2,100 and are made up of small individual sums that are invested with the Council 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 notice. 

13. External interest at an average rate of 5.54% and amounting to £3,915,405 has accrued on these loans for the first 9 months of 2014/2015.

 

14. The Council has made the following investments for the period 1st April 2014 to 31st December 2014 and  are set out below:-  

 

 

 


Borrowing Institution

Opening Balance

Invested

Returned

Closing Balance


01/04/2014



31/12/2014


£’000

£’000

£’000

£’000

Local Authorities

24,000

38,000

(28,000)

34,000

Debt Management Account Deposit Facility

71,550

1,135,200

(1,158,750)

48,000

Totals

95,550

1,173,200

(1,186,750)

82,000

 

 

15. Interest, at an average rate of 0.30% and amounting to £208,828 has been accrued from these investments for the first 9 months of 2014/2015.

Resource Implications (Financial and Employment)

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

Sustainability and Climate Change Implications

17. There are no sustainability and climate change implications.

Legal Implications (to Include Human Rights Implications)

18. 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

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

Equal Opportunities Implications (to include Welsh Language issues)

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

Corporate/Service Objectives

21. 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

22. This is a matter for decision by Full Council.

Consultation (including Ward Member Consultation)

23. None.

Relevant Scrutiny Committee

24. 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)

 

 

Officers Consulted

Not applicable

 

 

Responsible Officer:

Section 151 Officer

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