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Agenda Item No. 7

 

The Vale of Glamorgan Council

 

Scrutiny Committee (Corporate Resources): 12th November 2013

 

Report of the Section 151 Officer

 

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 2013 to 30th September 2013 which is a requirement of the 2011 edition of the CIPFA Treasury Management in the Public Services :Code of Practice.

2.             To submit for consideration the proposed amendments to the Treasury Management and Investment Strategy.

3.             To set out the latest Treasury Management Indicators

Recommendations

1.             That the Treasury Management mid year report for the period 1st April 2013 to 30th September 2013 be noted.

2.             That the proposal to replace paragraph 8.6 of the current Treasury Management and Investment Strategy with the following be noted:

'Certain contingencies are required to be included in the strategy for instances where sums of money cannot be invested on the money market either because it is received too late in the working day or for any other reason. In such cases-

    Either these monies can be deposited in ' call bank accounts' in UK banks which have a short term credit rating of a minimum of  F1 (Fitch), P-1 (Moody's) and A-1 (Standard and Poor's) even where there is a negative rating watch / outlook on the bank. 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 Any such deposit must be withdrawn from the account and invested on the money market in the usual manner at the earliest opportunity; or

    The monies can be placed with the Co-operative Bank (the Council’s Bankers) even though the Bank did not meet the minimum credit rating criteria and it could result in exceeding the maximum investment limit. Any such deposit must be withdrawn from the account and invested on the money market in the usual manner at the earliest opportunity'.

 

3.             That the proposal to amend the current Treasury Management and Investment Strategy to increase the total amount that can be invested in UK Local Authorities from £20 million to £30 million with no change to the individual authority limit of £5 million be noted.

4.             That the latest Treasury Management Indicators be noted.

5.             That any comments be forwarded to the next Cabinet.

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 apply the short term credit criteria to overnight deposits in particular circumstances.

3.             To allow an increase in the overall total investment with UK Local Authorities.

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

5.             To make any comments to Cabinet.

Background

4.             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.

5.             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 2013/14

6.             Council approved the 2013/2014 treasury management strategy at its meeting on 6th March 2013.

7.             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.

8.             The Authority's borrowing strategy estimated that it will borrow £3,827,000 of new external loans to support the capital programme for 2013-2014. 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.

9.             The Head of Financial Services (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

 

10.        This section of the report has been provided by the Council's treasury advisors and covers the period to September 2013:-

11.        Growth: The UK economy showed some improvement, with consumer spending boosting growth. Gross Domestic Product (GDP) for the first quarter of 2013 was revised up to +0.4% and for the second quarter was +0.7%. Recent data suggests a stronger rate in quarter three. 

12.        Some positive signs for household spending emerged. The deterioration in real earnings growth (i.e. earnings less inflation) slowed, which implied a slower erosion of purchasing power.  Consumer confidence improved. Household savings rates remained high, which is unsurprising given the uncertain economic outlook, but appear to be on a downward track, suggesting spending was being driven by borrowing or lower savings. This raises questions about the sustainability of the recovery at these rates of growth.

13.        Inflation: Annual CPI for August (published September) was 2.7%. Inflation fell in line with expectations and is expected to remain close to this level throughout the autumn. Further out, inflation should fall back towards the 2% target as external price pressures fade and a revival in productivity growth curbs domestic cost pressures.

14.        Monetary Policy: There was no change to UK monetary policy with official interest rates and asset purchases maintained at 0.5% and £375bn respectively.

15.        Global: Whilst the outlook for the global economy appeared to have improved over the first half of calendar 2013/14, significant economic risks remain, particularly in China and the Eurozone. The US recovery appeared to be in train, but a lack of agreement on the federal budget by the end of September caused a partial government shutdown at the start of October, which could have an effect on GDP growth.

16.        At the time of writing this activity report in September 2013, the UK economic outlook appears to have improved. The projected path for growth has risen, but remains relatively subdued, with a distinct reliance on household consumption, which itself remains under pressure given the deterioration in real earnings growth, high unemployment and general low confidence. The latest forecast for Bank Rate from our advisors Arlingclose is below:

 

Dec-13

Mar-14

Jun-14

Sep-14

Dec-14

Mar-15

Jun-15

Sep-15

Dec-15

Mar-16

Jun-16

Sep-16

Official Bank Rate

 

 

 

 

 

 

 

 

 

 

 

 

Upside risk

 

0.25

0.25

0.25

0.25

0.25

0.50

0.50

0.50

0.75

0.75

0.75

Arlingclose Central

0.50

0.50

0.50

0.50

0.50

0.50

0.50

0.50

0.50

0.50

0.50

0.50

Downside risk

0.25

0.25

0.25

0.25

0.25

0.25

0.25

0.25

0.25

0.25

0.25

0.25

 

Interim Report

 

17.        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

 

01/04/2013

 

 

30/09/2013

 

£’000

£’000

£’000

£’000

 

 

 

 

 

PWLB

91,524

0

2,123

89,401

 

 

 

 

 

Other Long Term Loans

6,002

0

0

6,002

 

 

 

 

 

Temporary Loans

100

0

0

100

 

 

 

 

 

Totals

97,626

0

2,123

95,503

 

·         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. 

18.        External interest at an average rate of 5.6019% and amounting to £2,894,495 has been accrued on these loans for the first 6 months of 2013/2014.

19.        The Authority has made the following investments for the period 1st April 2013 to 30th September 2013  as set out below:-  

Borrowing

Institution

Opening Balance

Invested

Returned

Closing Balance

 

01/04/2013

 

 

30/09/2013

 

£’000

£’000

£’000

£’000

 

 

 

 

 

UK Local Authorities

 

16,000

17,000

 

20,000

13,000

Debt Management Office

74,450

709,700

694,775

89,375

 

 

 

 

 

Totals

90,450

726,700

714,775

102,375

 

20.        Interest, at an average rate of 0.2633% and amounting to £131,716 has been earned from these investments for the first 6 months of 2013/2014.

 Investment Strategy

 

21.        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 Financial Services (Section 151 Officer) will always have regard to the security and liquidity of the investments before seeking the highest rate of return, or yield.

22.        The uncertainty in the financial markets means that the Authority needs additional flexibility to deal with monies received after midday on a working day and therefore too late to be accepted as an investment on the money market. The proposal is to provide an option to the Authority to place the monies  in  'call bank accounts' in UK banks which have a short term credit rating criteria of a minimum of F1 (Fitch), P-1 (Moody's) and A-1 (Standard and Poor's) even where there is a negative rating watch / outlook on the bank. Fitch’s F1 indicates the strongest intrinsic capacity for timely payment of financial commitments, Moody’s P-1 indicates a superior ability to repay short term debt and Standard & Poor’s A-1 indicates a strong capacity to meet financial commitments. 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.

23.        In addition it is considered appropriate at this time to increase the total amount that can be invested with UK Local Authorities from £20 million to £30 million. The investment with UK Local Authorities will usually give a better rate of return than the DMO without impacting on security of the investment. Investments with UK Local Authorities are not restricted to a maximum investment duration of 6 months as with the DMO, which will accordingly reduce costs of administration. The maximum investment with any individual authority will remain limited to £5 million.

Debt Management Strategy

 

24.        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

 

25.        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 2013.

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

      147m

91,626

Upper limit on variable rate exposures

+/- 154m

-102,825

 

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 2013 was:

 

Upper Limit

Lower Limit

Actual

Met

Under 12 months

20%

0%

3.74%

12 months and within 24 months

20%

0%

3.03%

24 months and within five years

30%

0%

6.18%

Five years and within 10 years

30%

0%

18.27%

10 years and above

100%

0%

68.78%

 

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:

 

2013/14

2014/15

2015/16

Limit on principal invested beyond year end

£30M

£30M

£30M

Actual principal invested beyond year end

0

0

0

Within limit?

Resource Implications (Financial and Employment)

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

Sustainability and Climate Change Implications

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

Legal Implications (to Include Human Rights Implications)

28.        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

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

Equal Opportunities Implications (to include Welsh Language issues)

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

Corporate/Service Objectives

31.        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

32.        This report needs to be referred to Council.

Consultation (including Ward Member Consultation)

33.        None.

Background Papers

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

 

Contact Officer

Robert Ingram, Principal Accountant.

Tel (01446 709252)

Officers Consulted

Not Applicable

Responsible Officer:

Clive Teague, Section 151 Officer

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