The Vale of Glamorgan Council

Cabinet Meeting: 27 July, 2015

Report of the Leader

Treasury Management

Purpose of the Report

1.    To present to Cabinet the annual review report on Treasury Management 2014/15.


1.    That Cabinet accept the annual report on Treasury Management 2014/15 and that the report be referred to Council for approval.

Reasons for the Recommendations

1.    To accept and refer the report to Council.


2.    In March 2012 the Council adopted the 2011 edition of the CIPFA Treasury Management in the Public Services: Code of Practice, which requires the Council 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.    This annual treasury report has been prepared as required and covers:

  • the economy / interest rates in 2014/15;
  • the strategy for  2014/15;
  • the borrowing outturn for 2014/15;
  • investment outturn for 2014/15;
  • compliance with treasury limits and Prudential Indicators;

The Economy / Interest Rates in 2014/15

4.    The following information has been prepared by the Authority's Treasury Management adviser, it sets out the changing conditions under which Treasury Management operations were carried out.


5.    Growth and Inflation: The robust pace of Gross Domestic Product (GDP) growth of 3% in 2014 was underpinned by a buoyant services sector, supplemented by positive contributions from the production and construction sectors. Resurgent house prices, improved consumer confidence and healthy retail sales added to the positive outlook for the UK economy given the important role of the consumer in economic activity.


6.    Annual Consumer Price Index (CPI) inflation fell to zero for the year to March 2015, down from 1.6% a year earlier.  The key driver was the fall in the oil price and a steep drop in wholesale energy prices with extra downward momentum coming from supermarket competition resulting in lower food prices. Bank of England Governor Mark Carney wrote an open letter to the Chancellor in February, explaining that the Bank expected CPI to temporarily turn negative but rebound around the end of 2015 as the lower prices dropped out of the annual rate calculation.


7.    Labour Market: The UK labour market continued to improve and remains resilient across a broad base of measures including real rates of wage growth. January 2015 showed a headline employment rate of 73.3%, while the rate of unemployment fell to 5.7% from 7.2% a year earlier. Comparing the three months to January 2015 with a year earlier, employee pay increased by 1.8% including bonuses and by 1.6% excluding bonuses.


8.    UK Monetary Policy: The Bank of England’s Monetary Policy Committee (MPC) maintained interest rates at 0.5% and asset purchases Quantitative Easing (QE) at £375 billion.  The minutes of the MPC meetings reiterated the Committee’s stance that the economic headwinds for the UK economy and the legacy of the financial crisis meant that increases in the Bank Rate would be gradual and limited, and below average historical levels.


9.    Political uncertainty had a large bearing on market confidence this year. The possibility of Scottish independence was of concern to the financial markets, however, this dissipated following the outcome of September’s referendum.


10.    On the continent, the European Central Bank (ECB) lowered its official benchmark interest rate in September and the rate paid on commercial bank balances.  The much-anticipated quantitative easing, which will expand the ECB’s balance sheet by €1.1 trillion was finally announced by the Central Bank at its January meeting. The possibility of a Greek exit from the Eurozone refused to subside given the clear frustrations that remained between its new government and its creditors.


11.    The US economy rebounded strongly in 2014, employment growth was robust and there were early signs of wage pressures building, albeit from a low level. The Federal Reserve made no change to US policy rates. The central bank however continued with ‘tapering’, i.e. a reduction in asset purchases by $10 billion per month, and ended them altogether in October 2014. 


12.    Market reaction: From July, gilt yields were driven lower by a combination of factors: geo-political risks emanating from the Middle East and Ukraine, the slide towards deflation within the Eurozone and the big slide in the price of oil and its transmission though into lower prices globally.

Treasury Management Strategy 2014/15

13.    The Section 151 Officer continued to adopt a cautious approach with respect to Treasury Management operations. The Council's primary objectives for the management of its investments are to give priority to the security and liquidity of its funds before seeking the best rate of return. This being the case the Authority continued to place the majority of its funds with the 'Debt Management Account Deposit Facility' (DMADF) as these deposits are guaranteed by the British Government, although the interest rate is lower than some commercial banks.


14.    Funds not placed in the DMADF were placed with other Local Authorities. These investments attract a slightly more favourable rate of return but still give priority to the security of funds invested.


15.    The Council's primary objective for the management of its debt is to ensure its long term affordability. The majority of its loans have therefore been borrowed from the Public Works Loan Board at long term fixed rates of interest. In 2014/15 the Council continued to finance the majority of its capital expenditure from internal resources. The potential reduction of the Council's investments balances at times of elevated credit risk was considered the most prudent option available to the Authority at this time.


16.    During 2014-2015 the Authority did borrow externally from the Public Works Loan Board (PWLB) as a special project rate was available under the 21st Century Schools Initiative.


17.    Council approved the Treasury Management Strategy for 2014/15 at its meeting on the 5th March 2014, minute no. 881


18.    Amendments to enable the borrowing required for the Housing Revenue Account Subsidy Buyout were made to the Treasury Management Strategy for 2014/15 as part of the 2015/16 Treasury Management Strategy report which was approved by Council on 4th March 2015, minute no. 938.


19.    The Housing Revenue Account Subsidy Buyout took place on 2nd April 2015, the 11 stock retaining councils in Wales took out PWLB loans and paid them over to the Treasury via Welsh Government to buy themselves out of the Housing Subsidy arrangements. The required loan sum of £63.186 million was arranged with PWLB on 31st March 2015. The transaction took place on 2nd April 2015 and therefore, is part of the 2015/16 accounts.


20.    The Section 151 Officer advises that all treasury management activity undertaken during the financial year complied with the amended approved strategy, the CIPFA Code of Practice, and the relevant legislative provisions.

Borrowing Outturn 2014/15

21.    During 2014/15 £3,437,000 of internal funds was used in the financing of capital expenditure. An average rate of interest was charged to reflect the use of capital resources. The total charges for interest and principal including for prudential borrowing during the year 2014/15 were £5,622,960 and £4,731,491 respectively.


22.    For all borrowing excluding loans that are advanced under the Local Government Borrowing Initiative an original estimate of 5.11% revised down to 4.60% had been included in the estimates for 2014/15. The actual rate was 4.61%.


23.    The Authority internally financed additional prudential borrowing totalling £12,154,000. This new borrowing comprised of 3 new loans. An education school investment programme loan for £5,370,000 and a Welsh Housing Quality Standard (WHQS) loan for £4,554,000 were both raised at a rate of 4.61%.and a loan for £2,230,000 was raised under the "Local Government Borrowing Initiative" which authorises funding for improving the road surfaces of the road network of the Authority. The interest rate on this loan was 3.94%. The total charge for interest and principal for 2014/2015 on prudential borrowing was £441,787 & £248,147 respectively.


24.    The Council’s external debt as at the 31st March 2015 (excluding accrued interest) was £96.368 million (1st April 2014 £95.369 million). This can be summarised as follows:












89,267 4,000 (3,001) 90,266
Market Loans 6,000 0 0 6,000
Bonds 2 0 0 2
Temporary Loans 100 0 0 100
Total 95,369 4,000 (3,001) 96,368

  • Loans borrowed from the Public Works Loan Board (PWLB) are intended to assist Local Authorities in meeting their longer term borrowing requirements. New loans totalling £4 million were borrowed during 2014-2015 at rates of 2.58% & 2.87%. The average interest rate on all the Authority’s outstanding PWLB debt has moved over the course of the year from 5.627% to 5.378%.
  • Market loans represent those non-PWLB loans that are repayable at least 1 year or more from the date they are advanced. The debt is a market loan, £2,000,000 of which will mature on the 8th November 2021 and £4,000,000 will mature on the 23rd February 2054. The average interest rate on the Authority’s outstanding market loans is 5.322%
  • Local bonds are issued to members of the public who wish to invest in the Authority.  There were no bond maturities during 2014/15. The average interest rate on the Authority’s outstanding local bond debt is 1.30%.
  • Temporary Loans represent loans that have no fixed maturity date. Current loans have been borrowed from The Vale of Glamorgan Welsh Church Act Fund. Interest is calculated on a monthly basis using the "Average 7 Day Rate". The interest rates payable on the Authority’s outstanding temporary loans ranged from 0.39% to 0.51% during 2014/15.

Investment Outturn for 2014/15

25.    Internally Managed Investments – The Authority manages investments in-house and is able to invest with those institutions who as a minimum meet the credit rating criteria and therefore would be included in the approved lending list. The Authority can invest short term for a range of periods from overnight to 364 days, dependent on its cash flows, its interest rate view and the interest rates/ periods on offer.  


26.    Investment movements for 2014/15 (excluding accrued interest) are summarised as follows:-








Debt Management Account Deposit Facility 71,550 1,561,150 (1,581,575) 51,125
Local Authorities 24,000 53,000 (47,000) 30,000
Total 95,550 1,614,150 (1,628,575) 81,125

27.    The continuing market uncertainties resulted in the majority of available funds still being invested cautiously either in the Debt Management Account Deposit Facility (DMADF) or with Local Authorities.


28.    Debt Management Account Deposit Facility - The Authority placed a significant portion of all surplus funds in the DMADF, which is guaranteed by the British Government. The maturity dates of these investments ranged from overnight to a maximum of period of 6 months. The Authority made a return of £189,719 at a rate of 0.25% pa on these investments.      


29.    Local Authorities - During the year deposits were placed with local authorities. The Authority made a return on these investments of £94,214 at a rate of 0.4397%.


30.    The overall return on investments for 2014/15 was 0.2954%.


31.    The Section 151 Officer will continue to keep the borrowing / investment strategy under review.

Treasury Limits and Prudential Indicators

32.    During the financial year a number of loans, (approximately £6 million), moved from the greater than 10 years to the 5 to 10 years maturity category, which resulted in the actual percentage of loans  between 5 and 10 years being 34.51% in 2014/15. The loan maturity profile has been amended to reflect this as part of the 2015/16 Treasury Management Strategy.


33.     The Council is asked to note the Prudential Indicators shown in Appendix 1.

Resource Implications (Financial and Employment)

34.    As set out in this report.

Sustainability and Climate Change Implications

35.     There are no sustainability and climate change implications.

Legal Implications (to Include Human Rights Implications)

36.    As set out in this report

Crime and Disorder Implications

37.    There are no crime and disorder implications.

Equal Opportunities Implications (to include Welsh Language issues)

38.    There are no equal opportunity implications.

Corporate/Service Objectives

39.    Provide sound financial and reliable advice in relation to all issues affecting the Council.

Policy Framework and Budget

40.    The report will be forwarded to Council for approval.

Consultation (including Ward Member Consultation)

41.    The appropriate Chief Officers have been consulted on this report. This report does not require Ward Member consultation. 

Relevant Scrutiny Committee

42.    Corporate Resources

Background Papers


Contact Officer

Gemma Jones Principal Accountant (01446) 709152

Officers Consulted

All appropriate Chief Officers have been consulted on the contents of this report.

Responsible Officer:

Section 151 Officer (01446) 709254