Agenda item

Treasury Management Annual Report 2016/17 and mid year report 2017/18

Report by the Chief Finance Officer.


34.1     The Head of Accounts and Pensions introduced report which reviews the Treasury Management performance for the last financial year and the first six months of the current financial year. During that period investments achieved a 0.62% rate of interest against a Bank of England base rate of 0.25%. The Head of Accounts and Pensions outlined the interest rates that are being paid on the Council’s borrowing, and explained that an option had been exercised on a LOBO (lender option, borrower option) loan to fix the interest rate at 4.25%.


Long Term Borrowing

34.2     The Committee noted that the fixing of the interest rate on the LOBO loan will increase the average interest on the Council’s long term borrowing, and that the loan maturity profile shows a pinch point in payback periods in around ten to twenty years time. It asked whether there was an opportunity to refinance some of the debt and what the limit was on further borrowing.


34.3     The Head of Accounts and Pensions responded that long term borrowing was kept under regular review and the Council will seek to re-finance and repay loans when opportunities arise. However, there was no opportunity to re-finance at moment and early repayment penalties can be high. The Council’s new borrowing is at lower interest rates and some Banks are reviewing their balance sheets, so there may be opportunities in the future to re-finance or repay debt.


34.4     The authorised borrowing limit is £422 million (2016/17) and the Council’s borrowing is currently well under this limit at £275 million. It was clarified that borrowing to invest in property would be classed as is prudential borrowing, and therefore would not be included as part of the borrowing limit calculation.


Investment Strategy


34.5     The Committee observed that with investments totalling around £300 million, compared with £275 million of debt, residents may on the face of it question why the Council does not repay the loans and save the cost of the interest paid on the debt. The Head of Accounts and Pensions explained that there is an ongoing review of investment and debt, but early repayment of debt incurs penalties, so it is not in the Council’s interest to do this at present.


34.6     The Committee discussed whether to review the Treasury Management Strategy to see whether returns on investments for longer term reserves could be improved to generate more income. It also observed that there could be links to property investment as discussed in the Treasury Management briefing session. The Committee asked for a breakdown of investments and longer term reserves to identify where it might be possible to use longer term investments. The Committee also asked for further information on the structure (“laddering”) of short term deposits (under 12 months) and whether there was a policy in place for this.


34.7     The Chief Operating Officer outlined that the Treasury Management performance is in line with the current Strategy. However, it is possible to review the Treasury Management risks and liquidity to see whether a change in the Strategy could produce further income and the possible links property investment.


34.8     The Head of Accounts and Pensions explained that most of £300 million is invested in deposits of up to six months maturity and around 10% is invested in six to twelve month deposits. How the money is invested is governed by the Treasury Management Strategy that the Council has in place and more detail can be provided to the Committee at the Committee’s Reconciling Policy, Performance and Resources (RPPR) Board.


34.9     The Committee agreed that the RPPR Board should examine the Treasury Management Strategy, with a view to seeing whether it would be possible to improve the income from the Council’s investments and the potential links to property investment.


Sovereign Ratings


34.10   The Committee asked why the Strategy has so much detail on sovereign ratings (appendix A) and whether this was due to risk in money market or in case the Council wants to make non- sterling transactions for borrowing or investment. The Head of Accounts and Pensions responded that the Treasury Management Strategy assesses the risk of placing deposits with particular organisations, and it has agreed sovereign ratings as a guide to where the Council could invest. It also provides a guide if there is an opportunity to go outside UK to borrow money if needs be. The Council is not intending to use non-sterling deposits.


Capital Financing Requirement (CFR)


34.11   The Committed noted the changes to accounting rules (Appendix D, paragraph 1.2) relating to finance leases and Private Finance Initiative (PFI) contracts and asked whether these changes had been made due to increased risk.  The Head of Accounts and Pensions responded that this was a change of accounting rules, and not a reflection of a risk. Previously PFI contracts were treated as expenditure in the revenue statement. Now they have been recognised as an asset and brought onto the balance sheet with a fixed reserve to cover liability. This has affected the calculation of the CFR and Minimum Revenue Payment (MRP).


34.12   The Committee RESOLVED to:

1) Note the Treasury Management performance in 2016/17 incorporating the mid-year review for the first half of 2017/18; and

2) Request further information on the Council’s investments (paragraph 34.6 above), for the Committee’s RPPR Board in December.

Supporting documents: