Agenda item

To present the report of the Head of Function (Resources)/Section 151 Officer.

The report of the Head of Function (Resources)/Section 151 Officer incorporating the Treasury Management Strategy Statement for 2019/20 was presented for the Committee’s consideration. The report set out the Council’s proposed approach to investment and borrowing arrangements for 2019/20 in light of current and forecasted economic conditions.

The Head of Function (Resources)/Section 151 Officer reported on the main points of the Strategy as follows –

•           That in setting the Treasury Management Strategy, consideration must be given to the economic situation as this has an impact on investment rates, the cost of borrowing and the financial strength of counterparties. The economic outlook is set out in detail in Appendix 3 to the report with the main points summarised in section 3.1. The main message is that increases in interest rate levels are expected to be gradual and minimal over the course of the next few years with the returns on investment also remaining low.

•           The Council’s current external borrowing position is set out in Table 2 of the report which provides a summary of the Council’s current outstanding loans.

•           One of the main functions of Treasury management is the funding of the Council’s capital plans. The Council’s capital programme for 2019/20 through to 2021/22 is set out in Table 3 of the report which also notes how the capital programme is to be funded. An important factor to consider is the impact of borrowing on the Council’s Capital Financing Requirement which calculates the Council’s underlying need to borrow in order to finance capital expenditure. Capital expenditure will increase the CFR but only by the sum that is not funded from capital grants, receipts, reserves or revenue. The CFR will also reduce annually by the sum of the Minimum Revenue Provision (MRP) which is a charge made to the revenue account each year to ensure that the Council is able to repay debt as it falls due. The impact of the Council’s capital expenditure plans and the MRP charge on the CFR and the level of external and internal borrowing (i.e. borrowing from the Council’s own cash balances) is shown in Table 4 of the report.

•           The Council continues to maintain an under borrowed position. The Council will not borrow more than, or in advance of its needs solely in order to profit from the investment of the extra sums borrowed since over the medium term the returns on investment are expected to continue to be below long-term borrowing rates. Consideration will be given to debt re-scheduling having regard to the factors outlined in section 6.5.2 of the report.

•           The Council will take a flexible approach to the choice between internal and external borrowing. The Council has been making use of its own cash funds to finance capital expenditure in order to minimise interest payments by deferring the need to borrow externally. However, the ability to externally borrow to repay the reserves and balances if needed is an important part of the strategy. The pros and cons of external v internal borrowing in the current climate are set out in section 6.3 of the report.

•           The Council’s investment priorities remain security of capital first, liquidity second and return on investment third. The Council will make investments with counterparties in accordance with the creditworthiness policy set out in section 7.2 of the strategy.

•           That there are no proposed amendments to the core principles and policies of the 2018/19 Statement.

The Committee considered the report and raised points as follows –

•           The Committee noted that the average interest rate on PWLB loans is 5.26%. The Committee sought clarification of whether it would be to the advantage of the Council were it to seek to restructure its debts in order to reduce the interest payments.

The Head of Function (Resources)/Section 151 Officer said that the Authority regularly reviews its loans for opportunities to make savings  and assesses the cost of the penalty payments that are incurred as a result of early repayment of loans against the savings made by not paying the interest. The penalties for early repayment are nearly always greater than the savings made on interest payments.

•           The Committee noted that the Council makes use of Link Asset Services to provide advice on treasury management. The Committee sought clarification of whether the Council’s advisors are assessed for value for money given that the funds which the Council has available to invest are limited.

The Head of Function (Resources)/Section 151 Officer said that the Council’s advisors also provide advice on matters other than investment including on borrowing and they provide services by way of facilitating access to money markets should the Council wish to avail itself of the opportunity; training on Treasury Management including for Elected Members, and by keeping the Council up to date on credit ratings. The contract was tendered and was awarded to Link Asset Services on the basis of a competitive fee which is deemed to provide value for money.

•           The Committee noted that the Council has made use of internal borrowing to fund capital expenditure. The Committee sought clarification of whether the only criterion in taking this approach is interest rates in order reduce the cost of servicing debt.

The Head of Function (Resources)/Section 151 Officer said that the cost of borrowing externally is currently greater than the returns were the Council to put the cash on deposit meaning that it is sensible to use surplus cash balances instead of taking on new external borrowing. To obtain better returns would require the Council to take a riskier approach to investment which would necessitate a change in the Treasury Management Strategy; this is not being considered.

It was resolved to accept the Treasury Management Strategy Statement for 2019/20 and to recommend the Statement to the Executive without additional comments.

NO ADDITIONAL ACTION WAS PROPOSED