Agenda item

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

The report of the Head of Function (Resources)/Section 151 Officer incorporating the Treasury Management Strategy Statement for 2020/21 was presented for the Committee’s consideration. The report set out the Council’s proposed approach to investment and borrowing activities in the forthcoming financial year in light of current and forecasted economic conditions.

The Finance Manager in confirming that there are no proposed amendments to the core principles and policies of the 2019/20 Statement highlighted the main points of the 2020/21 TM Strategy as follows -

•           The wider context to the Treasury Management Strategy. Setting out the Strategy cannot be undertaken in isolation, and 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. A full summary of the economic outlook is provided at Appendix 3 to the Statement and the main points are summarised in section 3.1. Uncertainty surrounding Brexit and its impact on the UK and Eurozone economy is likely to continue and investment returns are expected to remain low during 2020/21 with little increase in the following two years.

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

•           The Council’s capital programme for 2020/21 to 2022/23 as set out in Table 3 of the report and how this will 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. Regulations require that the Council approves a MRP Statement in advance of each financial year – the policy for 2020/21 is set out in Appendix 6 and is unchanged from that for 2019/20 following extensive revision in 2018. The impact of the Council’s capital expenditure plans and the MRP charge on the CFR and the level of external and internal borrowing is shown in Table 4 of the report.

•           The Council’s borrowing strategy and the factors impinging thereon as set out in section 6 of the Statement. The Council continues to maintain an under borrowed position meaning that the Council’s capital borrowing need (CFR) has not been fully funded with loan debt as cash supporting the Council’s reserves, balances and cash flow has been used as a temporary measure. Whilst this approach is prudent as investment returns are low and counterparty risk is still an issue to be considered, the ability to externally borrow to repay the reserves and balances if needed, is important. Table 4 of the Statement indicates that £12.777m may need to be externally borrowed if urgently required which is the amount of Council reserves and balances used in the past to fund the capital programme instead of taking out borrowing.

•           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. In determining whether borrowing will be undertaken in advance of need consideration will be given to the factors outlined in paragraph 6.4.2.

•           The Council will take a flexible approach to the choice between internal and external borrowing as set out in section 6.3 of the report. 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. Opportunities for debt re-scheduling or early repayment are likely to remain limited but will be considered if they meet the criteria set out in section 6.5 of the report.

•           The Council’s investment priorities remain security of capital first, liquidity second and return on investment third. The Council’s investment policy has regard to Welsh Government and CIPFA guidance which places a high priority on the management of risk. The Council has adopted a prudent approach to managing risk and defines its risks appetite by the means set out in section 7.2.3 of the report.

•           The Prudential and Treasury Indicators as outlined in in Appendix 11 to the Statement; these cover affordability and prudence and set out the limits for capital expenditure, external debt and the structure of the debt. The purpose of each indicator is described in Appendix 12.

The following matters were raised by the Committee in considering the report –

•           The Council’s overall borrowings of £126m and the reasons for this level of indebtedness.  The Committee was advised by the Director of Function (Resources)/Section 151 Officer that much of the debt is historic with the Council on its establishment in 1996 inheriting all of the outstanding borrowing of its predecessor Borough Council as well as a share of the loans of the former Gwynedd County Council. As regards the present Council’s borrowings, its largest borrowing has been for £21m for the purpose of buying itself out of the Housing Revenue Account Subsidy; more recently the Council has embarked on a schools modernisation programme which to date has involved building three new primary schools funded by a combination of Welsh Government grant, and both supported and unsupported borrowing. Whilst the Council has been borrowing internally by using the cash it holds to fund capital expenditure, a decision was taken last year to externalise some of this borrowing in order to replenish the cash spent.

In response to a further question about the merit of long-term borrowing the Officer confirmed that the interest charges do tend to be higher for long-term borrowing because of the increased risk involved; but conversely, as the Council has to meet interest payments from its revenue budget the longer the loan period the lower the minimum revenue provision (MRP) charge which is the sum the Council must set aside to repay the principal of its external debt –  with a long-term loan the MRP charge is spread over a longer period and is therefore significantly lower.

•           Whether the Council is actively seeking to move away from the Public Works Loans Board as its principal source of borrowing as a result of the 100 bps increase in PWLB rates in November, 2019. The Committee was advised by the Director of Function (Resources)/Section 151 Officer that even with the increase PWLB loans remain on the whole cheaper than their commercial counterparts. The Authority will discuss the matter with its Treasury Management Advisors and if its borrowing requirements increase, it may have to consider taking an alternative course to borrowing with the PWLB.

      In response to an observation about the importance of realising assets that are surplus to requirements in order to obtain income, the Officer confirmed that the Authority has in place an Asset Management Policy and seeks to dispose of surplus assets by ensuring that it sells at the right time in order to obtain the best price for the asset it is selling.

It was resolved to note the Treasury Management Strategy Statement for 2020/21 and to forward the Statement to the Executive without further comment.

NO ADDITIONAL ACTION WAS PROPOSED