Agenda item

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

The report of the Director of Function (Resources)/Section 151 Officer incorporating the Treasury Management Review for 2020/21 was presented for the Committee’s consideration. The report is produced to comply with the regulations issued under the Local Government Act 2003 and with the Council’s Treasury Management Scheme of Delegation for 2020/21 and forms one of a trio of treasury management reports that are issued in accordance with the minimum reporting requirements for 2020/21. The report provides an overview of the Council’s borrowing and investment activities during the year and highlights performance against the Prudential Indicators set by the Council.

The Director of Function (Resources)/Section 151 Officer referred to the main points as follows -

·         The external factors that have influenced treasury management activity and decisions in the year including interest rate movements, the state of the UK economy and the significant impact which the Covid pandemic has had thereon as well as the part conclusion of the Brexit process with the final agreement on a trade deal.

·         The internal factors which determine the treasury management outturn position which include the following :

·         Capital expenditure and financing – the table at 3.1 shows the actual capital expenditure and how this was financed. Actual General Fund capital expenditure financed by borrowing was significantly lower than that projected (£20m actual against £39m estimated) due to the large underspend on the capital projects listed at 3.1 many of which were delayed as a result of Covid 19 restrictions.

·         Reserves and cash balances – the Council’s cash balances comprise revenue and capital resources and cash flow monies. The Council’s core cash resources are set out in the table at 3.2 of the report and they include the Council Fund General Reserve; the provisional pre-audit figures show that the General Reserve increased from £7.060m as at 31 March, 2020 to £11.594m as at 31 March, 2021. The Council’s total usable reserves and provisions stood at £45.245m as at 31 March, 2021 (up from £31.124 at 31 March, 2020).

·         Gross borrowing and the Capital Financing Requirement (CFR) – The CFR reflects the Council’s total underlying need to borrow to finance its capital expenditure  and is a gauge of the Council’s debt position. It results from the capital activity of the Council and the resources utilised to pay for the capital spend. It represents the 2020/21 capital expenditure financed by borrowing and prior years’ capital expenditure funded by borrowing which has not yet been paid for by revenue or other resources. In order to ensure that borrowing levels are prudent over the medium term and is only for a capital purpose, the Council should ensure that its gross external borrowing does not except in the short-term, exceed the total of the capital financing requirements in the preceding year plus the estimates of any additional capital financial requirement for the current and next two financial years. The gross borrowing of £124.5m at 31 March, 2021 is less than the forecast CFR for the following two years.

·         Internal borrowing – at the beginning of the year, the internal borrowing position whereby the Council uses its own cash reserves to fund capital expenditure was overfunded by £2.3m. By repaying the £10m short term PWLB loan taken out in March, 2020 as contingency going into the Covid 19 crisis, and no other new loans taken out in the 2020/21 financial year, the internal borrowing position at 31 March, 2021 was underfunded by £12.1m. (CFR minus the gross borrowing position).

·         Debt repayments– Three PWLB loans matured during the year as detailed in paragraph 3.5 of the report. No short-term borrowings are outstanding.

·         Investments– Investment returns which had been low during 2019/20 plunged during 2020/21 to near zero. Average balances of £43.7m returned £0.035m at an average interest rate of 0.079% against an interest budget that was set at £0.053m. Limited investment in other local authorities and interest rates dropping to below that anticipated at budget setting contributed to this decrease in interest receivable. The forecast for interest rates in the 2020/21 Treasury Management Strategy was invalidated by the Covid pandemic which led to the  Bank Rate being cut down to 0.1% to counter the impact of lockdown on large swathes of the economy. Part of the Council’s deposits were held in no notice deposit accounts whilst there was one loan to another local authority.

·         In accordance with the Treasury Management Strategy for 2020/21, no debt rescheduling was done in the year as the average 1% differential between PWLB new borrowing rates and premature repayment rates made it unviable. During the year, the Council did not borrow more than or in advance of its needs purely in order to profit from the investment of extra sums borrowed. The investment activity during the year conformed to the approved strategy and the Council had no liquidity difficulties. When the Council invests its surplus cash, the most important aspect of the investment is the security of the money invested followed by liquidity and then the yield. The strategy on investing surplus cash would be to borrow short term with other local authorities to maximise returns in a secure way.

·         During 2020/21 the Council complied with its legislative and regulatory requirements. The key data for actual prudential and treasury indicators detailing the impact of capital expenditure activities during the year with comparators are set out in the table at paragraph 6.1 of the report. Capital expenditure was lower than that forecast at the time of producing the Prudential indicators due to reasons of underspend on capital projects; likewise the CFR was significantly lower than that projected when agreeing the Prudential Indicators due to the underspend on the 21st Century Schools Programme thereby reducing the amount of unsupported borrowing needed in 2020/21. Neither the Authorised Borrowing Limit (£183m) nor the Operational Boundary (£178m) were breached in the year with the amount of external debt peaking at £139.2m only. The financing costs as a proportion of the net revenue stream for the General Fund (4.80%) was very close to the anticipated total (5.15%) meaning this indicator performed as expected and also in line with the previous year. The financing costs as a proportion of net revenue stream for the HRA (16.34%) was below the anticipated total (17.16%) due to lower financing costs the net revenue stream also being lower than expected when the proposed indicator for 2020/21 was set.

·         The Council’s treasury management performance during the year was in line with the strategy of low risk, low return on investments and a planned approach to borrowing to minimise interest charges. Performance against the strategy takes into account the external economic factors and is kept under regular review to ensure the strategy remains the most appropriate.

·         The Council approved the Treasury Management Strategy Statement for 2021/22 in March, 2021; the strategy is not expected to change significantly as long as the Bank Rate remains at its current low level; however the Council will be guided by its Treasury Advisors when making decisions about where and when to invest and/or borrow. It is forecast that the Council will need to increase its borrowing in the next three years to fund its capital programme which will in turn affect the General Fund with an increased Minimum Revenue Provision being charged to fund the capital financing costs.

In considering the report the Committee raised the following points –

·         Clarity around the practice of investing with other councils, specifically whether that is done on the basis of a council’s creditworthiness and whether the process incurs an administration fee. The Director of Function (Resources)/Section 151 Officer clarified that the process is normally undertaken via a broker whose fee is paid for by the borrowing authority. In instances where the Council has an established connection or relationship with the borrowing authority, e.g. in a case where Anglesey Council  invested with another North Wales council, the initial investment was arranged via a broker but the subsequent rollover of the investment was undertaken without a brokerage service. While the local authority sector is viewed overall as a safe place for investment, the Council does undertake due diligence checks on the councils with which it invests by way of examining their accounts for example; additionally councils which are in financial difficulties are generally known within the sector and the Council also receives guidance from its Treasury Advisors about the councils that are financially sound and therefore safe to invest with, and those that are not.

·         Whether in light of the significant increase in school balances in 2020/21 and past criticism of schools for having balances deemed as excessive, Head teachers and governing bodies should now be looking to spend the surplus cash on suitable schemes or whether they should retain their balances as “rainy day” money to mitigate any financial pressures that may arise in future. The Director of Function (Resources) and Section 151 Officer advised that school balances have reduced greatly over the past two years as schools have utilised their reserves to make up budget shortfalls. The increase in school balances is not unique to Anglesey  and is attributable to three factors one being  the provision by Welsh Government  of additional grant funding late in the financial year to enable schools to help pupils catch up with their education which will be spent by schools in this financial year. Another factor is the reduced expenditure incurred by schools in 2020/21 due to periods of lockdown related closure in the year with the Authority deciding not to claw back the unused funding from the delegated school budget. The third factor which applies to secondary schools is the payment which the schools have made to the WJEC examining board which is significantly reduced from the payment that would have been due had the examinations taken place as normal. The advice to schools would be that whilst balances can be spent on specific projects that benefit the school, it is also useful to have balances available to draw upon to bridge the gap in a year when pupil numbers fall and the funding falls with it. Additionally, should there be an indication that budgets will decrease in the long term making savings necessary, then it is better that schools should implement those savings sooner in a planned way rather than later when it has to be done which only serves to weaken the financial position of the school.

·         Reference was made to the interest rate forecast from Link Asset Services at Table 7.5 of the report as not being reflective of the rising inflation rate, and the implications for treasury management if the interest rate is increased to counter inflationary pressures.  Additionally, it was suggested that given that interest rates are at historically low levels it might be  prudent to consider undertaking borrowing now in readiness for the time when capital is required especially if capital expenditure which has consistently fallen short of the budget, can be speeded up. The Director of Function (Resources) and Section 151 Officer advised that the Bank of England’s thinking is that the increase in inflation is temporary and is being driven by pent-up demand as restrictions are lifted and that it will reduce as demand evens out and life returns to normal. The long-term view is that the inflation rate will return to under 2% and that a short-term increase in interest rate is not necessary. Although the view might change if inflation continues on an upward trend, there is no immediate desire to depress consumer spending as the economy tries to recover. With regard to whether or not to borrow to take advantage of low interest rates and accelerate capital expenditure, that would be possible if the capacity and schemes were available; rushing out schemes because money is available and because it is cheap to borrow may mean the Council ending up with a debt burden for  schemes that are not in line with its priorities thereby restricting  future borrowing when there may be schemes on which the  Council wants to spend that meet its corporate objectives.

It was resolved –

·         To note that the outturn figures in the annual treasury management report for 2020/21 will remain provisional until the audit of the 2020/21 Statement of Accounts is completed and signed off; any resulting significant adjustments to the figures included in the report will be reported as appropriate.

·         To note the provisional 2020/21 prudential and treasury indicators in the report.

·         To accept the annual treasury management report for 2020/21 and to forward the report to the next meeting of the Executive without further comment.