Agenda item

To present the Annual Treasury Management Review for 2015/16.

The report of the Head of Function (Resources) and Section 151 Officer incorporating the Annual Treasury Management Review for 2015/16 was presented for the Committee’s consideration and comment. The report provided details of the outturn position for treasury activities in 2015/16 and confirms compliance with the Council’s policies previously approved by Members.

The Head of Function (Resources) and Section 151 Officer elaborated on the following elements of the Treasury Management review:

•           Capital activity. The Council’s actual capital expenditure and how this was financed is set out in table 2.2 of the report and forms one of the required prudential indicators.

•           The impact of this activity on the Council’s underlying indebtedness (the Capital Financing Requirement). The Council’s CFR for the year is shown in table 3.3.4 and represents a key prudential indicator.

•           The overall treasury position identifying how the Council has borrowed in relation to its indebtedness and the impact on investment balances. It was decided in light of the current and projected market interest rates and counterparty credit risks, to continue internalising borrowing at least in the short term which is a strategy that has been implemented throughout out each of the last five years. The gross borrowing position has increased during 2015/16 due to the loan from the PWLB for the HRA buy-out which replaces the former subsidy payments to Welsh Government.

•           The borrowing and investment figures for the Council as at the end of the 2014/15 and 2015/16 financial years. These are shown in paragraph 4.1 of the report and in more detail in Appendix 1. There was no debt rescheduling during the year as the average 1% differential between PWLB new borrowing rates and premature repayment rates made rescheduling unviable.

•           Investment activity.  Continued uncertainty in the aftermath of the 2008 financial crisis promoted a cautious approach, whereby investments would continue to be dominated by low counterparty risk considerations resulting in relatively low returns compared to borrowing rates. In this scenario, the treasury strategy was to postpone borrowing to avoid the cost of holding higher levels of investments and to reduce counterparty risk. The expected investment strategy was to keep to shorter term deposits although the ability to invest up to longer periods was retained.

•           Investment security and credit quality. No institutions in which the Council had made investments had any difficulty in repaying investments and interest on time and in full during the year. The UK Referendum result led to UK banks long-term outlook being downgraded from stable outlook to negative outlook. However their short and medium term ratings are still within the appropriate ratings approved in the Treasury Management Strategy 2015/16. The status of the banks and the Council’s deposits are under constant review to ensure that the Council’s risks are minimised.

The Committee noted the information and made the following points:

•           The Committee noted that the Council has complied with the key prudential and treasury indicators in 2015/16.

•           The Committee noted that borrowing was only undertaken for a capital purpose and that the statutory borrowing limit (the authorised limit) was not breached.

•           The Committee sought clarification of the impact on the Council’s borrowing of the Schools Modernisation Programme and how much of the Council’s contribution to the programme would be based on capital receipts and how much on borrowing. The Committee was informed that  there would be an increase in the Council’s borrowing in the short-term until capital receipts are realised to make up the shortfall. The Council’s Treasury Management advisors, Capita have been asked to review the Council’s borrowing requirements over the next few years to take account of the 21st Century Schools Programme and the outcome of the review will form the basis of the Council’s borrowing strategy over the long-term.

•           The Committee sought clarification of the impact of Brexit on interest rates and whether they were more likely to be driven upwards as a result. The Committee was informed that the prevailing uncertainty in relation to a number of key factors could drive interest rates up or down but that an increase in the region of 2% or 3% would put pressure on the revenue budget. Should there be an indication of a pressure upwards on interest rates then the Council’s borrowing position will be reviewed and consideration given to repaying some loans and to bringing forward borrowing to benefit from the low interest rates. However, timing is essential and the Council takes advice from Capita and its treasury management advisors as to the optimum time in which to borrow; it is not considered the Council is at that point currently. Although there is a significant gap between the Council’s level of borrowing and the authorised limit any additional borrowing feeds through to the capital financing costs which have a knock on effect on the revenue budget.

•           The Committee noted subsequently that the Council needs to be mindful of the impact on the revenue budget of committing to extra borrowing.

It was resolved:

•           To note that the out-turn figures in the report will remain provisional until the audit of the 2015/16 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 2015/16 prudential and treasury indicators within the report.

•           To accept and to note the Annual Treasury Management Review report for 2015/16 and to forward it to the Executive without further comment.

NO FURTHER ACTION ENSUING