Agenda item

To submit a report by the Head of Function (Resources)/Section 151 Officer.

The report of the Head of Function (Resources) and Section 151 Officer incorporating a mid-year review of the Treasury Management position 2017/18 was presented for the Executive’s consideration.

The Portfolio Member for Finance reported that the mid-year review report above was scrutinised by the Audit and Governance Committee at its meeting held on 5 December, 2017. The Committee in accepting the report recommended with regard to financing the Council’s part of the Twenty-First Century Schools Programme expenditure, that a proactive approach is taken to ensure the timely sale of assets so as to reduce the Council’s need to borrow along with the associated revenue costs arising from the borrowing.

The Portfolio Member said that the Council operates a balanced budget, which broadly means cash raised during the year will meet its cash expenditure. Part of the treasury management operations ensure this cash flow is adequately planned, with surplus monies being invested in low risk counterparties, providing adequate liquidity before considering optimising investment return. The second main function of the treasury management service is the funding of the Council’s capital plans. These capital plans provide a guide to the borrowing need of the Council, essentially the longer-term cash flow planning to ensure the Council can meet its capital spending operations. This management of longer term cash may involve arranging long or short term loans, or using longer term cash flow surpluses and on occasion any previously drawn debt may be restructured to meet Council risk or cost objectives. Despite a marginal increase in November, 2017 in the bank base rate, interest rates have remained low during the six-month period to which the report refers – at the mid-year point, there has been very little change in the general position compared with that of six months ago.

The Head of Function (Resources) and Section 151 Officer confirmed that the position remains largely unchanged. Although interest rates are low the Council’s borrowing strategy is to only borrow when it is necessary and when the funding is required. As there has been some slippage on the capital programme, the need to borrow has been less than anticipated when the capital budget was set. During the first six months of the financial year, two separate long-term loans with the PWLB matured the first being for £2.5m on an interest rate of 3.25% and the second for £3m on an interest rate of 10.375%. These repayments were made from existing cash balances and no new loans were taken to fund the repayment; thus, two high interest rate loans have been removed from the portfolio. However, as the capital programme progresses and in particular the Twenty-First Century Schools Programme, it is expected that borrowing will have to be undertaken to bring in additional funding over and above the Council’s cash balances which have previously been used to fund part of the capital programme. Section 9 of the report outlines activity since the end of Quarter 2 including the terms under which £5m will be borrowed from Tyne and Wear Pension Fund South Shields; this arrangement is made to supplement the Council’s cash balances with a view to bringing down the Council’s borrowing commitments thereby keeping the costs of borrowing as low as possible.

The Executive noted the information presented and noted also the Audit and Governance’s comment with regard to the need to be proactively seeking to maximise capital receipts to help reduce the borrowing need on the Twenty First Century Schools programme and therefore the costs that are incurred through borrowing. Following on from the above, the Executive further noted the points below –

•  The Executive noted the interest rates on the two long term loans with the PWLB that matured during the first half of the year. It sought clarification of the loan period that resulted in the high level of interest on these loans especially the 10.375% rate on the second loan to mature. The Head of Function (Resources) and Section 151 Officer said that both loans were over a period of at least 20 years and were taken out when intertest rates were higher. Whilst consideration is regularly given to early repayment of loans it is not always financially advantageous to do so as the penalties for early repayment often exceed the interest payments on the loan. The situation is kept under review.

•  The Executive sought clarification of whether the Council is undertaking scenario planning in readiness for the impact of Brexit and also in light of worsening inflation pressures and further likely increases in the bank base rate. The Head of Function (Resources) and Section 151 Officer said that the start of an upward trend in interest rates has been expected for some time; the Council does look at the timing of borrowing and has avoided borrowing unless it has a purpose for the money otherwise the interest on the loan will be higher than any return that can be made from investing the cash borrowed. Should there be a sudden increase in interest rates then the Council will look to tie into a low rate in order to get the benefit over the loan term. Inflation and funding the cost of inflation e.g. pay inflation, is a greater risk to the Council; this feeds into the Medium Term Financial Plan which allows the Council to plan ahead for financial risks including rising inflation.

It was resolved to accept the Treasury Management Mid-Year Review Report 2017/18 and to forward the report to the Full Council without additional comment.