Agenda item

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

The Annual Treasury Management Review of Activities Report for 2017/18 was presented for the Committee’s consideration and scrutiny in line with regulations under the Local Government Act 2003 and the Council’s Treasury Management Scheme of Delegation for 2016/17.

The Head of Function (Resources) and Section 151 Officer reported that the review summarises the position in relation to the Council’s capital expenditure, and its borrowing and investment activities during 2017/18. The report also sets out how the Council performed against the Treasury Management Strategy for 2017/18. The Officer referred to the main points of consideration as follows –

•           Capital Expenditure and Financing – from a starting budget of £53m the total capital expenditure for 2017/18 was £29m with the underspend being due in the main to slippage on major grant funded projects. The table in paragraph 2.2 of the report shows that £7m of capital expenditure was financed by borrowing. No long-term external borrowing (i.e. sourced from external bodies such as the Government, through the PWLB or money markets) was taken out during the year but was internally borrowed, with Council cash balances funding this in the short-term in order to reduce interest payments. This is in keeping with the Treasury Management Strategy.

•           The Council’s underlying need to borrow for capital expenditure is called the Capital Financing Requirement (CFR).This figure is a gauge of the Council’s debt position. The CFR results from the capital activity of the Council and what resources have been used to pay for the capital spend. It represents the 2017/18 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.

•           The table at paragraph 3.3.4 of the report shows that the Council’s CFR for the year which is one of the key prudential indicators (i.e. indicators that set limits on treasury management activity) was £95m for the Council Fund and £41m for the Housing Revenue Account making a total of £136m. When compared to the gross borrowing position as at 31 March, 2018 which stood at £117m, it shows that £19m of the Council’s balances has been used to fund capital expenditure. In these circumstances it is expected that in the long-term, borrowing will need to be taken out to replenish the balances.

•           The Treasury Management Strategy and policy sets a limit on the CFR which is known as the authorised limit. Once this has been set which for 2017/18 was £169m, the Council does not have the power to borrow above this level. The table at 3.5.3 of the report shows that the Council maintained gross borrowing (£117m) within its authorised limit as well as the operational boundary which designates the expected borrowing position of the Council during the year. However, there may be periods where the actual position is either below or over the boundary; this is acceptable providing the authorised limit is not breached.

•           The forecast CRF for 2018/19 and 2019/20 is shown in table 3.4.2 of the report based on the actual capital programme for 2018/19 and the estimated capital financing requirement for 2019/20. As the CFR increases so will the authorised limit and operational boundary accordingly.

•           The borrowing and investment figures for the Council at the end of the 2016/17 and 2017/18 financial years are set out in table 4.1 of the report. The Council’s debt position at £117.029m is similar to that of the previous year (£117.110m). The Council has £5.993m invested in no notice deposit accounts which pay interest at a rate near the prevailing base rate. All investments were for under a year. Further details are provided in Appendix 1 to the report.

•           There was no debt rescheduling during the year as the average 1% differential between PWLB new borrowing rates and premature repayment rates made re-scheduling unviable.

•           The Bank Rate at the start of the financial year was 0.25%; however, this was increased to 0.5% on the 2 November, 2017.This meant that the counterparty organisations’ interest rate on the typical call account ranged from 0.10% to 0.40%.

•           The expected investment strategy was to keep to shorter term deposits (up to 364 days), although the ability to invest out to longer periods was retained. Cash balances were expected to be up to £26m ranging between £5m and £26m.The budget was set at 0.055% for £15k after adjusting for the higher rates on existing investments. As it turned out, average balances of £14.4m returned £31.2k (0.12%).

•           The only borrowing that was made during the year was a £5m borrowing from the Tyne and Wear Pension Fund at an interest rate of 0.33% on a temporary basis for a period of 3 months to help with cash flow management. Upon maturity in January, 2018 the borrowing was rolled over for a further 3 months at an interest rate of 0.50%. At the time of maturity in April, 2018 when the Council starts to receive income from the RSG, Council Tax etc., the Council’s cash balances had increased meaning that the borrowing was no longer required and the debt was repaid.

•           The year as a whole was fairly stable with capital expenditure being less than anticipated and the Council funding this by using its own reserves. This is a continuation of the strategy implemented in recent years of internalising borrowing where possible so that borrowing costs are minimised. However, should there be further increases in interest rates, consideration will have to be given to varying the strategy by commencing borrowing whilst at the same time investing the Council’s cash balances. 

The Committee considered the report and responded as follows –

•           The Committee noted that there are limitations on the Council’s borrowing with the CFR ensuring that borrowing is not undertaken to support revenue expenditure. The Committee also noted that a point will be reached when it is inappropriate to allow cash balances to reduce further because of the need to maintain a working capital. The Committee sought clarification of the position currently.

The Head of Function (Resources) and Section 151 Officer said that the position with regard to the working capital is reviewed daily to ensure the Council has sufficient cash to meet its ongoing costs with the level set at a sum equivalent to the preferred level of General Fund balances which at around £6m is the level which the Section 151 Officer has assessed as adequate.

•           The Committee noted that the Council’s greatest monthly outgoings are staff salaries. The Committee sought clarification of whether the monthly figure for salaries is greater or less than £6m.

The Head of Function (Resources) and Section 151 Officer confirmed that the figure is in the region of £6m including NI and pension costs.

•           The Committee noted that the Council’s Balance Sheet for 2017/18 shows that the Council’s cash balances had reduced from £14.940m as at 31 March, 2017 to £.7.789m as at 31 March, 2018. The Committee sought assurance that the Council has sufficient funds available should there be an unforeseen call upon them.

The Head of Function (Resources) and Section 151 Officer said that it was his view that  the position as at 31 March, 2018 represented the minimum level of cash needed with consideration having been given to taking out borrowing at that point. However, as the new financial year in April was imminent bringing with it new income in the form of the first instalment of the RSG and Council Tax payments thereby boosting the Council’s cash flow position, it was decided not to borrow.

It was resolved that the Audit and Governance Committee –

•           Notes that the outturn figures in the report will remain provisional until the audit of the 2017/18 Statement of Accounts is completed and signed off; any resulting significant adjustments to the figures included in the report will be reported as appropriate.

•           Notes the provisional 2017/18 prudential and treasury indicators in the report.

•           Accepts the Annual Treasury Management Report for 2017/18 and forwards the report to the Executive without further comment.

ADDITIONAL ACTION: None