QUARTERLY TREASURY MANAGEMENT AND PRUDENTIAL INDICATOR REPORT

1st April 2019 – 30th June 2019

 

A   QUARTERLY TREASURY MANAGEMENT REPORT

 

1.   Introduction

 

The Treasury Management Policy and Strategy for 2019-2020 was approved by Council on 20th February 2019. Section B 1.1(2) stated that Treasury Management activity reports would be made during the year. This report outlines the Treasury Management activities in the period 1st April 2019 to 30th June 2019 and satisfies the reporting requirement stated above.

 

 

2.   Economic Update

 

After only tepid annual economic growth of 1.4% in 2018, growth from January to March 2019 was unexpectedly strong at 0.5%. However, this was boosted by stock building ahead of the original March Brexit deadline so April to June 2019 is now expected to be zero or slightly negative.

 

After the Monetary Policy Committee raised Bank Rate from 0.5% to 0.75% in August 2018, it is little surprise that they have abstained from any further increases since then. We are unlikely to see any further action from the MPC until the uncertainties over Brexit clear. If there were a no deal exit, it is likely that Bank Rate would be cut in order to support growth. Nevertheless, the MPC does have concerns over the trend in wage inflation which peaked at a new post financial crisis high of 3.5%, (excluding bonuses), in the three months to December before falling marginally to 3.4% more recently. Growth in employment fell to only 32,000 in the three months to April 2019, well below the 2018 average, while the unemployment rate remained at 3.8 percent, its lowest rate since 1975. Correspondingly, the total level of vacancies has risen to new highs.

 

As for CPI inflation itself, this rose slightly to 2.1% in April 2019 before falling back again to 2.0% in May 2019, and is likely to remain around this level over the next two years. If there was a no deal Brexit though, it could rise towards 4%, primarily as a result of imported inflation on the back of a weakening pound.

 

The rise in wage inflation and fall in CPI inflation is good news for consumers as their spending power is improving in this scenario as the difference between the two figures is now around 1.3%, i.e. a real terms increase. Given the UK economy is very much services sector driven, an increase in household spending power is likely to feed through into providing some support to the overall rate of economic growth in the coming months.

 

3.   Investments

 

One of the primary activities of the Treasury Management operation is the investment of surplus cash for which the Authority is responsible. As well as the Authority’s own cash the County Council invests School Trust Funds and other Funds, with any interest derived from these investments being passed over to the relevant Fund.  

 

All surplus money is invested daily on the London Money Markets. The security of the investments is the main priority. Appropriate liquidity should be maintained and return on investments the final consideration. It continues to be difficult to invest these funds as the market continues to be insecure and as a consequence appropriate counterparties are limited.

 

The total investments at 1st April 2019 to 30th June 2019 analysed between Banks, Building Societies, Local Authorities and Money Market Funds, are shown in the following table:

 

 

Investments on call are available immediately on demand.

Fixed term investments are fixed to a maturity date.

 

The £80.05m includes £0.55m (13.85% of original claim) invested in Kaupthing Singer and

Friedlander which has been reduced from the original £4.0m by distributions.

 

 

 

 

During the period the total investments made by the Council and repaid to the Council

(the turnover) amounted to £342.02m.This averaged approximately £26.31m per week or £3.76m per day. A summary of turnover is shown below:

 

 

 

The main aims of the Treasury Management Strategy is to appropriately manage the cash flows of the Council, the required short term and longer term market transactions and the risks associated with this activity. Lending on the money market secures an optimum rate of return and also allows for diversification of investments and hence reduction of risk, which is of paramount importance in today’s financial markets.

 

The benchmark return for the London money market is the “7 day LIBID rate”. For 2019-2020 the Council has compared its performance against this “7 day LIBID rate”. For the period under review the average “7 day LIBID rate” was 0.57% whereas the actual rate the Council earned was 0.81%, an out performance of 0.24%.

 

This outperformance can be quantified to £57k additional interest earned compared to the “7 day LIBID rate”.

 

The gross interest earned on investments for the period amounted to £192k.

 

The income from investments is used by the Authority to reduce the net overall costs to the Council taxpayer.

 

4.   Update on the investments with Kaupthing Singer & Friedlander (KSF)

 

In June 2019 the Council received an eighteenth dividend from the Administrators. This equated to 0.4p in the £ and amounted to £16k principal.

 

As at 30th June 2019 the sum of £3.45m principal and £211k interest had been received from the Administrators, which equates to 86.15% of the claim submitted. The Administrators estimate total dividends payable to non-preferential creditors at 86.75%.

 

A further update will be provided in future reports.

 

 

 

 

5.   Security, Liquidity and Yield (SLY)

 

Within the Treasury Management Strategy Statement for 2019-2020, the Council’s investment priorities are:

·          Security of Capital

·          Liquidity and

·          Yield

The Council aims to achieve the optimum return (yield) on investments commensurate with proper levels of security and liquidity. In the current economic climate it is considered appropriate to keep investments short term to cover short term cash flow needs but also to seek out value available in significantly higher rates in periods up to 12 months with highly credit rated financial institutions.

 

Attached in Appendix 1 is the Investment Summary and Top 10 Counterparty Holdings (excluding the £0.55m in KSF) as at 30th June 2019.

6.   Borrowing

One of the methods used to fund capital expenditure is long term borrowing. The principal lender for Local Authorities is the Public Works Loan Board (PWLB).

Under the Treasury Management Strategy it was agreed to borrow when interest rates are at their most advantageous.

 

The total loans at 1st April 2019 and 30th June 2019 are shown in the following table:

 

 

 

The Salix interest free loans have been provided by an independent publicly funded company dedicated to providing the public sector with loans for energy efficiency projects.

 

This interest free Invest-2-Save funding is to assist in the conversion of traditional street lighting to LED, which will help deliver a legacy of reduced energy costs and associated carbon taxes.

 

The Home Improvement Loan Scheme (HILS) repayable funding is provided by the Welsh Government to help individual home owners, small portfolio landlords, developers and charities to improve homes and increase housing supply.

 

The Town Centre Loan (TCL) repayable funding is provided by the Welsh Government to provide loans to reduce the number of vacant, underutilised and redundant sites and premises in town centres and to support the diversification of the town centres by encouraging more sustainable uses for empty sites and premises, such as residential, leisure and for key services.

 

6.1 New Borrowing

 

No new loans were borrowed during the period.

 

 

6.2 Interest Paid

 

Interest paid on loans in the period was:

 

 

7. Rescheduling and Premature Loan Repayments

No rescheduling opportunities arose during the period and there were no premature repayments of debt.

8. Leasing

 

No leases were negotiated in the period ended 30th June 2019.

 

9. Conclusion

 

The Treasury Management function for the period ended 30th June 2019 has been carried out within the policy and guidelines set in the Treasury Management Policy and Strategy 2019-2020.

 

B.  QUARTERLY PRUDENTIAL INDICATOR REPORT

 

 

1. Introduction

As part of the 2019-2020 Budget and the Treasury Management Policy and Strategy 2019-2020, Council adopted a number of Prudential Indicators. These Indicators are designed to ensure that any borrowing or other long-term liabilities entered into for capital purposes were affordable, sustainable and prudent.

The Indicators are required by the Local Government Act 2003 and the Revised Prudential Code of Practice in order to control Capital Finance. The Prudential Code also required that those Prudential Indicators that were forward looking should be monitored and reported. Some of the indicators are monitored by officers monthly, and are only reported if they are likely to be breached, others are to be monitored quarterly by the Executive Board.

 

 

 

 

 

 

 

2. The Monitored Prudential Indicators

 

 

      2.1 Affordability Prudential Indicator

 

 

      2.1.1 Ratio of Financing Costs to Net Revenue Stream

 

The indicator set for 2019-2020 in the Budget was:

 

 

2019-2020

%

Non –HRA

5.11

HRA

32.75

 

An examination of the assumptions made in calculating this indicator concluded that there have been no changes in the period.

 

2.2 Prudence Prudential Indicators

 

 

2.2.1 The Gross Borrowing and Capital Finance Requirement (CFR) indicator

 

The indicator set by the Budget for Gross Borrowing and CFR was that the Section 151 Officer envisaged no difficulty in meeting the requirement of the Gross Borrowing being less than the accumulated CFR for 2019-2020. An examination of assumptions made when calculating the Prudential Indicator show that there have been no material changes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2.2.2 Authorised Limit and Operational Boundary

 

The actual value of loans outstanding must not exceed the Authorised Limit.  In normal activity actual loans outstanding should be close but less than the Operational Boundary. The Operational Boundary can be breached in the short term due to adverse cash flows.

 

 

 

 

 

 

Neither the Authorised Limit nor the Operational Boundary have been breached.

 

 

 

 

 

 

 

 

 

2.3 Treasury Management Prudential Indicators

 

 

2.3.1 Interest Rate Exposure

 

Position as at 30th June 2019:

 

 

 

Fixed Interest Rate

£m

Variable Interest Rate

£m

TOTAL

 

£m

Borrowed

409.81

  3.00

412.81

Invested

  (42.55)

(37.50)

  (80.05)

Net

367.26

(34.50)

332.76

Limit

515.00

51.00

 

 

 

 

 

Proportion of Net Borrowing  Actual

 

   110.37%

 

  (10.37)%

 

100.00%

Limit

  125.00%

  5.00%

 

 

 

The authority is within limits set by the 2019-2020 indicators.

 

 

 

2.3.2 Maturity Structure Of Borrowing

 

 

 

Structure at

   30.06.19

         %

    Upper

     Limit

        %

    Lower

     Limit

        %

Under 12 months

       1.28

       15

        0

12 months to 2 years

       3.10

       15

        0

2 years to 5 years

       6.28

       50

        0

5 years to 10 years

       9.88

       50

        0

10 years to 20 years

      18.66

       50

        0

20 years to 30 years

      19.33

       50

        0

30 years to 40 years

      24.59

       50

        0

40 years and above

      16.88

       50

        0

 

 

The authority is within the limits set by the 2019-2020 indicators.

 

 

 

 

 

 

 

 

2.3.3 Maximum principal sums invested longer than 365 days

 

 

 

 

 2019-2020

       £m

Limit

 

       10

 

Actual  as at 30th June 2019

 

       NIL

 

 

 

 

3. Conclusion

 

For the period 1st April 2019 to 30th June 2019 the actual Prudential Indicators to be monitored by the Executive Board are within the limits set by the Budget 2019-2020 and the Treasury Management Policy and Strategy 2019-2020. This is also true for the indicators being monitored by officers.

 

 

RECOMMENDATION

 

That Executive Board considers and approves the report.