Agenda item

The attached report was considered and noted by the Cabinet at its meeting on 11^th June 2024.

Members considered a joint report ofCouncillor Noordad Aziz, Deputy Leader and Portfolio Holder for Transformation, Education and Skills, and Councillor Vanessa Alexander, Portfolio Holder for Resources and Council Operations, updating Cabinet on the Treasury outturn position for 2023/24.  The report had previously been considered and noted by the Cabinet at its meeting held on 11^th June 2024.

The Prudential Code for Capital Finance in Local Authorities required the Council to set Prudential Indicators annually for the forthcoming three years to demonstrate that the Council’s capital investment plans were affordable, prudent and sustainable.  The Council had adopted its prudential indicators for 2023/2024 at its meeting in February 2023.

The Prudential Code required the Council, having agreed at least a minimum number of mandatory prudential indicators (including limits and statements), to monitor them in a locally determined format on a quarterly basis.  This full-year report complemented the quarterly reports presented to Cabinet throughout the year and a more regular review by the Executive Director (Resources).

The indicators were purely for internal use and not designed to be used as comparators between authorities.  If it should be necessary to revise any of the indicators during the year, the Executive Director of Resources would report and advise the Council further.

‘Treasury Management’ related to the borrowing, investing and cash activities of the authority, and the effective management of any associated risks.  In February 2023, in the same report referred to above, the Council had also set out and then approved its current Treasury Management Strategy.  This had been in accordance with the CIPFA (Chartered Institute of Public Finance & Accountancy) code of practice on treasury management in public services, the Council having previously adopted, via Cabinet, the then revised code of practice.  Associated treasury management Prudential Indicators had been included in the February 2023 report.

Prudential Indicators Monitoring

Appendix 1 to the report had set out the monitoring information for each of the prudential indicators and limits.  They related to:

• External debt overall limits;
• Affordability (eg implications for Council Tax);
• Prudence and sustainability (eg implications for external borrowing);
• Capital expenditure; and
• Other indicators for Treasury Management.

Treasury Management Update

The balance sheet outturn position for treasury manage activity was set out in a table included within the report.

The table demonstrated that the Council was performing within the original targets set at the start of the year.  Within the prudential indicators there were a number of key indicators to ensure that the Council operated its activities within well-defined limits.  In general, the requirement was that the Capital Financing Requirement exceeded gross debt.  However, in 2023/24 the gross debt had exceeded the Capital Financing Requirement.  This was due to the Council having historical debt with a maturity repayment profile (meaning all principal was paid at the loans maturity date) but the accounting treatment required that the Capital Financing Requirement was reduced each year by the payment of Minimum Revenue Provision (MRP).  Other Liabilities reflected finance liabilities relating to vehicles and plant.

The requirement to have Capital Financing Requirement exceed Gross Debt centred around providing an assurance that borrowing was not taking place for Revenue purposes. However, as the Council was not borrowing additional funds at this time, this was not an issue.

The current position of the treasury function, and its expected change in the future, introduced risk to the Council from an adverse movement in interest rates. The Prudential Code was constructed on the basis of affordability, part of which was related to borrowing costs and investment returns.

Investments balances were higher than had been forecast when the Prudential Indicators and strategy had been set.  This was mainly due to grants received in advance of capital spend being incurred, as well as slippage in the capital programme.

The Capital Programme 2023/24 had been funded by the use of Government Grants (including Levelling Up Fund and UK Shared Prosperity Fund) and other external financing.  It had also been supported during the year by greater use of internal sources of capital finance (including capital receipts and use of the Council’s reserve balances).  No external or internal borrowing had been required during the year.

Expected Movement in Interest Rates

The Council had appointed Link Asset Services as treasury adviser to the Council and part of their service was to assist the Council in formulating a view on interest rates.  A graph was provided in the report which gave Link’s latest available view of the expected future movement in interest rates.

The latest forecast set out a view that both short and long-dated interest rates would start to fall, as it was expected that inflation would come closer to, and possibly fall below, the Bank of England’s target of 2.00%.

The Council’s exposure to interest rate movements was largely neutralised currently as its borrowings were effectively at a fixed rate until a trigger point was reached, where the lender believed a better rate could be achieved elsewhere.  Interest rates would have to exceed current levels before this was likely to happen.  The aforementioned graph indicated that this was unlikely to happen in the next few years as interest rates were expected to fall, although this would continue to be closely monitored.

The revenue outturn position on the Council’s Treasury Management activities was shown in a further table included in the report.

Interest Receivable – The Council had invested amounts of surplus cash on a short-term, temporary basis.  The interest received from these investments was above the budgeted expectations for the full year to 31^st March, this was mainly due to three different factors:

(a)   Increased cash balances due to grants received in advance of capital spend and slippage in the capital programme;

(b)   Higher interest rates than had been forecast when the budget was set, at that time the Bank of England base rate had been forecast to peak at a high of 4.50% and to have fallen to 3.50% by 31^st March 2024; and

(c)   A change in the Council’s investment strategy which had been approved at Full Council in February 2023 to increase the limit for investments with the Government’s Debt Management Agency Deposit Facility (DMADF) from £2M to unlimited.  This had allowed greater flexibility for placing funds with potential for higher returns and greater security of principal amounts invested.  It was estimated that this change in policy had resulted in additional investment income of £300,000 in 2023/24.

Other interest receivable related to interest charged on long term loans, mainly to Hyndburn

Leisure.

The Council continued to invest surplus cash in top rated financial institutions.  The authority continued to spread its money around a number of institutions to ensure that it was not potentially damaged by the unforeseen collapse of any one bank.  Deposits were also held with banks where the Council believed that the respective governments were likely to be able to guarantee deposits in the event of bank failure.  This strategy was continuing to yield an appropriate rate of return, though at a lower rate, as there was less risk attached to these deposits.  The Council also operated a policy of holding no more than £2m in any one bank (with the exception of the liquidity account held with Nat West Bank where the limit was £3m) to ensure that the risk was spread.

Interest Payable – An estimate of interest on additional borrowing had been included in the budget and no new borrowing had been required during the year.  There was also a delay in delivery of several new vehicles which the Council was acquiring on finance lease, which had resulted in an underspend on interest payable on finance leases.

Minimum Revenue Provision – Minimum Revenue Provision (MRP) was the charge to revenue made in respect of paying off the principal sum of the borrowing undertaken to finance the capital programme in previous years.  The underspend on MRP was due to the delay in delivery of the new vehicles, as mentioned in the point above, but also slippage on the capital programme.

Decision                                     -    That the Council notes the Treasury outturn position for 2023/24