Agenda item
Prudential Indicators Monitoring and Treasury Management Strategy Update - Quarter 4 2024/25
Report attached.
Minutes:
Members considered a joint report of Councillor Vanessa Alexander, Portfolio Holder for Resources and Council Operations, providing an update on the Treasury Management outturn position for 2024/25.
Councillor Alexander provided a brief introduction to the report. Councillor Khan noted the good work undertaken by the Executive Director (Resources) and his team.
Approval of the report was not deemed a key decision.
Reasons for Decision
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 2024/2025 at its meeting in February 2024.
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.
The indicators were purely for internal use and were 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 (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 2024 in the same report referred to above, the Council also had set out and then approved its current Treasury Management Strategy. This was 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 2024 report.
Prudential Indicators Monitoring
Appendix 1 to the report set out the monitoring information for each of the prudential indicators and limits. They related to:
· External debt overall limits;
· Affordability (e.g. implications for Council Tax);
· Prudence and sustainability (e.g. implications for external borrowing);
· Capital expenditure; and
· Other indicators for Treasury Management.
Treasury Management Update
The outturn balance sheet position at 31st March 2025 for treasury management activities was shown in the table below.
Forecast Treasury Balance Sheet Position 2024/25
|
Portfolio Position 2024/25 Q4 |
Original Estimate 2024/25
£'000 |
Outturn Position 2024/25
£'000 |
|
EXTERNAL DEBT |
|
|
|
Borrowing |
9,595 |
9,595 |
|
Other Long-Term Liabilities |
1,274 |
1,542 |
|
Total External Debt |
10,869 |
11,137 |
|
Capital Financing Requirement |
8,798 |
7,524 |
|
Under/(Over) Borrowing |
(2,071) |
(3,613) |
|
INVESTMENTS |
|
|
|
Total Short-Term Investments |
27,722 |
35,190 |
|
Total Long-Term Investments |
- |
- |
|
Total Investments |
27,722 |
35,190 |
|
Net Investments / (Borrowing) |
16,853 |
24,053 |
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 several 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 2024/25 the gross debt 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 in prior years reflected finance liabilities relating to vehicles and plant and in the current year reflected the transfer of all leases onto the balance sheet to comply with the new IFRS 16 – Leases accounting standard.
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 currently, 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 based on affordability, part of which was related to borrowing costs and investment returns.
Investment 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 2024/25 was expected to be funded using 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 borrowing was expected to be required during the year.
Investment Activities during The Period
During the year the Council had invested funds with other Local Authorities, the Government’s Debt Management Agency Deposit Facility and used Money Market Funds and Bank deposit accounts.
|
Portfolio Position |
Provisional Outturn 2024/25
£'000 |
|
Local Authorities |
30,000 |
|
Debt Management Agency Deposit Facility |
3,110 |
|
Money Market Funds |
2,000 |
|
Lancashire County Council Call Account |
0 |
|
Bank Deposit Accounts |
80 |
|
Total Short-Term Investments |
35,190 |
Two further tables were included in the report, which gave further details of the investments the Council had in place at 31st March 2025 with other local authorities and any future dated loans agreed at the end of the quarter. However, there were no future dated loans agreed at the end of the quarter.
The Council’s Finance team had a number of checks in place before any loans to other local authorities were agreed, to prioritise the security of any funds invested.
To ensure the Council was considering any possible risk posed by the recent increase in Section 114 Notices being issued (ie. a formal notice indicating that a council’s forecast income is insufficient to meet its forecast expenditure for the next year), the authority was undertaking additional due diligence, which included:
- Reviewing local press for any signs of financial distress;
- Analysing the latest financial statements of the local authority;
- Assessing the overall financial health and stability of the local authority.
Expected Movement in Interest Rates
The Council had appointed MUFG (formally 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 included in the report, which gave MUFG’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 gradually fall, as inflation moved closer to the Bank of England’s target of 2.00%.
Interest rate risk was minimised as the Council’s borrowings were fixed until a trigger point, where the lender sought better rates. Current interest rates would need to rise significantly for this to occur. With rates expected to fall in the short-term this was unlikely to occur, but this would be monitored closely.
The revenue outturn position on the Council’s Treasury Management activities was as shown in the table below.
Forecast Treasury Revenue Outturn – 2024/25 Q4
|
Portfolio Position 2024/25 |
Working Budget 2024/25
£'000 |
Outturn 2024/25
£'000 |
Forecast (Under) / Over Spend
£'000 |
|
INTEREST RECEIVABLE |
|
|
|
|
Interest Receivable on Temporary Investments |
(401) |
(1,684) |
(1,283) |
|
Total Interest Receivable |
(401) |
(1,684) |
(1,283) |
|
INTEREST PAYABLE |
|
|
|
|
Interest Payable on Long-Term Borrowings |
513 |
439 |
(74) |
|
Interest Payable on Finance Leases |
41 |
38 |
(3) |
|
Total Interest Payable |
554 |
477 |
(77) |
|
Minimum Revenue Provision |
1,085 |
930 |
(155) |
|
Net (Income) / Expenditure from Treasury Activities |
1,238 |
(277) |
(1,515) |
Interest Receivable
The Council had invested amounts of surplus cash on a short-term, temporary basis. The Council’s strategy continued to focus on the security of deposits and the liquidity of funds. The interest received from these investments was above the budgeted expectations for the full year, mainly due to higher levels of funds being held and the Bank of England maintaining interest rates at higher levels than had been anticipated when the budget had been set. The actual income from investment interest for the year ending 31st March 2025 was £1.684m; an increase of £1.283m against the original budget forecast.
The Council continued to invest surplus cash in top-rated financial institutions. The authority continued to spread its money around several 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 operated a policy of holding no more than £2m in any one bank (except for the liquidity account held with Nat West Bank where the limit was £3m) to ensure that the risk was spread.
The Council could place unlimited funds with the Government Debt Management Agency Deposit Facility (DMADF). This allowed greater flexibility for placing of funds with potential for higher returns with minimal risk.
Interest Payable
An estimate of interest on additional borrowing had been included in the budget. No new borrowing was expected to be required during the year.
Minimum Revenue Provision
Minimum revenue provision charge was forecast to be below budget due to new vehicles being delivered later than had been expected.
Performance against Prudential Indicators
The Council’s performance to date, and current forecasts for the year, against the Prudential Indicators set in the Treasury Management Strategy approved by full Council on 27th February 2024 were shown in Appendix 1 of the report. The Council had remained within the Prudential Indicators set out in the approved Treasury Management Strategy.
Liability Benchmark
The Council’s Treasury Management Strategy also set out a Liability Benchmark. This compared the Council’s actual borrowing against an alternative strategy. The liability benchmark was calculated showing the lowest risk level of borrowing.
The liability benchmark was a useful tool to help establish whether the Council was likely to be a long-term borrower or a long-term investor in the future, and so shape its strategy focus and decision making. The liability benchmark itself represented an estimate of the cumulative amount of external borrowing the Council had to hold to fund its current capital and revenue plans, while keeping treasury investments at the minimum level required to manage day-to-day cash flow.
There had been no significant changes to the inputs to this calculation, therefore there had been no updates to this indicator. A chart illustrating the liability benchmark was provided in the report, which reflected that presented in the approved Treasury Management Strategy.
There were no alternative options for consideration or reasons
Resolved - That the Cabinet notes the Treasury Management outturn position for 2024/25.
Supporting documents:
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