Agenda item

Report attached.

Members considered a report of Councillor Vanessa Alexander, Portfolio Holder for Resources and Council Operations, providing an update on the Council’s treasury management activities for the current financial year.  The report outlined the performance of investments and borrowing, assessed compliance with the approved Treasury Management Strategy, and highlighted any emerging risks or opportunities that might impact the Council’s financial position.  Overall, this report supported effective budget monitoring and ensured transparency and accountability in the management of public funds.

 

In the absence of Councillor Alexander, the Leader of the Council provided a brief introduction to the report which was largely technical in nature.  Councillor Dad highlighted the total of short-term investments, £38.675m, and how the Council invested.  He also drew attention to the forecast interest rates and the interest returns expected by the Council in the sum of £1.287m.

 

Councillor Zak Khan queried the relationship between the Council’s borrowing and investments and any timescales applicable to the Council’s main funding pressures (as outlined in the Revenue Monitoring report at Agenda Item 6), particularly in the light of the impending Local Government Reorganisation.  Councillor Dad confirmed that these pressures were carefully monitored and should be deliverable without the need for additional borrowing.  However, the outcome of the Fair Funding review was still awaited.  The Chief Executive confirmed that even under the worst-case scenario envisaged in the Medium Term Financial Strategy (MTFS), the Council should not need additional borrowing.  Jane Ellis, Executive Director (Legal and Democratic Services) indicated that the Government was likely to make an Order under s.24 of the Local Government and Public Involvement in Health Act 2007, which would be effective from April 2027 and would give the new shadow unitary authority powers of veto over certain expenditure by the councils due to be abolished.  This might cover disposal of assets over £100k, revenue expenditure over £100k and capital expenditure over £1m.

 

Approval of the report was not deemed a key decision.

 

Reasons for Decision

 

Local authorities were required to manage their borrowing, investments, and cash flows in a way that was affordable, prudent, and sustainable.  This was governed by the CIPFA Prudential Code and the CIPFA Treasury Management Code of Practice, which together set the framework for how councils planned and monitored their capital financing and treasury activities.

 

As part of this framework, councils had to set Prudential Indicators each year to support decision-making around capital investment and borrowing.  These indicators helped demonstrate that the Council’s plans were financially sound and that risks were being managed appropriately.

The Council also adopted a Treasury Management Strategy annually, which outlined how it would manage borrowing, investments, and cash balances throughout the year.  Regular monitoring reports were required to track performance against the strategy and indicators, and to provide assurance that treasury activities remained aligned with the Council’s financial objectives.

 

Borrowing Activities During the Period

 

Table 1 below showed the current borrowing position at Q2 2025/26 compared with the original estimate.  An increase in finance leases relating to vehicle purchases had increased the liability and Capital Financing Requirement (CFR) totals.

 

Table 1: Comparison of latest position with the original estimate as at Q2 2025/26

 

Borrowing Position - \Q2 2025/26	Original Estimate 2025/26   £’000	Forecast at Q2 2025/26   £‘000
External Debt
Borrowing	9,595	9,595
Other Long-Term Liabilities	1,967	4,088
Total External Debt	11,562	13,683
Capital Financing Requirement	9,190	11,311
Under(Over) Borrowing	(2,372)	(2,372)

 

 

The Council continued to operate within the borrowing limits and targets set at the start of the financial year.  A key measure in the Prudential Indicators was the relationship between the Capital Financing Requirement (CFR) and the Council’s gross external debt.

 

The CFR represented the total amount the Council needed to borrow over time to fund capital investment — such as buildings, infrastructure, and equipment.  It reflected the underlying need to borrow, even if the Council chose to use internal resources (like reserves or cash balances) instead of taking out loans.  The gross external debt of £13.683m was the actual amount the Council had borrowed from external sources, such as the Lender Option Borrower Option (LOBO) loans and finance leases.

 

In general, gross debt should not exceed the CFR.  This was an important safeguard built into the Prudential Code, as it provided assurance that the Council was not borrowing more than it needed for capital purposes — and crucially, that it was not borrowing to fund day-to-day services, which was not permitted.

 

In 2025/26, the Council’s gross debt was forecast to exceed the CFR by £2.372m, placing the authority in an over-borrowed position.  This was not due to new borrowing, but was explained by:

 

• Historic loans that were structured with repayment at maturity (i.e. the full amount was repaid at the end of the loan term).  These loans kept the gross debt figure high, while the CFR reduced each year through the Minimum Revenue Provision (MRP) — an annual charge that reflected repayment of capital.

 

• The implementation of International Financial Reporting Standard (IFRS) 16 – Leases, which now required all lease liabilities (e.g. for vehicles and equipment) to be shown on the balance sheet as debt.  This had increased the reported level of gross debt, even though it did not represent new borrowing.

 

• Timing differences between capital expenditure and financing, which could temporarily affect the CFR.

 

Despite this technical position, no new external borrowing had been undertaken, and the Council was not borrowing to support revenue spending.  The position was therefore acceptable and well understood.

 

Investment Activities During the Period

 

The Council invested surplus cash balances on a short-term basis to ensure that funds were readily available when needed, while also generating a modest return.  These balances arose from timing differences — for example, when grants were received before the related expenditure was incurred, or when capital projects were delayed.

 

Short-term investments were typically placed in secure, low-risk instruments such as money market funds, government-backed deposits, or other approved counterparties.  This approach supported the Council’s priorities of:

 

• Liquidity: ensuring cash was available to meet day-to-day spending needs.
• Security: protecting public funds by minimising investment risk.
• Yield: earning interest to support the revenue budget, where possible.

 

The strategy aligned with the CIPFA Treasury Management Code, which required councils to manage investments prudently, balancing risk and return.

 

Table 2 below provided a list of counterparties and the balances invested as at Q2 2025/26.

 

Table 2: Invested balance by counterparty:

 

Investment Portfolio – Q2 2025/26	Balance at Q2 2025/26   £’000
Local Authorities	26,000
Debt Management Agency Deposit Facility	10,595
Money Market Funds	2,000
Bank Deposit Accounts	80
Total Short-Term Investments	38,675

 

 

A further table (Table 3) was included in the report, which gave more details of the investments the Council had in place at Q2 2025/26 with other local authorities.

 

There were no future dated loans agreed at the end of the quarter.

 

To protect public funds, the Council’s Finance team carried out thorough checks before agreeing to lend money to other local authorities.  These checks helped ensure that any investments were secure and that the borrowing authority was financially stable.

 

Interest Rates

 

The Council had appointed MUFG (formerly Link Asset Services) as its treasury adviser.  As part of their role, they provided guidance on expected movements in interest rates to support the Council’s investment and borrowing decisions.

 

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 start to fall, as inflation had fallen 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 would seek 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.

 

Interest Receivable

 

The Council had invested surplus cash on a short-term, temporary basis.  These investments had generated interest income above the budgeted expectations for the year.  This is mainly due to:

 

• Higher levels of cash being held (e.g. from grants received in advance of spending); and
• The Bank of England maintaining interest rates at higher levels than anticipated when the budget had been set.

 

As a result, the Council now expected to receive £0.097m in additional interest income by the end of March 2026.  The investment strategy continued to prioritise security and liquidity, ensuring that funds were safe and available when needed.

 

The Council invested surplus cash in highly rated financial institutions, spreading deposits across multiple banks to reduce risk.  This approach helped protect public funds in the event of an unexpected bank failure.

 

• Deposits were placed with banks where government guarantees were likely to apply;
• No more than £2 million was held with any single bank, except for the NatWest liquidity account, which had a limit of £3 million; and
• The Council could place unlimited funds with the Government’s Debt Management Account Deposit Facility (DMADF), which offered low-risk returns and flexibility.

 

This strategy continued to deliver a reasonable return while keeping risk to a minimum.

 

Interest Payable

 

The budget included an estimate for interest costs on potential new borrowing.  However, as no new borrowing was expected to take place during the year, these interest costs would not be incurred.

 

Forecast Revenue Outturn – 2025/26 Q2

 

Table 4 below showed the forecast revenue outturn position on the Council’s Treasury Management activities as at 2025/26 Q2.

 

The interest forecast has increased since Q1 due to prevailing interest rates overperforming what was expected.

 

Table 4: Forecast Revenue Outturn – 2025/26 Q2

 

Portfolio Position	Working Budget 2025/26     £’000	Forecast Outturn 2025/26     £’000	Forecast (Under)/ Over Spend   £’000
INTEREST RECEIVABLE
Interest Receivable on Temporary Lending	(700)	(1,287)	(587)
Other Interest Receivable	-	-	-
Total Interest Receivable	(700)	(1,287)	(587)
INTEREST PAYABLE
Interest Payable on Long-Term Borrowings	440	301	(139)
Interest Payable on Finance Leases	41	253	212
Other Interest Payable	-	-	-
Total Interest Payable	481	554	73
Minimum Revenue Provision	1,085	1,127	42
Net (Income) / Expenditure from Treasury Activities	866	394	(472)

 

 

Performance Against Prudential Indicators

 

The Prudential Code for Capital Finance in Local Authorities required councils to set Prudential Indicators annually for the forthcoming three years.  These indicators demonstrated that the Council’s capital investment plans were affordable, prudent, and sustainable.

 

Hyndburn Borough Council had adopted its Prudential Indicators for 2025/26 at its meeting in February 2025.  In addition to setting these indicators, the Prudential Code required the Council to monitor them on a quarterly basis, using a locally determined format.  These indicators were intended for internal use and were not designed for comparison between authorities.

 

Should it become necessary to revise any of the indicators during the year, the Executive Director of Resources would report and advise the Council accordingly.

 

Appendix 1 of the report provided a full list of monitoring information for each of the prudential indicators and limits.  These included:

 

• 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.

 

Liability Benchmark

 

As part of the approved Treasury Management Strategy, the Council had set out a Liability Benchmark.  This was a key tool that compared the Council’s actual borrowing levels against a theoretical benchmark that represented the lowest risk level of borrowing, based on current capital and revenue plans.

 

The Liability Benchmark helped the Council understand whether it was likely to be a long-term borrower or a long-term investor.  It did this by estimating the minimum level of external borrowing needed to:

 

• Fund planned capital expenditure;
• Repay existing debt; and
• Maintain only the minimum level of cash investments required for day-to-day operations.

 

This insight supported strategic decision-making around future borrowing and investment activity.

 

The inputs that determined the Liability Benchmark had been revised to include the increased capital expenditure relating to vehicle leasing and the increased draw down of useable reserves anticipated to support the revenue budget over the MTFS period.

 

Based on current forecasts, the Liability Benchmark suggested that the Council might need to undertake new borrowing around the year 2029.  However, this was only a projection based on existing capital and revenue plans — it was not a confirmed borrowing requirement and might change as plans and funding sources evolved.

 

A chart illustrating the liability benchmark as at Q2 2025/26 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 Cabinet notes the treasury management activities undertaken during the period and the performance against the approved strategy.