Agenda item

Report attached.

Members considered a report of Councillor Joyce Plummer, Portfolio Holder for Resources, providing updates on activities around Performance Indicator Monitoring and Treasury Management since the start of this financial year.

Councillor Plummer introduced the report which was largely technical in nature.  Borrowing had been maintained at the estimated level of £1,431k.

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 current prudential indicators at its meeting in February 2022.

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 and frequency.  This half-year report to Cabinet complemented a more regular review by the Deputy Chief Executive.

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 and cash activities of the authority, and the effective management of any associated risks.   On 24^th February 2022 in the same report referred to above, the Council also set out and then approved its current Treasury Management Strategy.  This had been done 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 were included in the February 2022 report.

Prudential Indicators Monitoring

Table 1 and Table 2 (in the Appendix to the report) showed the monitoring information for each of the prudential indicators, limits and statements.   They related to:

·           External debt overall limits – Table 1;

·           Affordability   (eg implications for Council Tax) – Table 2;

·           Prudence and sustainability  (eg implications for external borrowing);

·           Capital expenditure; and

·           Other particular indicators for Treasury Management.

Treasury Management Update

The current Treasury position was as follows:

As could be seen from the above table, the authority 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 CFR exceeded gross debt.  However, in 2022/23, the gross debt would exceed CFR.  This was due to the annual payment of Minimum Revenue Provision (MRP).  Other Liabilities reflected the transfer of contract hire leases to the balance sheet to comply with IFRS16.

The requirement to have CFR 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.

The Capital Programme 2022/23 would be funded by the use of Government Grants (including New Homes Bonus Grant and S31 Grants) and other external financing.  It would also be supported during the year by greater use of internal sources of capital finance (including capital receipts reserve) because of the reduced level of external grant allocation.  It was not anticipated currently that any capital borrowing would be required.

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.  The following table gave Link’s latest available view of the expected future movement in interest rates, from quarter ending 31^st December 2022 (their Qtr3 2022) onwards.

The latest forecast set out a view that both short and long-dated interest rates would be elevated as the Bank of England sought to squeeze inflation out of the economy.  This had happened but the new Government’s policy of emphasising fiscal rectitude probably meant the Bank Rate did not now need to increase to further than 4.5%.

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 4% and possibly 5% before this was likely to happen.  The above table indicated that this was unlikely to happen in the next few years.

The Council had invested relatively small amounts of surplus cash on a short-term, temporary basis.  The interest received from these investments was above the budgeted expectations for the six months to 30^th September, mainly due to the Bank of England increasing the interest rates.  The Council’s strategy continued to focus on the security of deposits and the liquidity of funds.  The additional interest generated as a result of rate increases was forecast to be in the region of £200k for the year ending March 2023.  This increase would offset the additional inflation pressures in the current year and future year’s financial forecasts.

The Council continued to invest surplus cash in the 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.

It was recommended that the policy on external investment was changed by increasing the maximum limit for investment with the Government’s Debt Management Agency Deposit Facility (DMADF) from £2m to unlimited.  This would allow greater flexibility for the placing of funds with potential for higher returns with minimal risk.  This recommendation would be included in the updated Treasury Management Strategy to be approved at the Budget Council meeting in February 2023.

There were no alternative options for consideration or reasons

Resolved                                    -    That Cabinet notes the report on Performance Indicator Monitoring and the Treasury Management Strategy.