Report to: |
Audit and Governance Committee |
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Date: |
10 October 2023 |
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Title: |
Annual Treasury Management Report 2022/23 |
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Portfolio Area: |
Cllr C Edmonds – Resources
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Wards Affected: |
ALL |
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Urgent Decision: |
N |
Approval and clearance obtained: |
Y |
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Date next steps can be
taken: N/A |
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Author: |
Clare Scotton
Pauline Henstock |
Role: |
Principal Accountant
Head of Finance Practice |
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Contact: |
Email: clare.scotton@swdevon.gov.uk |
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Email: pauline.henstock@swdevon.gov.uk
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Recommendations: That the Audit and Governance Committee: 1. Approves the actual 2022/23 prudential and treasury indicators in this report.
2. Notes the Annual Treasury Management report for 2022/23.
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1. Executive summary
1.1 Income from investments this year was £600,571 which is £575,250 higher than the budget of £25,321 at an average return of 2.08%. The comparable performance indicator (Benchmark) is the Sterling Overnight Interbank Average rate (SONIA) which was 2.19%. Therefore the Council achieved 0.11% return on investments below the benchmark for 22/23. The reason for the benchmark not being met is that rates were very low at the start of 2022/23 (0.04%) and then substantially rose throughout the year.
2. Background
2.1 This Council is required by regulations issued under the Local Government Act 2003 to produce an annual treasury management review of activities and the actual prudential and treasury indicators for 2022/23. This report meets the requirements of both the CIPFA Code of Practice on Treasury Management (the Code) and the CIPFA Prudential Code for Capital Finance in Local Authorities (the Prudential Code).
2.2 Treasury management is defined as:
“The management of the local authority’s cash flows, its banking, money market and capital market transactions; the effective control of the risks associated with those activities; and the pursuit of optimum performance consistent with those risks”.
2.3 During 2022/23 the minimum reporting requirements were that the full Council should receive the following reports:
• An annual treasury strategy in advance of the year (Minute CM 73)
• A mid-year (minimum) treasury update report (Minute AC 29)
• An annual review following the end of the year describing the activity compared to the strategy (this report)
2.4 The regulatory environment places responsibility on members for the review and scrutiny of treasury management policy and activities. This report is therefore important in that respect, as it provides details of the outturn position for treasury activities and highlights compliance with the Council’s policies previously approved by Members.
2.5 This Council also confirms that it has complied with the requirement under the Code to give prior scrutiny to all of the above treasury management reports by the Audit Committee before they were reported to the full Council. Member training on treasury management issues was undertaken during 2020/21 and will be carried out again in November 2023 in order to support their scrutiny role.
3. The Economy and Interest Rates
3.2 Market commentators’ misplaced optimism around inflation has been the root cause of the rout in the bond markets with, for example, UK, EZ and US 10-year yields all rising by over 200bps in 2022. The table below provides a snapshot of the conundrum facing central banks: inflation is elevated but labour markets are extra-ordinarily tight, making it an issue of fine judgment as to how far monetary policy needs to tighten.
3.6 Bank Rate increased steadily throughout 2022/23, starting at 0.75% and finishing at 4.25%.
4. Overall Treasury Position as at 31 March 2023
4.1 At the beginning and the end of 2022/23 the Council‘s treasury position was as follows:
Treasury Portfolio |
31 March 2022
|
31 March 2023
|
||
£’000 |
Rate% |
£’000 |
Rate% |
|
Treasury Investments: |
||||
Short term – fixed |
17,200 |
0.74 |
*10,200 |
3.98 |
Money Market Funds |
9,650 |
0.38 |
10,800 |
3.98 |
Property Funds |
553 |
3.25 |
462 |
4.26 |
Total treasury investments |
27,403 |
|
21,462 |
|
Treasury External Borrowing |
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PWLB |
28,341 |
2.54 |
27,726 |
2.54 |
Total external borrowing (£27.012m of long term borrowing and £714k of short term borrowing) |
28,341 |
|
27,726 |
|
Net treasury investments / (borrowing) |
(938) |
|
(6,264) |
|
* The reduction in investments as at 31 March 2023 of £7m partly relates to the timing of the Council Tax energy rebate grant (£2.99m) which was received at the end of 2021/22 and the payments were made on behalf of Central Government at the beginning of 2022/23. In addition the Council also administered various Business Grants on behalf of Central Government in 2021/22 and part of the reduction in investments relates to unapplied funding being repaid to Central Government in 2022/23.
4.2 The following is a list of the Council’s investments at 31 March 2023.
Fixed Term Deposits
Amount |
Investment |
Average Interest rate |
£3,000,000 |
Lloyds Bank Plc |
4.35% |
£3,000,000 |
Standard Chartered |
3.82% |
£4,200,000 |
DMO |
3.77% |
£10,200,000 |
Total |
|
Money Market Funds
Amount |
Investment |
Average Interest rate |
£1,800,000 |
Aberdeen Standard Investments |
3.95% |
£3,000,000 |
BlackRock |
4.06% |
£3,000,000 |
Deutsche |
3.95% |
£3,000,000 |
LGIM |
3.97% |
£10,800,000 |
Total |
|
Property Funds
Amount |
Investment |
Dividend Yield |
£461,930 |
CCLA – Property Fund |
4.26% |
4.3 At Council in February 2017, it was approved (Minute CM54 and HC50) that a sum of £500,000 be used to invest in CCLA’s (CCLA Investment Management Limited) Local Authorities Property Fund, with the investment being placed in April 2017.
4.4 The investment was made with a view to a long term commitment. The bid market value as at 31 March 2023 for the Council’s investment was £461,930. As at August 2023, the value is £456,640.
South West Mutual
4.5 South West Mutual have provided an update on their website which references that for the past few years, they have worked hard to find the starting point for a regional mutual bank for Devon, Cornwall, Somerset and Dorset. However they have reached a point that it has become clear to them that while there will be a time to launch the bank, that time has not yet come and they are moving forwards as a lean, volunteer-led member organisation.
4.6 In December 2018 the Council supported the formation of the South West Mutual with an economic grant of £49,995 which was funded out of the business rate pilot gain from 2018/19. Further information is available on their website. https://southwestmutual.co.uk/
5. The Strategy for 2022/23
Investment strategy and control of interest rate risk
5.2 Starting April at 0.75%, Bank Rate moved up in stepped increases of either 0.25% or 0.5%, reaching 4.25% by the end of the financial year, with the potential for a further one or two increases in 2023/24. As at September 2023 the bank base rate is 5.25%.
5.6 The Treasury Management Strategy Report for 2022/23 was approved by the Council on 5 April 2022 (Minute – CM73).
Borrowing strategy and control of interest rate risk
· if it had been felt that there was a significant risk of a sharp FALL in long and short term rates, (e.g. due to a marked increase of risks around relapse into recession or of risks of deflation), then long term borrowings would have been postponed, and potential rescheduling from fixed rate funding into short term borrowing would have been considered.
5.10 Interest rate forecasts were initially suggesting only gradual rises in short, medium and longer-term fixed borrowing rates during 2022/23 but by August it had become clear that inflation was moving up towards 40-year highs, and the Bank of England engaged in monetary policy tightening at every Monetary Policy Committee meeting during 2022, and into 2023, either by increasing Bank Rate by 0.25% or 0.5% each time. Currently the CPI measure of inflation is still above 10% in the UK but is expected to fall back towards 4% by year end. Nonetheless, there remain significant risks to that central forecast.
5.11 Interest rate forecasts during 2022/23 are shown below (as at 27.03.2023).
5.12 The latest interest rate forecasts as at 25 September 2023 are shown below.
5.13 Actual PWLB borrowing rates - the graph below shows, for a selection of maturity periods, the average borrowing rates, the high and low points in rates, spreads and individual rates at the start and the end of the financial year.
1 Year |
5 Year |
10 Year |
25 Year |
50 Year |
|
Low |
1.95% |
2.18% |
2.36% |
2.52% |
2.25% |
Date |
01/04/2022 |
13/05/2022 |
04/04/2022 |
04/04/2022 |
04/04/2022 |
High |
5.11% |
5.44% |
5.45% |
5.88% |
5.51% |
Date |
28/09/2022 |
28/09/2022 |
12/10/2022 |
12/10/2022 |
28/09/2022 |
Average |
3.57% |
3.62% |
3.76% |
4.07% |
3.74% |
Spread |
3.16% |
3.26% |
3.09% |
3.36% |
3.26% |
5.17 Regarding PWLB borrowing rates, the various margins attributed to their pricing are as follows: -
· PWLB Standard Rate is gilt plus 100 basis points (G+100bps)
· PWLB Certainty Rate is gilt plus 80 basis points (G+80bps)
· Local Infrastructure Rate is gilt plus 60bps (G+60bps)
6. Borrowing Outturn for 2022/23
6.1 Details of the loans outstanding at 31 March 2023 are shown below:
Lender |
Type |
Maturity |
Interest Rate % |
Principal held at 31 March 2022 £’000 |
Principal held at 31 March 2023 £’000 |
PWLB - Maturity |
Fixed Interest Rate |
45 Years |
4.55 |
2,100 |
2,100 |
PWLB - Annuity |
Fixed Interest Rate |
9 Years |
1.92 |
1,528 |
1,234 |
PWLB – Annuity |
Fixed Interest Rate |
22 Years |
1.95 |
1,331 |
1,273 |
PWLB – Annuity |
Fixed Interest Rate |
50 Years |
2.65 |
12,241 |
12,105 |
PWLB - Annuity |
Fixed Interest Rate |
50 Years |
2.60 |
3,471 |
3,432 |
PWLB – 23 maturity loans |
Fixed Interest Rate |
49 Years |
2.54* |
3,592 |
3,592 |
PWLB – Annuity |
Fixed Interest Rate |
50 Years |
2.31 |
1,740 |
1,720 |
PWLB – Annuity |
Fixed Interest Rate |
30 Years |
1.73 |
2,338 |
2,270 |
Total |
|
|
|
28,341 |
27,726 |
*Average interest rate
Repayments
6.2 During 2022/23 the Council repaid interest of £733,000 at an average rate of 2.54%.
6.3 The Council has not borrowed more than, or in advance of its needs, purely in order to profit from the investment of the extra sums borrowed. The Council has not taken out any borrowing in 2022/23.
6.4 In September 2019, when borrowing rates fell to a point where it was considered optimal to do so in order to finance capital expenditure which would be incurred within the time frame of the forward approved Capital Financing Requirement estimates, the Council borrowed £2.5 million at an interest rate of 1.73% for future forecast capital expenditure. In taking this decision, the Council carefully considered achieving best value, the risk of having to borrow at higher rates at a later date, the carrying cost of the difference between interest paid on such debt and interest received from investing funds which would be surplus until used, the current economic climate and that the Council could ensure the security of such funds placed on temporary investment.
Debt rescheduling
6.5 No rescheduling was done during the year as the average 1% differential between PWLB new borrowing rates and premature repayment rates made rescheduling unviable.
7. Investment Outturn for 2022/23
7.2 The investment activity during the year conformed to the approved strategy, and the Council had no liquidity difficulties.
7.3 Resources – the Council’s cash balances comprise revenue and capital resources and cash flow monies. Income from investments this year was £600,571 which is £575,250 higher than the budget of £25,321 at an average return of 2.08%. The comparable performance indicator (Benchmark) is the Sterling Overnight Interbank Average rate (SONIA) which was 2.19%. Therefore the Council achieved 0.11% return on investments below the benchmark for 22/23. The reason for the benchmark not being met is that rates were very low at the start of 2022/23 (0.04%) and then substantially rose throughout the year.
7.4 By March 2023 the rate of investment return achieved on investments was 4.19% (Link Services March 2023 report).
7.5 The Council’s core cash resources comprised as follows:
Balance Sheet Resources £’000 |
31 March 2022 |
31 March 2023 |
General Fund Balance |
1,490 |
1,569 |
Earmarked Reserves |
9,189 |
8,902 |
Usable Capital Receipts |
56 |
70 |
Provisions |
921 |
733 |
Other (Collection Fund and Capital contributions unapplied) |
(511) |
2,125 |
Total |
11,145 |
13,399 |
8. Other Issues 2022/23
IFRS 9 fair value of investments
9. Outcomes/outputs
9.1 Income from investments this year was £600,571 which is £575,250 higher than the budget of £25,321.
9.2 Industry performance is judged and monitored by reference to a standard benchmark; this is the Sterling Overnight Interbank Average rate (SONIA). The SONIA rate at the end of March was 2.19% which is 0.11% higher than our average return of 2.08% as at 31 March 2023.
10. Options available and consideration of risk
10.1 The Treasury Management Strategy is risk averse with no investments allowed for a period of more than a year and very high credit rating is required, together with a limit of £3m per counterparty. This has resulted in only a small number of institutions in which the Council can invest (see Appendix A).
10.2 The Council’s treasury management activities and interest rates are reviewed daily to ensure cash flow is adequately planned with surplus funds being invested in low risk counterparties, providing adequate liquidity initially before considering optimising investment return.
10.3 The 2018 CIPFA Codes and guidance notes have placed enhanced importance on risk management. Where an authority changes its risk appetite e.g. for moving surplus cash into or out of certain types of investment funds or other types of investment instruments, this change in risk appetite and policy will be brought to Members’ attention in treasury management update reports.
11. Proposed Way Forward
11.1 The Council’s treasury activities and interest rates will continue to be monitored daily and appropriate action taken to mitigate risk whilst optimising investment return where possible.
12. Compliance with Treasury Limits and Prudential Indicators
12.1 During 2022/23 the Council operated within the treasury limits and Prudential Indicators set out in the Council’s Treasury Policy Statement and annual Treasury Strategy Statement. The Council’s Prudential Indicators for 2022/23 are detailed and shown in Appendix B.
13. Implications
Implications
|
Relevant |
Details and proposed measures to address |
Legal/Governance
|
Y |
Statutory powers are provided by the Local Government Act 1972 Section 151 and the Local Government Act 2003 |
Financial Implications to include reference to value for money
|
Y |
Income from investments this year was £600,571 which is £575,250 higher than the budget of £25,321 at an average return of 2.08%. The comparable performance indicator (Benchmark) is the Sterling Overnight Interbank Average rate (SONIA) which was 2.19%. Therefore the Council achieved 0.11% return on investments below the benchmark for 22/23.
By March 2023 the rate of investment return achieved on investments was 4.19% (Link Services March 2023 report).
Consideration of the Annual Treasury Report forms an essential component of the Council’s systems for public accountability. It also provides a platform for future investment planning. |
Risk |
Y |
The security risk is the risk of failure of a counterparty. The liquidity risk is that there are liquidity constraints that affect the interest rate performance. The yield risk is regarding the volatility of interest rates/inflation. The Council has adopted the CIPFA Code Of Practice for Treasury Management and produces an Annual Treasury Management Strategy and Investment Strategy in accordance with CIPFA guidelines.
The Council engages a Treasury Management advisor and a prudent view is always taken regarding future interest rate movements. Investment interest income is reported quarterly to SLT and Members. |
Supporting Corporate Strategy |
|
The income from treasury management supports all the Council’s corporate strategy themes. |
Climate Change - Carbon / Biodiversity Impact |
|
No direct carbon/biodiversity impact arising from the recommendations. |
Comprehensive Impact Assessment Implications |
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Equality and Diversity |
N |
None directly arising from this report. |
Safeguarding |
N |
None directly arising from this report. |
Community Safety, Crime and Disorder |
N |
None directly arising from this report. |
Health, Safety and Wellbeing |
N
|
None directly arising from this report. |
Other implications |
N |
None directly arising from this report. |
Supporting Information
Appendices:
Appendix A – Lending list as at 31 March 2023
Appendix B - Prudential and Treasury Indicators 2022/23
Background Papers:
Annual treasury strategy in advance of the year (Council 5 April 2022 – CM73)
A mid-year treasury update report (Audit Committee 14 March 2023 –AC29)
Approval and clearance of report
Process checklist |
Completed |
Portfolio Holder briefed |
Yes |
SLT Rep briefed |
Yes |
Relevant Exec Director sign off (draft) |
Yes |
Data protection issues considered |
Yes |
Accessibility checked |
Yes |
APPENDIX A
PRUDENTIAL AND TREASURY INDICATORS 2022/23
The Council’s capital expenditure plans are the key driver of treasury management activity. The outputs of the capital expenditure plans are reflected in prudential indicators, which are designed to assist members to overview and confirm capital expenditure plans.
Capital Expenditure and Financing
The Council undertakes capital expenditure on long-term assets. These activities may either be:
· If insufficient financing is available, or a decision is taken not to apply resources, the capital expenditure will give rise to a borrowing need.
The actual capital expenditure forms one of the required prudential indicators. The tables below show the actual capital expenditure and how this was financed.
Capital Expenditure |
2021/22 Actual £000 |
2022/23 Estimate £000 |
2022/23 Actual £000 |
General Fund services |
1,103 |
*3,945 |
*2,032 |
TOTAL |
1,103 |
3,945 |
2,032 |
*This estimate included a housing redevelopment project. These estimates were prepared in January 2022.
**The main projects included in the actual for 2022/23 were Private Sector Renewal Grants, Disabled Facilities Grants and Green Homes Grants.
Capital Expenditure and Financing |
2021/22 Actual £000 |
2022/23 Estimate £000 |
2022/23 Actual £000 |
Capital Expenditure |
1,103 |
3,945 |
2,032 |
Financed by: |
|||
External sources |
(607) |
(2,288) |
(1,774) |
Own resources |
(334) |
(1,165) |
(258) |
Unfinanced capital expenditure |
(162) |
*492 |
0 |
*The 2022/23 estimates were prepared in January 2022. See the Capital Expenditure table above for an explanation of the differences in value between the estimates for capital schemes and the actual expenditure in 2022/23.
The Council’s Overall Borrowing Need (the Capital Financing Requirement)
Part of the Council’s treasury activities is to address the funding requirements for this borrowing need. Depending on the capital expenditure programme, the treasury service organises the Council’s cash position to ensure that sufficient cash is available to meet the capital plans and cash flow requirements. This may be sourced through borrowing from external bodies, (such as the Government, through the Public Works Loan Board [PWLB], or the money markets), or utilising temporary cash resources within the Council.
CFR |
2021/22 Actual £000 |
2022/23 Estimate £000 |
2022/23 Actual £000 |
Opening balance |
25,361 |
24,738 |
24,900 |
Add unfinanced capital expenditure (as above) |
162 |
*492 |
0 |
Less MRP/VRP |
(623) |
(636) |
(647) |
Closing balance |
24,900 |
24,594 |
24,253 |
*The 2022/23 estimates were prepared in January 2022. See the Capital Expenditure table above for an explanation of the differences in value between the estimates for capital schemes and the actual expenditure in 2022/23.
The Council’s Gross Debt and the Capital Financing Requirement
Statutory guidance states that debt should remain below the capital financing requirement, except in the short-term. As can be seen from the indicator below, the debt is slightly higher than the CFR by £3.47m in 2022/23. This is only a short term position as this will finance future capital expenditure which will be incurred within the time frame of the forward approved Capital Financing Requirement estimates.
|
2021/22 Actual £000 |
2022/23 Estimate £000 |
2022/23 Actual £000 |
Debt |
28,341 |
27,726 |
27,726 |
Capital Financing Requirement |
24,900 |
24,594 |
24,253 |
Over/(under) funding of CFR |
3,441 |
3,132 |
3,473 |
The previous sections cover the overall capital and control of borrowing prudential indicators, but within this framework prudential indicators are required to assess the affordability of the capital investment plans.
These provide an indication of the impact of the capital investment plans on the Council’s overall finances. The Council is asked to approve the following indicators:
Ratio of financing costs to net revenue stream
Although capital expenditure is not charged directly to the revenue budget, interest payable on loans and MRP are charged to revenue, offset by any investment income receivable. The net annual charge is known as financing costs; this is compared to the net revenue stream i.e. the amount funded from Council Tax, business rates and general government grants.
|
2021/22 Actual |
2022/23 Estimate |
2022/23 Actual |
Financing costs (£) |
1,333,593 |
1,343,363 |
*778,880 |
Proportion of net revenue stream |
18.3% |
17.3% |
10.0% |
*The estimates were prepared in January 2022. During the year income from investments was £600,571 which was £575,250 higher than the budget of £25,321. This was due to successive increases in the bank base rate. As at March 2023 the Council was achieving 4.19% return from its treasury management investments. In addition to this the Council took out no external borrowing in 2022/23 and therefore financing costs were lower than estimated.
TREASURY INDICATORS: LIMITS TO BORROWING ACTIVITY
The Operational Boundary – this is the expected borrowing position of the Council during the year. Periods where the actual position is either below or over the boundary are acceptable subject to the authorised limit not being breached.
Operational Boundary |
2021/22 |
2022/23 |
£ |
£ |
|
Borrowing |
47,500,000 |
35,000,000 |
Other long term liabilities |
- |
- |
Total |
47,500,000 |
35,000,000 |
The Authorised Limit for External Debt – A further key prudential indicator represents a control on the overall level of borrowing. This represents a limit beyond which external debt is prohibited, and this limit needs to be set or revised by Full Council. It reflects the level of external debt which, while not desired, could be afforded in the short term, but is not sustainable in the longer term.
This provides headroom over and above the operational boundary for unusual cash movements. This is the maximum amount of money that the Council could afford to borrow.
This is the statutory limit determined under section 3 (1) of the Local Government Act 2003. The Government retains an option to control either the total of all councils’ plans, or those of a specific council, although no control has yet been exercised.
Authorised limit |
2021/22 |
2022/23 |
£ |
£ |
|
Borrowing |
50,000,000 |
50,000,000 |
Other long term liabilities |
- |
- |
Total |
50,000,000 |
50,000,000 |
West Devon Borough Council’s current level of borrowing as at 31 March 2023 was £27.726 million.
The maturity analysis of fixed rate borrowing is as follows, with the maximum and minimum limits for fixed interest rates maturing in each period:
Refinancing rate risk indicator |
Approved minimum limits |
Approved maximum limits |
Actual 31 March 2022 |
Actual 31 March 2023 |
||
|
% |
% |
£million |
% |
£million |
% |
Less than 1 year |
0% |
10% |
0.615 |
2.2 |
0.713 |
2.6 |
Between 1 and 2 years |
0% |
10% |
0.713 |
2.5 |
0.642 |
2.3 |
Between 2 and 5 years |
0% |
30% |
2.057 |
7.3 |
1.869 |
6.7 |
Between 5 and 10 years |
0% |
30% |
2.185 |
7.7 |
2.135 |
7.7 |
Between 10 and 20 years |
0% |
50% |
5.018 |
17.7 |
5.037 |
18.2 |
20 years and above |
0% |
100% |
17.753 |
62.6 |
17.330 |
62.5 |
Total |
28.341 |
100 |
27.726 |
100 |