Agenda item

Treasury Management Strategy 2018/19


Mr John Owen, Finance Manager, introduced his report setting out the draft Treasury Management Strategy for 2018/19, including the Treasury Management and Prudential Indicators.


Mr Owen explained that:


·  The Strategy was based upon a proposed Capital Programme for 2018/19 to 2022/23 which would be discussed by the Policy and Resources Committee on 24 January 2018, and might be subject to amendments.


·  The Council had not changed its stance from 2017/18 and would continue to run down balances to fund the Capital Programme until such time that prudential borrowing was needed.  On the assumption that the Capital Programme would be fully spent, the Council might be in a borrowing position by the end of 2018/19.


·  Most investments would be short term (less than a year), but there was a provision for longer term investments (£5m) if rates were appealing.


·  Upon the advice of Arlingclose, the Council’s Treasury Management advisers, he wished to make the following amendments to the Treasury Management Strategy Statement (Appendix A) and the Prudential Indicators (Appendix C):


Appendix A – Pages 15-16 – Table showing Non-Specified Investment Limits – Amend second line to read:


Total investments without credit ratings or rated below A- except UK Government and Local Authorities - £5m


Appendix A – Page 16 – Table showing Investment Limits – Increase the cash limit in respect of negotiable instruments held in a broker’s nominee account from £5m to £10m per broker.  Arlingclose felt that this restricted the Authority when using different financial instruments these provide.


Appendix C – Amend to include reference to the Gross Debt and the Capital Finance Requirement Indicator.  The purpose of this indicator was to ensure that borrowing required was only used for the Capital Programme and not for revenue purposes.  The Gross Debt should not exceed the Capital Financing Requirement.


·  CIPFA had revised the Prudential Code which took into account non-treasury investments and had changed the wording of Treasury Management Practices which would require an amended Strategy to be reported to the Committee probably mid 2018/19.


During the ensuing discussion, Members drew attention to the following typographical errors in the Treasury Management Strategy Statement:


Page 10 – Amend the figure in the first line of the second paragraph to read £5.547m.


Page 10 – Amend the second word of the second line of the penultimate paragraph to read “forgone”.


In response to questions, the Officers explained that:


·  The capital expenditure prudential indicator was a summary of the Council’s capital expenditure plans that were known about at this stage.  The capital expenditure forecast of £5.025m as at 2021/22 would increase nearer that time.


·  The interest rate forecasts provided by Arlingclose did have upside and downside risks.  The assumption was that interest rates would remain constant for a period of time, but they could go up.  The Council was currently maintaining an under-borrowed position.  This meant that the Capital Financing Requirement had been funded using cash supporting the Council’s reserves, balances and cash flow as a temporary measure rather than through loan debt.  This strategy was prudent as currently borrowing rates were higher than investment returns.


·  Local authorities were not allowed to borrow in foreign currencies.


·  In terms of limits to borrowing activity, the operational boundary was the limit which external debt was not normally expected to exceed.  In most cases it would be a similar figure to the Capital Financing Requirement which was a measure of the Council’s borrowing need to fund the proposed Capital Programme.  A negative amount showed the Council had more funding than capital expenditure.  The authorised limit for external debt represented a control on the maximum level of borrowing in any particular year. 


·  The ratio of financing costs to net revenue stream indicator showed the proportion of the revenue budget that was attributable to the financing costs of capital expenditure.  The estimated 2.9% in 2021/22 was a very low figure compared to commercial bodies.


·  The Medium Term Financial Strategy assumed that the Council would be able to borrow from the PWLB at competitive rates, but there was a risk that this might be subject to restrictions in future.  However, recent Government consultations and announcements did not indicate a direct impact for the Council’s spending plans.


·  If the Council was to borrow to fund the Capital Programme, the affordability of the Programme would need to include an assessment of the cost of borrowing compared with the return on investments and appropriate provision would need to be built in to the Medium Term Financial Strategy to cover the cost.


·  The Medium Term Financial Strategy inflation projections were based on the Government’s 2% target, but this could be higher.


·  Other funding streams proposed in the development of the Capital Programme included the New Homes Bonus Grant (revenue funding).  No major capital receipts were envisaged.


During the discussion Members expressed concern about the risks associated with unexpected changes in interest rates, exchange rates and inflation.  The Director of Finance and Business Improvement undertook to keep Members up to date with developments in these areas.


RESOLVED to RECOMMEND to the COUNCIL:  That subject to (a) any potential amendments arising from the Policy and Resources Committee’s consideration of the Capital Programme; (b) the amendments to the Treasury Management Strategy Statement (Appendix A) and the Prudential Indicators (Appendix C) made by the Finance Manager at the meeting; and (c) the correction of the typographical errors identified at the meeting, the Treasury Management Strategy for 2018/19, including the Treasury Management and Prudential Indicators, attached as Appendices A and C to the report of the Director of Finance and Business Improvement, be adopted.


Supporting documents: