Agenda item

To receive and discuss the Treasury Management Quarter One Report 2023/24.

The Committee received a summary to explain the key issues within the 2023/24 Treasury Management Quarter One Review. The consideration of a Quarter One report is a new requirement with effect from the financial year 2023/24.

 

The Committee was informed that from the start of 2023/24, following a competitive tendering process, the Council changed its treasury management advisors from The Link Group, Treasury Solutions to Arlingclose Ltd. The format of the Treasury Management reports has therefore changed in line with the advice received from Arlingclose Ltd.

 

The Director of Finance set out the following key items for consideration and discussion –

 

(1) Compliance with Statutory and CIPFA requirements

 

The 2021 Prudential Code requires Treasury Management to be reported quarterly from the financial year 2023/24. The presentation of the Treasury Management Quarter One Review 2023/24 to Audit Committee (this meeting) was to enable scrutiny prior to the presentation of the report to Cabinet (18 September 2023), full Council (1 November 2023) and ensures that the Council complies with its statutory requirements.

 

(2) The Council’s Capital Expenditure and Financing During the first quarter of 2023/24

 

The level of capital expenditure forms one of the required prudential indicators.  The 2023/24 projected outturn, based on actual expenditure to month 3 was £103.748m, a reduction of £6.557m compared to the original budget expenditure of £110.305m.  Projects and their associated financing packages will be reprofiled into 2024/25 and future years.  

 

Capital Grants (£39.962m), capital receipts (£8.295m), Revenue and other resources (£1.063m) and prudential borrowing (£54.428m) were the sources of capital financing of the revised position.

 

(3) The Councils Overall Borrowing Need

 

The Council’s underlying need to borrow for capital expenditure is termed the Capital Financing Requirement (CFR).  This figure is a gauge of the Council’s debt position.  Part of the Council’s treasury activity 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 sufficient cash is available to meet the capital plans and cash flow requirements. 

 

At the end of 2022/23, the CFR was £465.723m, and was forecast for the year 2023/24 to be £503.278m. The estimated quarter one CFR, based on the projected expenditure referred to above is £493.124m.  The decrease is as a result of the reduction in actual capital expenditure in 2022/23 and the projected position in 2023/24.

 

(4) Treasury Position at 30th June 2023

 

At the end of June 2023, the Treasury position was such that the net borrowing position was £80.516m.  This was made up of:

 

a)    Total external borrowing £160.996m

 

b)    Investments £80.480m

 

Comparing this to the estimated borrowing CFR (CFR less PFI) of £299.337m means that the Council is estimating to be under-borrowed by £113.341m, compared to actual 2022/23 under borrowed position of £100.338m, as illustrated in the table below:

 

	2022/23	2023/24
	31 March	30 June
	Actual	Actual
	£'000	£'000
Total Borrowing	160,996	160,996
Investments	(70,780)	(80,480)
Net Borrowing	90,216	80,516
Borrowing CFR (year-end position)	261,384	299,337
Under Borrowed Position	100,388	113,341

 

 

 

 

 

5) Borrowing Position

 

No borrowing or debt rescheduling has been undertaken to date in the current financial year. It is anticipated that if the capital programme expenditure continues as projected then £25m of new borrowing will be required to fund this. The value of new borrowing is well within the approved £54.428m of prudential borrowing in the programme. Furthermore, it is confirmed that the Council operated within the prudential indicators as set out in the annual treasury management strategy for the first quarter of the 2023/24 financial year

 

6) Investment Portfolio

 

The key investment portfolio issues to note are as follows:

 

a)    The Council held £80.480m of investments at 30 June 2023, including property funds (£15m), an increase of £9.700m compared to £70.780m held at 31 March 2023. With the exception of the property fund all the investments held are scheduled to mature within 12 months.

 

b)    The Treasury Team measures the financial performance of its treasury management activities both in terms of its impact on the revenue budget and its relationship to benchmark interest rates. The investment returns are measured against the Sterling Overnight Index Average (SONIA). The average rate of interest earned in the first quarter exceeded the budgeted position and average SONIA rate, however the average rate earned is slightly less than the benchmark SONIA which expected to gain 5% on top of the average SONIA rate. This is due to the fast-moving interest rate environment and SONIA moves quicker than any fixed investments that have been placed. These can be seen in the table below.

 

	Budgeted Performance Rates / Benchmark SONIA Return %	Benchmark SONIA Return % Plus 5%	Actual Return
			%
Budgeted Investment Rates	4.400%		4.504%
Overnight SONIA	4.379%	4.598%	4.504%

 

(7) Authorised Limit and Operational Boundary

 

The authorised limit is the “affordable borrowing limit” required by Section 3 of the Local Government Act 2003 and represents a control on the maximum level of borrowing.  The operational boundary is the expected borrowing position of the Council during the year and reflects the maximum anticipated level of external debt.

 

 

 

There has been no change to these limits to those that were set in the 2023/24 Strategy presented to Council on 1 March.  The limits are in the table below:

 

 

Prudential Indicator 2023/24	Original                      £'000	Recommended                      £'000
Authorised Limit	533,500	533,500
Operational Boundary	508,500	508,500

 

 

(8) Liability Benchmark

 

This is another new indicator which compares the Authority’s actual existing borrowing against a liability benchmark that has been calculated to show the lowest risk level of borrowing. The liability benchmark is an important tool to help establish whether the Council is likely to be a long-term borrower or long-term investor in the future, and so shape its strategic focus and decision making.

 

The liability benchmark calculation expects the Council to be a long-term borrower to finance the expected capital spend. There could be timing differences between when the Council externally borrows compared to when the expenditure is required due to the nature of capital works, but new treasury investments are therefore primarily made to manage day-to-day cash flows using short-term low risk instruments.

 

(9) Other Issues

 

The Council has a number of Lender Option Borrower Option (LOBO) loans that have a call date during the summer months. The lender has the option to increase the interest rate when each loan reaches its call date. As the Council is now operating in a rising interest rate environment, there may be opportunities to repay the Council’s historical LOBO borrowing. The Council will investigate all opportunities and will ensure any repayments create revenue savings.  LOBO loans are held by banks and are not Government loans.

 

The treasury team will monitor this situation and report back to the Audit Committee at a future date on any loans that have been repaid.

 

The Committee was informed that as Members of the Audit Committee are aware, there are considerable risks to the security of the Authority’s resources if appropriate treasury management strategies and policies are not adopted and followed. The Council has established good practice in relation to treasury management which have previously been acknowledged in both Internal and the External Auditors’ Reports presented to the Audit Committee.

 

The Treasury Management activities followed the pattern of the established experience and good practice further evidenced with a rating of ‘good’ (the highest possible rating) in the recently issued Fundamental Financial Systems audit undertaken by the Internal Audit Team on the Treasury Management function.

 

Resolved: that the Audit Committee commends the report to Cabinet.