Agenda item

To consider a report which provides the Audit Committee with the  performance of the Treasury Management function of the Council for the first six months of 2023/24.

The Committee considered and discussed a report submitted by the Director of Finance which advised the Audit Committee of the performance of the Treasury Management function of the Council for the first six months of 2023/24 and provides a comparison of performance against the 2023/24 Treasury Management Strategy and Prudential Indicators.

 

The Council is required to consider the performance of the Treasury Management function in order to comply with the Chartered Institute of Public Finance and Accountancy’s (CIPFA) Code of Practice on Treasury Management (revised 2021). This quarterly report provides an additional update and includes the new requirement in the 2021 Code, mandatory from 1 April 2023, of quarterly reporting of the treasury management prudential indicators. This report therefore sets out the key Treasury Management issues for Members’ information and review.

 

The report is presented to the Audit Committee to enable it to have the opportunity to review and scrutinise the Treasury Management Half Year Review report prior to its presentation to Cabinet and Council.

 

The Council operates a balanced budget, which broadly means cash raised during the year will meet its cash expenditure. Part of the treasury management operation is to ensure this cash flow is adequately planned, with surplus monies being invested with low-risk counterparties, providing adequate liquidity initially before considering optimising investment returns.

 

The second main function of the treasury management service is the funding of the Council’s capital plans. These capital plans provide a guide to the borrowing need of the Council, essentially the longer-term cash flow planning to ensure the Council can meet its capital spending obligations. This management of longer-term cash may involve arranging long or short-term loans, or using longer term cash flow surpluses, and on occasion any debt previously drawn may be restructured to meet Council risk or cost objectives.

 

As a consequence, treasury management is defined as: “The management of the local authority’s investments and 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.”

 

With regard to the Treasury Management Code of Practice

 

The Council has adopted the Chartered Institute of Public Finance and Accountancy’s Treasury Management in the Public Services: Code of Practice (Revised 2021) (the CIPFA Code) which requires the Authority to produce a quarterly treasury management update report; a requirement in the 2021 Code which is mandatory from 1 April 2023.

 

The Treasury Management Quarter 1 Update Report was presented to the Audit Committee for scrutiny on 5 September 2023. This report provides the Treasury Management position at the end of September 2023.

 

The Council’s Treasury Management Strategy for 2023/24 was approved at a meeting on 1 March 2023. The Council has borrowed and invested substantial sums of money and is therefore exposed to financial risks including the potential loss of invested funds and the revenue effect of changing interest rates. The successful identification, monitoring and control of risk remains central to the Authority’s Treasury Management Strategy.

 

This Half Year Review report has been prepared in compliance with CIPFA’s Code of Practice, and covers the following:

 

• An economic update for the second quarter of 2023/24;

• A review and updates of the Council’s current treasury management

  position;

• Council Borrowing;

• Treasury Investment Activity;

• Treasury Performance for the first six months;

• Treasury Management Prudential Indicators;

 

The Treasury and Prudential Indicators are incorporated at Appendix 1 to this report.

 

In summary, the following key issues were brought to the Committee’s attention:

 

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 Half Year Review Review 2023/24 to Audit Committee (this meeting) to enable scrutiny prior to presentation to Cabinet (13 November 2023), full Council (13 December 2023) ensures that the Council complies with its statutory requirements. 

 

 

2)           The Council’s Capital Expenditure and Financing During the first half 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 6 is £76.595m, a reduction of £33.710m compared to the original budget expenditure of £110.305m and a further reduction of £27,153m compared to quarter one forecast position.  These projects and their associated financing packages will be reprofiled into 2024/25 and future years.  

 

Capital Grants (£29.464m), capital receipts (£7.050m), Revenue and other resources (£1.079m) and prudential borrowing (£39.002m) 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 Half Year Review CFR, based on the projected expenditure referred to above is £487.634m.  The decrease is as a result of the projected reduction in actual capital expenditure 2022/23 and the projected position in 2023/24.

 

 

4)         Treasury Position at 30th September 2023

 

At the end of September 2023, the Treasury position was such that the net borrowing position was £87.401m.  This was made up of:

 

a)    Total external borrowing £160.996m

 

b)    Investments £73.595m

 

Comparing this to the estimated borrowing CFR (CFR less PFI) of £293.847m means that the Council is estimating to be under-borrowed by £120.351m, compared to actual 2022/23 under borrowed position of £100.338m, and £113,341m under borrowed as forecast at the end of June 23 as illustrated in the table below:

 

	2022/23	2023/24	2023/24
	31 March	30 June	30 September
	Actual	Actual	Actual
	£'000	£'000	£'000
Total Borrowing	160,996	160,996	160,996
Investments	(70,780)	(80,480)	(73,595)
Net Borrowing	90,216	80,516	87,401
Borrowing CFR (year-end position)	261,384	299,337	293,847
Under Borrowed Position	100,388	113,341	120,351

 

 

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 £12.5m of new borrowing will be required to fund this. The value of new borrowing is well within the approved £39.002m 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 £73.595m of investments at 30 September 2023, including property funds (£15m), a slight increase of £2.815m compared to £70.780m held at 31 March 2023, but a reduction of £6,885m from the quarter one position. 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 exceeds the budgeted position and average SONIA rate, however the average rate earned is slightly less than the benchmark SONIA which expects to gain 5% on top of 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%		4.710%
Overnight SONIA	4.751%	4.989%	4.896%

 

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.

 

Due to the change in the capital expenditure forecast it is recommended to reduce both the Authorised Limit and Operational Boundary, the revised limits are in the table below.

 

Prudential Indicator 2023/24	Original                      £'000	Recommended                      £'000
Authorised Limit	533,500	519,000
Operational Boundary	508,500	494,000

 

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.

 

 

Conclusion

 

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 (FFS) audit undertaken by Internal Audit on the Treasury Management function.

 

 

In response to a query on the possible use of projected savings in capital expenditure from this year into transformation plans for the next financial year, the committee was informed that this would generally not be the case.

 

The Chair made reference to the recent very informative Treasury Management training delivered by Arlington Close and suggested that if there was a demand from those Members who could not attend could a further training day be offered.

 

The Committee was informed that the suggestion for further Treasury Management Training would be taken forward and that the suggestion would be put to Members who were unable to attend.

 

Resolved – that

 

(i) the Committee accepts the proposed revisions to the Operational Boundary and Authorised Limit as presented at paragraph 2.6.9 in the report;

 

(ii) commends the report to Cabinet; and

 

(iii) the recent Treasury Management Training be offered to those Members who were unable to attend and subject to demand an appropriate date be arranged in the near future.