Agenda item

(Director of Resources) To consider the attached report (AGC-015-2015/16).

The Principal Accountant presented a wide-ranging report in respect of the Council’s Treasury Management Strategy Statement and Investment Strategy for the period 2016/17 to 2018/19, which was a requirement of the Chartered Institute of Public Finance and Accountancy (CIPFA) Code of Practice on Treasury Management and covered the authority’s treasury activity for the period concerned. The Strategy Statement set out the risks associated with the Council’s treasury activity and how these were managed.

The Principal Accountant reported that the Council undertook capital expenditure on long-term assets, funded by capital receipts, grants or borrowing. The Committee noted that the Council planned to borrow to carry out its capital investment, and that the Capital Programme envisaged a balance of £5.207million in capital receipts and £0 in the Major Repairs Reserve on 31 March 2019, from which it was concluded that adequate resources still existed to fund the Capital Programme in the medium-term. The Council’s underlying need to borrow was referred to as the Capital Finance Requirement (CFR). As a consequence of the Housing Revenue Account Subsidy reform, and some large projects within the Capital Programme, an authorised limit of £230million had been set for borrowing, rising to £250million by the end of 2018/19.

The Committee was reminded that the Council’s current investments were subject to regular advice from it’s treasury management advisors, Arlingclose, regarding the use of counterparties. Members noted that the Council currently had an investment portfolio of £54.6million, of which all were invested in the United Kingdom (UK). The Committee noted that the maturity profile of the investments ranged from £13.6million available for instant access, to £10million with a maturity date between nine months and a year; it was important that the cash flow of the Council was carefully monitored and controlled to ensure that sufficient funds were available each day to cover its outgoings. Members were advised that this would become more difficult as the Council used up capital receipts and investment balances reduced.

The Principal Accountant advised members of the key risks associated with the Council’s treasury management activity, and how these had been managed throughout the year via the use of prudential indicators:

            (i)         The Credit and Counterparty risk was the possibility of a counterparty        going into liquidation and failing to meet its obligations to the Council. The       Council’s counterparty list was both prudent and regularly updated by its treasury advisors, and the authority kept its investments fairly liquid within a           restricted counterparty list.

            (ii)        The Liquidity risk was the possibility that sufficient cash would not be          available to the Council when required. In mitigation of this risk, a number of            Money Market Funds were maintained and the Director of Resources held       monthly meetings with treasury staff to review cash flow requirements.

            (iii)       The Interest Rate risk was concerned with potential fluctuations in interest rates. It was proposed to maintain no more than 75% of the Council’s investments in variable rate financial instruments, with the remainder of the       investments made in fixed rate deposits. This approach would allow the     Council to take advantage of any favourable changes in interest rates whilst     also receiving a reasonable return. The Council’s treasury management   advisors considered that interest rates were unlikely to change significantly in        the short to medium term.

The Principal Accountant informed the Committee that the Council had borrowed between the General Fund and Housing Revenue Account (HRA) for many years, and the interest rate charged had been based upon the average investment interest earned for the year. Regulations issued by CIPFA required that this interest rate should be approved by the Council before the start of the financial year, and it was proposed that the average investment interest continue to be used as the rate for any inter-fund borrowing.

The Committee noted that the Treasury Management Strategy Statement and Investment Strategy would be considered by the Council at its meeting on 18 February 2016, and that the views of the Committee in respect of the authority’s management of the risks associated with its treasury management activity, would be reported to the Council meeting.

In response to questions from the Committee, the Principal Accountant explained that the expected rise in the Council’s need to borrow was based on an estimate including the current size of the Capital Programme, the forecast for the HRA, expenditure in the recent past, plus some flexibility or contingency. It was currently difficult to envisage the Council needing to borrow more than £250million. It was acknowledged that the Balance Sheet on page 25 of the agenda did not strictly show the expected extra borrowing, although it did illustrate that the Council would need to borrow money in 2017/18 when the Resources Available became a negative figure; the Council still expected to borrow the majority of this amount from other Local Authorities at a competitive rate of interest. It was accepted that the wording for the ‘Gross Debt and the Capital Financing Requirement’ section could be clearer, and the Principal Accountant agreed to provide Members with a written explanation after the meeting.

The Principal Accountant reiterated that the Council’s prime concern was risk and the security of its investments; therefore, it would be correct to imply that the Council was a low risk authority and was careful about where it invested its money. However, the Council needed to diversify from solely investing in Banks, as the Council could lose some of its deposit if the Bank failed as an ongoing business. It was highlighted that there were no material changes to the Strategy Statement and Investment Strategy for this year, but increased levels of borrowing and reduction in investment limits were key themes that were accentuated last year.

The Committee noted the forecast capital expenditure on the Epping Forest Shopping Park, and that this was expected to generate a better return for the Council than if the funds were invested in Money Market accounts. The Committee also felt that the Council was maintaining a relatively low risk strategy, which had been a consistent theme for a number of years for the Council’s Treasury Management function. In addition, the Committee also recognised that the Council was currently aiming to:

            (i)         diversify from solely investing with Banks;

            (ii)        maintain liquidity; and

            (iii)       improve its return from capital investments.

Resolved:

(1)        That the Council’s proposed Treasury Management Strategy Statement and Investment Strategy for the period 2016/17 to 2018/19 be noted;

(2)        That the arrangements for dealing with the risks associated with its treasury management activity, as outlined in the Council’s proposed Treasury Management Strategy Statement and Investment Strategy, be considered adequate; and

Recommended:

(3)        That the proposed Treasury Management Strategy Statement and Investment Strategy for the period 2016/17 to 2018/19 be recommended to the Council for approval and adoption without further amendment.