Agenda item

(Director of Resources) To consider the attached report (AGC-018-2016/17).

The Director of Resources presented a report on the Treasury Management Strategy Statement for 2017/18, which was a requirement of the Chartered Institute of Public Finance & Accountancy (CIPFA) Code of Practice on Treasury Management and covered the Council’s treasury activity for the financial year 2017/18. The Strategy Statement set out the risks associated with the Council’s treasury activity and how these were managed.

The Director 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 £1.368million in capital receipts and £0 in the Major Repairs Reserve on 31 March 2020, from which it was concluded that adequate resources, including borrowing, 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 £240million had been set for borrowing, rising to £260million by the end of 2019/20.

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 £48.5million, of which £46.5million was invested in the United Kingdom (UK) and £2million in Sweden. The Committee noted that the maturity profile of the investments ranged from £15.5million available for instant access, to £14million with a maturity date between one and three months; 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 Director 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. The most significant change from the previous Strategy was an increase in the minimum credit rating for counterparties from            BBB to BBB+.

            (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 Director 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 for 2017/18 would be considered by the Council at its meeting on 21 February 2017, 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.

When questioned by the Committee, the Director further explained that the Treasury Management Indicators ensured that the Council complied with the Code. It was acknowledged that the upper limit of 100% and lower limit of 0% for the Maturity Structure of Borrowing did give the Council maximum flexibility, and similarly with 75% for the upper limit on variable interest rate exposure. In respect of the Council’s Capital Programme, the single most expensive item was the construction of the Epping Forest Shopping Park, which was due to be completed by 2018/19. A moratorium had been placed on the Council Housebuilding Programme after Phase IV until a further review had been conducted, and hence spending also reduced in 2018/19.

The Director acknowledged the high degree of uncertainty in both the United Kingdom and global economies, which had been illustrated by the vote in the Referendum last year to leave the European Union, as well as the election of Donald Trump to the American Presidency. There was also the very real risk of the Council’s Revenue Support Grant being further reduced by the Government; hence the Council was investing its capital resources in assets that would generate future revenue for the Council.

The Committee welcomed the report and noted that the Council was a relatively risk adverse authority. The Committee was content with the Strategy, as well as the prudent approach adopted for dealing with the risks associated with its Treasury Management activity, and noted that the Council currently had no issues with its proposed borrowing. The Committee agreed that that the Strategy Statement for 2017/18 should be recommended to the Council for adoption, with the additional comments above.

The Committee noted that the Council was a relatively risk adverse local authority, and no problems were currently foreseen with the degree of borrowing that was proposed to finance the Capital Programme in future years. It was the intention for future borrowing to only be undertaken on revenue generating schemes, which would ultimately strengthen both the balance sheet and revenue position of the Council, and this would offset the risk of future reductions in the Council’s Revenue Support Grant from Government. Overall, the Committee was content with the Strategy as presented, as it represented a continuation of the prudent approach which had been a consistent theme for the Council’s Treasury Management function for a number of years.

Resolved:

(1)        That the Council’s proposed Treasury Management Strategy Statement for 2017/18 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 for 2017/18, be considered adequate; and

Recommended:

(3)        That the proposed Treasury Management Strategy Statement for 2017/18 be recommended to the Council for approval and adoption; and

(4)        That the following comments be made to the Council by the Chairman when it considered the adoption of the Treasury Management Strategy Statement:

            (a)        the Council was a relatively risk adverse authority;

            (b)        no problems were foreseen with the level of borrowing that was       proposed to finance the Capital programme in future years; and

            (c)        the Strategy represented a continuation of the prudent approach      which had been a consistent theme of the Council’s Treasury Management      function for a number of years.