PART 1
(OPEN TO THE PUBLIC)
ITEM NO. 9
REPORT OF THE LEAD MEMBER FOR CORPORATE SERVICES
TO:
THE QUALITY AND PERFORMANCE SCRUTINY COMMITTEE
27th OCTOBER 2003 AND THE COUNCIL 19TH NOVEMBER 2003
TITLE: TREASURY MANAGEMENT ANNUAL REPORT 2002/2003 AND
BORROWING AND INVESTMENT STRATEGY REVIEW 2003/2004
RECOMMENDATIONS:
Part 1 - Treasury Management Annual Report 2002/2003
It is recommended that members note the treasury management performance in
2002/2003.
Part 2 - Borrowing and Investment Strategy Review 2003/2004
It is recommended that members note the recent activity and current position for
2003/2004 with regard to the Treasury Management function.
EXECUTIVE SUMMARY: - The report provides details of Treasury Management
activity in 2002/2003 and also a review of the borrowing and investment strategy for
2003/2004.
BACKGROUND DOCUMENTS: - Various working papers in the Finance Division
CONTACT OFFICER: - John Bilsborough
Tel No. 793 3224
ASSESSMENT OF RISK: - The monitoring and control of risk underpins all treasury
management activities. The main risks are of adverse or unforeseen fluctuations in
interest rates and security of capital sums.
SOURCE OF FUNDING: - Revenue Budget
LEGAL ADVICE OBTAINED: - Not applicable
FINANCIAL ADVICE OBTAINED: - This report has been prepared by the Finance
Division of Corporate Services.
WARD(S) TO WHICH REPORT RELATE(S): None specifically
KEY COUNCIL POLICIES: Treasury Management and Budget Strategy.
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REPORT DETAIL
OVERVIEW
On 20th March 2002, the Council adopted CIPFA’s code of practice for Treasury
Management in the Public Services.
Two of the key requirements of the Code are that the Council receives:
a) an annual strategy and plan at the start of the year, and
b) an annual report on the previous years activities after its close.
The Treasury Management Strategy report for 2002/03 was approved by Council on 20th
March 2002, satisfying requirement a). Part 1 satisfies requirement b).
It is also felt that members will be interested in an update of the Treasury Management
Strategy for the current year, approved by Council on 19th March 2003. Part 2 following
reviews the strategy in the light of borrowing and investment activity to date.
This report is therefore set out in two parts as follows:-
PART 1
Treasury Management Annual Report 2002/2003
PART 2
Borrowing and Investment Strategy Review 2003/2004.
Members are asked to note the content of the report.
A. WESTWOOD
Director of Corporate Services
J. SPINK
Head of Finance
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PART 1
ANNUAL REPORT ON TREASURY MANAGEMENT 2002/2003
1.
INTRODUCTION
1.1
The Treasury Management Strategy for 2002/2003 was approved by Council on
20th March 2002. The strategy was reviewed and a report was presented to the
Quality and Performance Scrutiny Committee on 23rd September 2002.
.
1.2
The CIPFA Treasury Management in the Public Services : Code of Practice 2001
adopted by the City Council on the 20th March 2002 requires that an Annual
Report on Treasury Management be presented to Council.
1.3
This report provides a review of 2002/03 and highlights the major issues arising
during the year.
1.4
Members should be aware that the Council has fully complied with the
CIPFA Code recommendations.
2.
BORROWING LIMITS
2.1
In accordance with the requirements of section 45 of the Local Government and
Housing Act 1989, the following limits on borrowing in 2002/03 were set by the
City Council at the meeting of 20th March 2002:
an Aggregate Credit Limit (ACL), representing the maximum long and
short term borrowing by the Council of £543.523m.

a maximum short term borrowing limit (loans of less than one year) of
20% of the ACL i.e. £108.705m; and

a maximum amount of variable rate loans of 50% of the total loans
outstanding.
2.2
These limits were not exceeded during 2002/03. The maximum long term
borrowing during the year was £466.329m and there was no short term borrowing
during the year.
3.
BORROWING REQUIREMENT AND SOURCES OF FUNDING
3.1
At the time of preparation of the 2002/2003 Revenue Budget it was estimated that
the borrowing requirement for the year would be £13.016m.
3.2
The estimate has been reviewed during the year and the actual borrowing
requirement was revised to £31.266m. The increase in the borrowing requirement
was mainly due to an underborrowing arising from additional borrowing
approvals not exercised in 2001/2002, and also the premature repayment of a
PWLB loans totalling £12.255m as part of the rescheduling activity undertaken
during the year.
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3.3
The actual funding of the borrowing requirement and the rescheduling exercise
compared to the budget assumption is shown below:-
Budget
Assumption
Borrowing
requirement
FUNDING
PWLB – Lower quota
£m
13.016
%
£m
31.266
13.016
5.5
12.255 4.3125
13/06/02
5,000
6.200
6.000
29.455
1.811
31.266
24/07/02
29/07/02
25/09/02
Market (lobo loans)
Underborrowing b/f
Actual
_____
13.016
%
2.50
2.40
3.60
Date
Years
1.0
variable
40.0 (1)
40.0 (2)
40.0 (3)
Note (1) £5m @ 2.50% first 2 years thereafter 4.99% subject to lobo.
(2) £6.2m @ 2.40% first 2 years thereafter 4.99% subject to lobo.
(3) £6m @3.60% first 3 years thereafter 4.625% subject to lobo
‘Lobo’ loans are loans where the interest rate is fixed for the initial term but
thereafter the lender can amend the interest rate on the rollover date and the
borrower is free to accept the new terms or reject them and repay the loan
without penalty.
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MATURITY PROFILE
4.1
The parameters approved by members in November 1992 set an absolute limit of
no more than 15% of the City Council’s loan debt to fall due in any one year. The
current intention is to work within a limit of 7.5%.
4.2
The maturity profile at 31st March 2003, attached at Appendix 1, indicates that
the working limit (though not the absolute limit) will be slightly exceeded in
2015/16, and also 2041/2042 when the market loans taken in 2001/2002 mature,
whilst the absolute limit will be exceeded when the stock issue made in 1993/94
and 1994/95 mature in 2018/19.
4.3
As reported previously action, in accordance with proper treasury management
practices, will be taken to reduce these excesses to within the working limits as
the opportunities arise to reschedule the loans.
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5.
RESCHEDULING DISCOUNTS
5.1
On 13th June 2002 taking advantage of the favourable yield curve a long term
PWLB loan for £12.255m was converted from a fixed to a variable rate loan with
a three month roll over period in order to secure a discount. The total discount
received was £0.717m shared £0.444m to HRA and £0.273m to the General Fund.
5.2
This discount was accounted for over the period of the variable rate loan, ie 12
months, and has benefited the General Fund revenue budget . Discounts generated
by the HRA are effectively returned to the Government through reduced housing
subsidy.
6.
INVESTMENT ACTIVITY
6.1
The revenue budget assumed an average interest rate of 4.12% would be obtained
on investments which would average £48.67m during 2002/2003 giving
investment income of £2.005m. The approximate updated the forecast of interest
earned on investments to £2.279m and the actual interest earned was £2.410m.
6.2
As members are aware £20m was placed with the external fund manager Hambros
(since taken over by Investec), on 5th July 1996. The value of the portfolio as at
31st March 2003 was £23.943m as a result of accrued interest being permitted to
be held by Investec. Accrued interest can be recalled when required, with the last
occasion being in 1999/2000 when £5.2m was recalled.
6.3
Over the period 1st April 2002 to 31st March 2003 Investec exceeded the local
authority 7 day rate against which their performance is measured and their overall
performance has exceeded the 7 day rate since their appointment commenced on
5th July 1996 as shown below:-
Actual rate of return (net)
Compound 7 day local authority rate
6.4
1st April 2002 to
31st March 2003
%
5.34
3.74
5th July 1996 to
31st March 2003
%
6.28
5.52
Following the disappointing return in the final months of 2001/2002 there has
been the expected improvement in performance this year. This was largely due to
the gilts that had been held in the portfolio from the previous year and also
investments in the longer dated Certificates of Deposits, taking advantage of
changing market expectations. In the last quarter of the year the fund was
positioned conservatively in anticipation of market volatility ahead of military
action in the Gulf. Exposure to the gilt market was increased in January reflecting
the increased risks to the economy and then in March just before the dramatic fall
in bonds (later to be substantially reversed) gilt exposure was reduced. Overall,
bond and money market yields fell over the quarter but the fund outperformed
cash rates by a substantial margin.
.
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6.5
The annual average rate of interest received on internally managed investments
was 3.81%. The average level of total investments was £30.7m and investments
held at 31st March 2003 totalled £37.7m. The lower return than that achieved by
Investec is due to the investment in short term cash deposits, which are of a less
volatile nature than gilts.
7.
LEASING
7.1
The Council holds capital assets, mainly motor vehicles, I.T. equipment and
wheeled bins under operating leases. Operating leases do not provide for the asset
to transfer to the Council and are exempt from classification as a credit
arrangement. The length of the leases reflect the expected life of the asset and are
generally for a period of 5 years for motor vehicles, 3 years for I.T. equipment
and 7 years for wheeled bins.
7.2
Leases entered into during 2002/2003 amounted to £0.658m in capital value and
£0.129m in annual rentals.
Details of the leases are as follows :Leasing Co.
Key Finance
Sovereign
Key Finance
Sovereign
Asset
Capital
Value
£m
0.109
0.035
0.082
0.432
0.658
Wheeled Bins
Cash Receipting
Telephone Systems
Education ICT
Period of
rental
Years
7
5
5
5
7.3
Total rentals payable for all leases held by services from their 2002/2003 revenue
budgets were £2.355m.
7.4
At 31st March 2003 the Council had a commitment to meet the following leasing
charges, which have been built into the appropriate services/DSO’s budget plans:-
2003/2004
2004/2005
2005/2009
£m
1.551
0.938
0.730
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8.
CAPITAL FINANCING
8.1
The outturn position for the Capital Financing costs compared to the estimate and
approximate is summarized below:-
CAPITAL FINANCING 2002-2003
Borrowing Costs
HRA
GFund
Investment Income
HRA
GFund
Net borrowing costs
Estimate
£m
Approximate
£m
Outturn
£m
Variance
£m
25.929
19.635
45.564
25.223
19.489
44.712
25.464
19.432
44.896
0.241
(0.057)
0.184
(0.427)
(1.597)
(2.024)
43.540
(0.429)
(1.847)
(2.276)
42.436
(0.422)
(1.984)
(2.406)
42.490
0.007
(0.137)
(0.130)
0.054
It should be noted that the HRA borrowing costs are financed by housing subsidy
from the Government.
9.
RECOMMENDATION
9.1
It is recommended that members note the Treasury Management performance in
2002/2003.
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PART 2
TREASURY MANAGEMENT POLICY AND STRATEGY REVIEW 2003/04
1.
INTRODUCTION
1.1
The Treasury Management Policy and Strategy for 2003/2004 was considered at
the meeting of Cabinet held on 11th March 2003 and approved at the meeting of
the City Council on 19th March 2003.
1.2
This report reviews the strategy in the light of the borrowing and investment
activity to date.
2.
BORROWING LIMITS
2.1
In accordance with the requirements of Section 45 of the Local Government and
Housing Act 1989 the following limits on borrowing in 2003/2004 were set by the
City Council at the meeting of 19th March 2003.

an Aggregate Credit Limit (ACL), representing the maximum long and
short term borrowing by the City Council, of £576.708m.

a maximum short term borrowing limit (loans of less than one year) of
20% of the ACL, i.e. £115.342m; and

a maximum amount of variable rate loans of 50% of the total loans
outstanding
2.2
These limits have not been exceeded during 2003/04 to date. The maximum
long term borrowing during the year is £500.603m and there has been no short
term borrowing during the year.
3.
BORROWING ACTIVITY
3.1
The initial assumption with regard to the borrowing requirement for 2003/04 as
determined for the revenue budget was that the City Council would need to
borrow £22.566m and that this would be taken from the PWLB at the beginning
of the year at an interest rate of 4.75% based upon estimated long term interest
rates at the time of preparing the budget.
3.2
The latest estimate of the borrowing requirement for 2003/04 has increased to
£25.563m to take account of an estimated increase in the basic credit approval
(BCA) and supplementary credit approvals (SCA) made available to the authority
and also the underborrowing of £1.811m in 2002/2003.
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3.3
The PWLB is the major source of local authority borrowing as it traditionally
offers more competitive rates than the money market. Based upon current
estimates, the 2003/04 PWLB quota entitlement which the City Council is
allowed to borrow from this source is as follows:-
BCA/SCA
PWLB repayments
Entitlement b/fwd
Total PWLB quota 2002/2003
Lower rate
Higher rate
£
20.328
12.576
3.817
36.721
14.144
22.577
36.721
3.4
Appendix 2 shows the latest interest rates for all types and period of PWLB loan,
whilst Appendix 3 illustrates the latest interest rate forecasts together with the 25
year PWLB lower quota historic rates.
3.5
Under the Local Government and Housing Act 1989. local authorities are required
to set aside a proportion of their capital receipts as Provision for Credit Liabilities
to be used to repay debt. In 1997/1998 £33m of set aside receipts were formally
applied in debt redemption. There is £22.5m of receipts set aside as at 31st March
2003 awaiting the appropriate opportunity to be used for debt redemption. In
2003/2004 this option is being considered. Furthermore while investment rates
remain lower than borrowing rates there has been no new borrowing. This has the
beneficial effect of funding new borrowing at the lower investment rate. Members
should be aware that the variable rate PWLB loan totaling £12.255m repaid on
13th June 2003 has not been replaced but has been met by internal investments.
3.6
As can be seen from Appendix 3 long term PWLB interest rates have fluctuated
within an extremely narrow margin during the first six months of 2003/2004.
Rates have varied between 4.5% and 4.85% peaking at 4.95% early to mid
September. Current forecasts are that long term interest rates will remain steady
for the remainder of the year.
4.
INVESTMENTS
4.1
The revenue budget assumed that an average interest rate of 4.23% would be
obtained on investments which would average £55.91m during 2003/2004, giving
investment income of £2.365m.
4.2
Investment income earned to 30th September compared to the revenue budget
assumption is detailed below.
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INVESTMENT INCOME
Budget Assumption
Internally Managed
Externally Managed
Full Year
£m
1.275
1.090
2,365
Actual
to 30th Sept
£m
0.649
0.547
1.196
To30th Sept
£m
0.579
0.325
0.904
£m
(0.070)
(0.222)
(0.292)
4.3
At the time the revenue budget was set it was not expected that interest rates
would fall so soon after the 1st April and hence the shortfall in the internally
managed funds.
5.
EXTERNAL CASH FUND MANAGERS
5.1
Investec (formerly Hambros Bank) was appointed as external fund managers on
5th July 1996 for an initial period of two years, with an option to extend subject to
their satisfactory performance. Approval has been given to extend the period of
appointment to 4th July 2003.
5.2
Over the period 1st April 2003 to 30th September 2003 Investec has failed to
exceed the local authority 7 day rate against which their performance is measured
by 0.39% However their overall performance has exceeded the 7 day rate since
their employment commenced on 5th July 1996 as shown below:-
Actual rate of return
Compound 7 day local authority rate
1st April 2003 to
30th
September2003
%
1.32%
1.71%
5th July 1996 to
30th September
2003
%
6.02%
5.38%
5.3
The recent performance of the funds has been disappointing due to rising yields in
gilts at a time when they were predicted to fall, and the markets continue to be
very volatile. However Investec anticipates that the market will stabilize and
improve in the medium term and the performance of the fund should benefit from
this.
5.4
In view of Investec’s overall satisfactory performance it is to be recommended to
the Lead Member for Corporate Services that their appointment be rolled forward
on a month to month basis, but that when quarterly comparative data with regard
to the performance of all fund managers as at 30th September and, if necessary,
31st December, is available then the retention of Investec as fund managers over a
longer period is reviewed.
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6.
MONEY MARKET FUNDS (MMF)
6.1
An MMF is a triple A rated open ended investment fund that represents a
diversified portfolio of short term, high quality debt instruments. The size of the
liquidity pool means that the investor can be offered the flexibility of overnight
and call money combined with the attractive returns of longer dated deposits.
6.2
Members approved the addition of MMFs to the approved list of investments as
part of the 2002/2003 Treasury Management Policy and Strategy Statement
reported to Council on 20th March 2002. As part of the treasury management
strategy, investments can be made with AAA/P1 rated MMFs, for a maximum of
£10m for up to 3 months. To date accounts have been opened with Aim Global
and Barclays Global Investors.
6.3
MMFs are regarded as an additional instrument to manage short term cash flows,
up to 30days and they have been particularly attractive when overnight
investment rates have been weak.
7.
LEASING
7.1
The following operating lease has been arranged to date:Leasing
Company
Lombard N.C.
Asset
Mobile-Library
Vehicles (2)
Capital
Value
£m
0.139
Period of
Rental
Years
7
8.
TREASURY MANAGEMENT PRACTICES
8.1
The Council formally adopted the CIPFA Treasury Management in the Public
Services: Code of Practice 2001 and reported to the Council with full details of
the code on 20th March 2002.
8.2
As part of the code it was necessary for the Director of Corporate Services to
prepare the following Treasury Management Practices (TMP’s) to which
schedules will be attached, to specify the systems and routines to be employed
and the records to be maintained. The twelve schedules have been reviewed in
preparation for the CPA assessment. The full list of TMPs and schedules is set out
below:-
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TMP 1 Treasury Risk Management
TMP 2 Best Value and Performance Measurement
TMP 3 Decision Making Analysis
TMP 4 Approved Instruments , Methods and Techniques
TMP 5 Organisation , Segregation of Responsibilities, and Dealing
Responsibilities
TMP 6 Reporting Requirements and Management Information
TMP 7 Budgeting , Accounting and Audit Arrangements
TMP 8 Cash and Cash Flow Management
TMP 9 Money Laundering
TMP 10 Staff Training and Qualifications
TMP 11 Use of External Service Providers
TMP 12 Corporate Governance
9.
RECOMMENDATIONS
It is recommended that members note the recent activity and current position for
2003/2004 with regard to the Treasury Management function.
12