PART 1
(OPEN TO THE PUBLIC)
ITEM NO.
REPORT OF THE LEAD MEMBER FOR CORPORATE SERVICES
TO:
THE QUALITY AND PERFORMANCE SCRUTINY COMMITTEE
23RD SEPTEMBER 2002
TITLE: TREASURY MANAGEMENT 2001/2002 AND 2002/2003
RECOMMENDATIONS:
Part 1 - Treasury Management Annual Report 2001/2002
It is recommended that members note the Treasury Management performance in
2001/2002.
Part 2 - Borrowing and Investment Strategy Review 2002/2003
It is recommended that members :
1)
note the recent activity and current position for 2002/2003 with regard to the
Treasury Management function
2)
note the addition of the Bank of Scotland Deposit accounts to the approved list of
investments
EXECUTIVE SUMMARY:
The report provides details of Treasury Management activity in 2001/2002 and also a
review of the borrowing and investment strategy for 2002/2003.
BACKGROUND DOCUMENTS:
Various working papers in the Finance Division
CONTACT OFFICER:
John Bilsborough
Tel No. 793 3224
WARD(S) TO WHICH REPORT RELATE(S): None specifically
KEY COUNCIL POLICIES: Treasury Management and Budget Strategy.
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REPORT DETAIL
BACKGROUND
Treasury Management in Local Government is regulated by the CIPFA Treasury
Management in the Public Services : Code of Practice 2001.
The primary requirement of the Code is the formulation and agreement by full Council of
a Treasury Policy Statement which sets out Council, Committee and Chief Financial
Officer responsibilities, and delegation and reporting arrangements.
The Treasury Management Policy and Strategy for 2001/2002 and 2002/2003 was
approved by Council on 21st March 2001 and 20th March 2002 respectively.
The Treasury Management Policy requires that an annual report on Treasury
Management is presented for approval and that other matters are reported as appropriate.
This report is therefore set out in two parts as follows:PART 1
Treasury Management Annual Report 2001/2002
PART 2
Borrowing and Investment Strategy Review 2002/2003.
Members are asked to note the content of the report.
A. WESTWOOD
Director of Corporate Services
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J. SPINK
Head of Finance
2
PART 1
ANNUAL REPORT ON TREASURY MANAGEMENT 2001/2002
1.
INTRODUCTION
1.1
The Borrowing and Investment Strategy for 2001/2002 was approved by Council
on 21st March 2001. The strategy was reviewed and a report was presented to the
Quality and Performance Scrutiny Committee on 24th September 2001.
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 the Lead Member of Corporate
Services and the Quality and Performance Scrutiny Committee.
1.3
This report provides a review of 2001/02 and highlights the major issues arising
during the year.
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 2001/02 were set by the
City Council at the meeting of 21st March 2001:
an Aggregate Credit Limit (ACL), representing the maximum long and
short term borrowing by the Council of £527.923m.

a maximum short term borrowing limit (loans of less than one year) of
20% of the ACL i.e. £105.585m; and

a maximum amount of variable rate loans of 50% of the total loans
outstanding.
2.2
These limits were not exceeded during 2001/02. The maximum long term
borrowing during the year was £513.188m and the maximum short term
borrowing during the year was £11.8m.
3.
BORROWING REQUIREMENT AND SOURCES OF FUNDING
3.1
At the time of preparation of the 2001/2002 Revenue Budget it was estimated that
the borrowing requirement for the year would be £4.577m.
3.2
The estimate has been reviewed during the year and the actual borrowing
requirement was revised to £57.941m. The increase in the borrowing requirement
was mainly due to an underborrowing in 2000/2001, additional supplementary
credit approvals, and also the maturity of a number of PWLB variable loans
totalling £46m arising from the rescheduling undertaken in 2000/2001.
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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
Market (lobo loans)
Underborrowing
Actual
£m
4.577
%
£m
57.941
%
Date
4.577
5.5
4.200
25,000
21.000
50.200
7.741
57.941
4.875
3.70
2.75
30.08.01
13.12.01
14.02.02
_____
4.577
Years
20.5
40.0 (1)
40.0 (2)
Note (1) £25m @ 3.70% first 3 years thereafter 4.50% subject to lobo.
(2) £21m @ 2.75% first 2 years thereafter 4.50% subject to lobo.
4.
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 28th March 2002, 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 matures in 2018/19.
4.3
As reported previously action will be taken to reduce these excesses to within the
working limits as the opportunities arise to reschedule the loans. No such
opportunities arose during 2001/02.
5.
INVESTMENT ACTIVITY
5.1
The original revenue budget assumed an average of £25.8m would be available
for investment for the full year at an average rate of 5.75% giving investment
income of £1.486m. The approximate updated the forecast of interest earned on
investments to £1.711m and the actual interest earned was £1.621m.
5.2
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 2002 was £22.729m 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.
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5.3
Over the period 1st April 2001 to 31st March 2002 Investec failed to exceed the
local authority 7 day rate against which their performance is measured. However
their overall performance has exceeded the 7 day rate since their appointment
commenced on 5th July 1996 as shown below:1st April 2001 to
31st March 2002
%
4.06
4.41
Actual rate of return (net)
Compound 7 day local authority rate
5th July 1996 to
31st March 2002
%
6.45
5.84
5.4
The return in 2001/2002 was disappointing but reflected events in the world’s
money markets following on from the tragic events of September 11th. Investec
increased their exposure to gilts in February and March. In the short term, their
view was not matched by US economic indicators, and consequently the price of
gilts fell. As a result of their higher gilt exposure Investec have performed poorly
relative to the benchmark over the year and in particular the final quarter of the
year. However, their expectations were realised in the early months of 2002/03,
leading to compensatory increases in returns from gilts (see para 5.3 in Part 2).
5.5
The annual average rate of interest received on internally managed investments
was 4.21%.
5.6
The average level of total investments during the year was £37.7m and
investments held at 31st March 2002 totalled £36.5m.
6.
LEASING
6.1
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.
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6.2
Leases entered into during 2001/2002 amounted to £1.908m in capital value and
£0.413m in annual rentals.
Details of the leases are as follows :Leasing Co.
Asset
Bank of Scotland
G.E. Capital
Bank of Scotland
Yorkshire Bank
Neopost
Key Finance
Key Finance
Sovereign
Capital
Value
£m
0.031
0.073
0.016
0.044
0.008
0.140
0.224
1.372
1.908
Vehicles
Vehicles
Vehicles
Wheeled Bins
Enveloping Machine
Council Tax processor
Document Management
Education ICT
Period of
rental
Years
5
5
3
7
6
5
4
5
6.3
Total rentals payable for all leases held by services from their 2001/2002 revenue
budgets were £2.492m.
6.4
At 31st March 2002 the Council had a commitment to meet the following leasing
charges, which have been built into the appropriate services/DSO’s budget plans:£m
2.089
1.416
1.232
2002/2003
2003/2004
2004/2011
7.
SUMMARY
7.1
The outturn position for the Capital Financing costs compared to the estimate and
approximate are summarized below:Capital Financing 2001/2002
Borrowing Costs
HRA
GFund
Investment Income
HRA
GFund
Net borrowing costs
Estimate
£m
Approximate
£m
Outturn
£m
Variance
£m
26.918
17.677
44.595
27.050
17.664
44.714
26.969
17.702
44.671
(0.081)
0.038
(0.043)
(0.498)
(0.988)
(1.486)
43.109
(0.540)
(1.171)
(1.711)
43.003
(0.540)
(1.081)
(1.621)
43.050
0.090
0.090
0.047
It should be noted that the HRA borrowing costs are financed by housing subsidy
from the Government.
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8.
RECOMMENDATION
8.1
It is recommended that members note the Treasury Management performance in
2001/2002.
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PART 2
TREASURY MANAGEMENT POLICY AND STRATEGY REVIEW 2002/03
1.
INTRODUCTION
1.1
The Treasury Management Policy and Strategy for 2002/2003 was considered at
the meeting of Cabinet held on 19th March 2002 and approved at the meeting of
the City Council on 20th March 2002.
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 2002/2003 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 City 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 have not been exceeded during 2002/03. The maximum long term
borrowing during the year is £476.335m 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 2002/03 as
determined for the revenue budget was that the City Council would need to
borrow £13.016m and that this would be taken from the PWLB at the beginning
of the year at an interest rate of 5.25% based upon estimated long term interest
rates at the time of preparing the budget.
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3.2
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 2002/03 PWLB quota entitlement which the City Council is
allowed to borrow is as follows:-
BCA/SCA
PWLB repayments
Entitlement b/fwd
Total PWLB quota 2002/2003
Lower rate
Higher rate
£
16.886
1.289
12.571
30.746
14.828
15.918
30.746
3.3
The latest estimate of the borrowing requirement for 2002/03 has increased to
£17.206m to take account of the actual basic credit approval (BCA) and
supplementary credit approvals (SCA) made available to the authority and the
underborrowing of £7.741m in 2001/2002.
3.4
In order to fund the borrowing requirement three market loans (details below)
have been taken. All of the loans are Lobos (lender borrower options) which
means that after the initial fixed period, the lender has the right to amend the rate
in the second period of the loan. If this right is exercised, the borrower if unable
to agree the new rate, can repay the loan in full without penalty. In normal
circumstances the Council would not take lobo loans, because of the lack of
control. However, in this instance the rates were both favourable and too good an
opportunity to miss. During the period the loans were taken PWLB low quota
rates ranged between 5.125% to 4.625% for a 25 year maturity.
Lender
Depfa Bank
Europe plc
Amount
£m
5.000
Barclays
6.200
Dresdner
6.000
Rate
£
2.50% fixed two
years, thereafter
4.99% subject to lobo
2.40% fixed two
years, thereafter
4.99% subject to lobo
3.60% fixed two years
thereafter 4.625%
subject to lobo
Period
Years
40
Date
Taken
24.07.2002
40
29.07.2002
40
25.09.2002
3.5
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.
3.6
As can be seen from Appendix 3 long term PWLB interest rates have fluctuated
within an extremely narrow margin from 5.25% to 4.625% during the first five
months of 2002/2003. Current forecasts are that long term interest rates will
remain steady for the remainder of the year.
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4.
INVESTMENTS
4.1
The revenue budget assumed that 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.
4.2
Investment income earned to 31st August compared to the revenue budget
assumption is detailed below together with an explanation of the major variances.
INVESTMENT INCOME
Budget Assumption
Internally Managed
Externally Managed
Actual
Full Year
£m
746
to 31st Aug 02
£m
0.311
to 31st Aug 02
£m
0.311
£m
0.000
1.259
2,005
0.524
0.835
0.615
0.926
0.091
0.091
The reasons for the variation in income from investments to date compared with
the budget assumption are as follows:a) Internally Managed Funds
Interest rate -
average interest rate achieved is in line
with the budget assumption of 3.5%
b) Externally Managed Funds
Interest rate -
average interest rate achieved slightly
exceeds the budget assumption 4.5%
gilts prices have increased
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 2002.
5.2
Over the period 1st April 2002 to 31st August 2002 Investec exceeded the local
authority 7 day rate against which their performance is measured by 1.13%. Their
overall performance since the commencement of their appointment is shown
below:-
Actual rate of return
Compound 7 day local authority rate
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1st April 2002 to
31st August 2002
%
2.67%
1.54%
5th July 1996 to
31st August 2002
%
6.45%
5.69%
5.3
Following on from last year’s dip in performance there has been the expected
improvement in performance this year. In the first quarter 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 Deposit, taking advantage of
changing market expectations and hence the positive yield curve. In the second
quarter the gilts have been sold as Investec believes gilt prices have peaked and
further investments made in Certificates of Deposit, maintaining the improved
performance.
5.4
In view of the satisfactory performance it is to be recommended to the Lead
Member for Corporate Services that their appointment be extended further.
5.5
Bank of Scotland Deposit Accounts
In July 2002 the Council opened two deposit accounts with the Bank of Scotland;
the Corporate Investment Account and the Corporate Reserve Account. Both
accounts have a minimum deposit of £500,000 and the main difference between
the accounts is that Investment Account has same day access and the Investment
Reserve account has a 7 day notice period for withdrawal. Both accounts
compare favourably with current money market rates and also the Co-operative
Special Reserve Account. For example the current guaranteed rate of return for a
£5m deposit is 3.9% for the investment account and 3.95% for the Reserve
Account. Members should note that the Bank of Scotland is included in the
approved list of investments with a maximum investment amount of £10m up to
364 days.
6.
LEASING
6.1
The following operating leases have been arranged to date:Leasing
Company
Key Finance
Key Finance
Key Finance
Key Finance
Key Finance
7.
Asset
Document Imaging
Council Tax
Cash Receipting
Wheeled bins
I.T. training plan
Capital
Value
£m
0.140
0.043
0.035
0.108
0.025
Period of
Rental
Years
4
5
5
7
3
RECOMMENDATIONS
It is recommended that members:a) note the recent activity and current position for 2002/2003 with regard to the
Treasury Management function.
b) note the addition of the Bank of Scotland Deposit accounts to the approved
list of investments.
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