ITEM 8
NORTH YORKSHIRE FIRE AND RESCUE AUTHORITY
AUDIT PERFORMANCE AND REVIEW COMMITTEE
Report of the Director of Finance and Technical Services
9th December 2015
TREASURY MANAGEMENT AND PRUDENTIAL INDICATORS MID YEAR REVIEW 2015/16
1.0
Purpose of Report
1.1
To present the results of a mid year review of the Treasury Management operations and
Prudential Indicators of the Authority for 2015/16.
2.0
Background
2.1
The process of Treasury Management in Local Government is regulated by the CIPFA
Code of Practice on Treasury Management. The primary requirement of the Code is the
formulation and agreement by the Authority of a Treasury Management Policy Statement
which sets out the parameters for the lending and borrowing of money as well as the
respective responsibilities of the Authority, the Audit Performance and Review Committee
and the Director of Finance and Technical Services.
2.2
A revision of the Code of Practice was adopted by the Authority on 8th February 2011.
2.3
The Local Government Act 2003 also requires the Authority to “have regard” to the CIPFA
Prudential Code for Capital Finance in Local Authorities to ensure that capital
investment plans are affordable, prudent and sustainable. This Code was also revised in
2009.
2.4
The Authority’s Treasury Management and Investment Strategy for 2015/16 were approved
by the Authority on 11th February 2015. Under the Code, the Authority must review this
strategy mid year which is brought to Audit Performance and Review Committee under the
requirement to nominate a Committee to be responsible for ensuring effective scrutiny of
the Treasury Management Strategy and Policies. There is a specific requirement of a mid
year review as a minimum being reported to Members.
2.5
As a result of the review, it is considered that the strategy approved in February is still fit for
purpose in the current economic climate. No changes to the agreed strategy are considered
necessary at this stage.
2.6
As part of the strategy review, and annual borrowing process, Officers:
(a)
Undertake a borrowing appraisal exercise looking at the cost and cashflow
comparisons between maturity and annuity loans over different repayment periods;
(b)
Explore the opportunity for premature repayment of external debt and debt
rescheduling in order to reduce current capital financing costs; and
(c)
Give consideration to the financing of capital expenditure from cash balances
(‘internal borrowing’) built up through minimum revenue provision due to the
majority of debt outstanding being on a maturity basis.
NORTH YORKSHIRE FIRE AND RESCUE AUTHORITY
(d)
Give consideration to the use of reserves to finance the capital programme in order
to reduce the rate of increase and the incidence of capital financing costs, alongside
the Authority’s medium term financial strategy and budgetary pressures.
The outcomes of which are reported in paragraphs 4.11 to 4.20 below.
(e)
A full review of all Prudential Indicators. The updated Indicators are set out
alongside those approved in February 2015 and are reported in paragraph 6.4
below.
3.0
Current Treasury Position
3.1
The Authority’s treasury portfolio position at 30th September 2015 consisted of:
Item
£m
Average
Interest Rate
%
Debt Outstanding (excluding finance lease
and PFI liabilities)
Fixed Rate funding
PWLB
16.27
Variable Rate funding
0.00
Total Debt Outstanding
4.01
-
16.27
4.01
Managed by NYCC
13.85
0.65
Total Investments
13.85
0.65
Investments
3.2
There have been no new loans taken to date during 2015/16.
3.3
The average 0.65% return to 30/9/15 on investments compares with the average market
benchmark returns as follows:
7 day
1 month
3 months
6 months
12 months
0.36%
0.38%
0.46%
0.62%
0.93%
Investment rates available in the market have been broadly stable in the quarter and have
continued at historically low levels as a result of the ultra low bank rate and other
Government measures such as the Quantitative Easing programme and the Government’s
Funding for Lending Scheme.
4.0
Debt & Borrowing
4.1
The main strategy for undertaking new borrowing continues to be to take advantage of the
lowest rates consistent with asset lives.
NORTH YORKSHIRE FIRE AND RESCUE AUTHORITY
4.2
In practical terms, the policy of the Authority is to finance capital expenditure by borrowing
(from the Public Works Loan Board or the money markets), on average, over periods which
reflect the life of the Authority’s assets, or other appropriate periods. Individual loans are
chosen over varying periods depending on the perceived value of interest rates at the time
of borrowing.
4.3
Loans from the PWLB have in the past been very competitive with other forms of borrowing,
reflecting prices on the gilt market for Government securities and therefore it has been very
unusual if the PWLB's interest rates are not the lowest available, particularly for the length
of loan period involved.
4.4
The strategy also focuses on borrowing over periods where there is no concentration of
debt so as to achieve a balanced spread in the Authority’s debt maturity profile. The
Director of Finance and Technical Services continues to monitor this situation closely
throughout the year to determine whether at any stage, money market loans are more
appropriate and advantageous to the Authority than PWLB loans. To date, all of the
Authority’s borrowing is with PWLB.
4.5
One of the annual principal factors in increases in revenue costs relate to Capital Financing
charges. The provision for debt repayment (otherwise known as the Minimum Revenue
Provision or MRP) is a statutory calculation, whilst external interest payments are due
under loan agreements with external borrowers. These sums are the product of past and
future assumed borrowing.
4.6
Whilst not anticipating decisions to be taken by the Authority in February 2016, the
calculation includes a change to the Authority’s MRP policy from 2016/17 onwards which
will be proposed as part of the Treasury Management Strategy for 2016/17 to be approved
at the February meeting. Under the current statutory MRP guidance, for locally agreed
prudential borrowing incurred after 1st April 2008, MRP is to be calculated based upon
equal annual instalments over the estimated life of the asset for which the borrowing is
undertaken.
4.7
Currently this life is taken to be 40 years for land and buildings which stemmed from a
review in 2014 and based upon the average life of buildings within the estate (as advised by
the Authority’s valuers as part of the annual valuation process). However, subject to
review, it will be proposed within the strategy for 2016/17 to further increase this life to 60
years for the purposes of MRP. This would result in a saving per year in capital financing
charges of £1,500 in 2017/18, rising to £38,000 in 2019/20 in line with forecast borrowing in
respect of the Capital Programme for 2016/17 to 2020/21 taken to CFA on 9th December
2015 as part of the 2016/17 Provisional Revenue Estimates, Capital Programme and
Precepts report.
NORTH YORKSHIRE FIRE AND RESCUE AUTHORITY
4.8
The capital financing costs resulting from the proposals in paragraphs 4.6 to 4.7 above are:
4.9
Clearly, a key element of the future cost in the period following the current three year
moratorium on major new builds will be the number and nature of schemes included in the
Capital Programme from 2018/19 onwards. The Asset Management Group strengthens the
existing monitoring processes required by Financial Regulations that focus primarily on the
financial aspects of the programme. The Group regularly reviews the five year capital
programme considering the wider value for money aspects of the provision of assets in the
context of the amount of capital borrowing the Service can sustain over the medium term.
4.10
Since the setting of the Authority’s Annual Treasury Management Strategy for 2015/16, the
Authority has undertaken the following reviews in the aim of reducing the cost of future
borrowing against its capital programme:
Borrowing Appraisal Exercise
4.11
This looks at the cost and cashflow comparisons between maturity and annuity loans over
different repayment periods. Each loan is appraised individually prior to being taken out with
the PWLB. Borrowing taken in March 2015 was on a Maturity basis over a 15 year period.
Premature repayment of External Debt and Debt Rescheduling
4.12
The premature repayment of long term debt produces the following immediate benefits:
(a) revenue savings achieved derived from the significant current differential between the
rate of interest payable on the long term debt repaid and the loss of interest being
earned on short term investments.
(b) the running down of cash balances limits the investment exposure risk.
(c) adjusting the Authority’s debt maturity profile to get a more balanced spread of
refinancing risk.
4.13
This policy is however not risk free in terms of:
(a) loss of the long term stability in interest payments that longer term fixed borrowing
provides.
(b) potential “day to day” operational cash flow issues
NORTH YORKSHIRE FIRE AND RESCUE AUTHORITY
4.14
(c) ultimately the prematurely repaid loans have to be refinanced by taking new long term
loans.
No early debt repayment or rescheduling exercises have been effected to date in 2015/16
or are proposed. Higher rate historical rate borrowing continues to be cheaper compared
with current repayment premiums and interest rates. The situation will continue to be
monitored to identify any opportunities for the Authority’s debt portfolio that may arise.
Such opportunities, however, are limited in the current economic climate.
External v Internal Borrowing
4.15
Over the next two or three years, investment rates are expected to continue to be below
long term borrowing rates. A value for money assessment would therefore indicate that
value could be best obtained by avoiding/delaying new borrowing and using internal cash
balances to finance new capital expenditure or to replace maturing external debt. This
would maximise short term savings and produce other benefits but is not risk free (as
highlighted in paragraph 4.13 above in relation to the Premature Repayment of External
Debt). As with the recommendation last year, given the current uncertainties surrounding
the Authority’s external financing position, it is not recommended that this approach be
taken at this time.
4.16
Repayment of maturing debt of £886,400 is due in 2015/16. Cash balances, outside of
reserves, built up through minimum revenue provision over the life of the borrowing will be
used to make repayment rather than taking out replacement debt.
4.17
This “Internal Capital Financing” option will therefore continue to be actively considered and
pursued on an ongoing basis in order to assess short term revenue savings and mitigation
of the credit risk incurred by holding investments in the market.
Creation of a Capital Reserve
4.18
The Authority is able to hold a capital reserve available to support investment in the Capital
Programme. Members will recall that a £2,263,000 reserve was used to finance the
2013/14 capital programme in order to reduce the rate of increase and the incidence of
capital financing costs in 2014/15 following a peak in expenditure on property schemes in
2013/14.
4.19
At present, no such use in 2015/16 is proposed. However, it will continue to be considered
alongside the Authority’s medium term financial strategy and future budgetary pressures.
4.20
In addition, the Authority also maintains a usable capital receipts reserve which on current
information will stand at £209,600 as at 31st March 2016. This does not include potential
capital receipts from the former Fire Stations at Clifford Street and Easingwold which
remain under conditional offer of purchase.
Capital Grant
4.21
As expected, no General capital grant has been received in 2015/16. However, following
the successful bid to Government for funding, a specific capital grant of £2,420,000 has
been received for the replacements of the Transport and Logistics Premises at Crosby
Road.
Prospects for Interest Rates
4.22
The Authority will continue to receive regular advice from North Yorkshire County Council
under the Service Level Agreement.
NORTH YORKSHIRE FIRE AND RESCUE AUTHORITY
5.0
Investment Activity
5.1
North Yorkshire County Council currently provides most of the Authority’s Treasury
Management arrangements under the terms of the Service Level Agreement. Under this
agreement the County Council is required to comply with the terms of the Authority’s
approved Annual Treasury Management Policy Statement and Annual Treasury
Management and Investment Strategy. This includes providing advice to the Authority on
any necessary changes required at the time of annually updating these documents. By
virtue of the Service Level Agreement, the Authority has adopted the Annual Investment
Strategy of the Council which is embedded within the terms of the agreement and within the
services which the Council provides on the Authority’s behalf.
5.2
The Treasury Management Strategy Statement (TMSS) for 2015/16 was approved by
County Council on 18th February 2015. The County Council’s Annual Investment Strategy,
which is incorporated in the TMSS, outlines the County Council’s investment priorities as
follows:
(a)
security of capital
(b)
liquidity
5.3
The Strategy also aims to achieve the optimum return on investments commensurate with
the proper levels of security and liquidity. In the current economic climate and heightened
credit concerns, it is considered appropriate to keep investments relatively short term to
cover cashflow needs, but also to seek out any value available in significantly higher rates
for periods up to 12 months with highly credit rated financial institutions, where this is
possible within the constraints of the latest Approved Lending List.
5.4
The only financial investments made by the County Council during Quarters 1 and 2 of
2015/16 were the placing of surplus funds on the money markets for periods of up to one
year. These placements were only made to institutions included in the Approved Lending
List at the time of investment.
6.0
Prudential Indicators
6.1
The Prudential Indicators for the three year period 2015/16 to 2017/18 were initially
approved by Authority on 11th February 2015.
6.2
As a result of capital programme updates and other changes since approval, a full review of
all Prudential Indicators has been undertaken. The updated Indicators are set out
alongside those approved in February 2015 and are reported in paragraph 6.4 below. This
review is necessary because:
(a) The Indicators approved in February 2015 included a number of provisional forecasts
(b) Subsequent and more up to date information has become available resulting in
forecasts for future years having to be refined.
6.3
It is important to note that the updated Indicators reflect a number of common factors:
NORTH YORKSHIRE FIRE AND RESCUE AUTHORITY
(a) Updates to the Five Year Capital Programme 2015/16 - 2019/20 since approval in
February 2015.
(b) The use of capital receipts (£151,000) and insurance proceeds (£258,000) to fund
elements of capital expenditure in 2014/15.
(c) The Mobile Data Terminal project not being delivered in 2014/15 due to Government
announcements being awaited by the Emergency Services Mobile Communications
Programme in March 2015.
(d) Changes in actual and forecast PWLB loan rates.
(e) Construction of the provisional Revenue Estimates for 2016/17.
6.4
Prudential Indicators 2015/16 to 2017/18 - Revised
(i)
Estimated ratio of capital financing costs to the net Revenue Budget
(a)
Formally required indicator is net of interest earned
2014/15 actual
2015/16 estimate
2016/17 estimate
2017/18 estimate
Feb
2015
%
8.4
8.5
8.5
8.2
Sep
2015
%
8.5
8.7
9.0
(b) Local Indicator capping Capital Financing Costs to 10.0% of the annual Net
Revenue Budget
2014/15 actual
2015/16 estimate
2016/17 estimate
2017/18 estimate
Feb
2015
%
8.6
8.8
8.7
8.5
Sep
2015
%
8.7
8.9
9.2
Both indicators are calculated with reference to the net revenue stream of the
Authority i.e. Precepts plus General Grants.
The current profile of the five year capital programme and assumptions regarding
the Authority’s external financing position over the medium term suggest it is
reasonable to keep the local cap at 10% at this time. This will be reviewed prior to
setting the Treasury Management Strategy for 2016/17 in February 2016.
(ii)
Estimates of the incremental impact of capital investment decisions on the
Council Tax (Band D)
Calculated with reference to incremental cost of annual plan divided by council tax
base
NORTH YORKSHIRE FIRE AND RESCUE AUTHORITY
For a Band D Council Tax
2015/16 estimate
2016/17 estimate
2017/18 estimate
(iii)
0.53
-0.13
-0.53
0.37
-0.01
0.06
Feb
2015
£m
Sep
2015
£m
2.6
3.6
2.3
3.5
3.5
5.6
5.6
Capital Financing Requirement (as at 31 March)
The capital expenditure incurred historically by the Authority that has yet to be
financed.
2014/15 actual
2015/16 estimate
2016/17 estimate
2017/18 estimate
(v)
Sep
2015
£p
Capital Expenditure Actual and Forecasts
2014/15 actual
2015/16 estimate
2016/17 estimate
2017/18 estimate
(iv)
Feb
2015
£p
Feb
2015
£m
Sep
2015
£m
18.6
18.7
17.2
16.8
18.0
19.8
21.4
Ratio of Gross Debt to Capital Financing Requirement
In order to ensure that over the medium term debt will only be for Capital purposes,
the Authority should ensure that debt does not, except in the short term, exceed the
total of the Capital Financing Requirement (CFR) in the preceding year, plus the
estimate of any additional capital financing requirement for 2015/16 and the next
two financial years.
All of the Authority’s outstanding debt has been taken for the purpose of funding
capital expenditure. However, it does not currently comply with the revised
prudential indicator as a result of the annual minimum revenue provision for debt
repayment reducing the CFR below gross debt, the majority of which is on a fixed
maturity basis for longer term period. In the current interest rate environment, there
is no financial incentive for the Authority to reschedule its existing debt portfolio.
However, the application of reserves in 2013/14 to finance the capital programme in
order to reduce the rate of increase and the incidence of capital financing costs, in
turn reduced the differential between CFR and gross debt over the medium term.
NORTH YORKSHIRE FIRE AND RESCUE AUTHORITY
CIPFA do recognise that authorities may not be in a position to meet the
requirement due to their current debt portfolios, and in such circumstances require a
statement of non compliance accompanied with reasons. This situation will be
monitored.
(vi)
Operational Boundary for external debt
2015/16
2016/17
2017/18
Feb
2015
£m
21.2
20.0
20.2
Sep
2015
£m
20.5
22.6
24.9
(vii) Authorised limit for external debt
Operational boundary plus an allowance for temporary short term borrowing in year to
allow for cash flow movements.
2015/16
2016/17
2017/18
(viii)
Sep
2015
£m
22.9
25.1
27.3
Actual External Debt
Includes “other long term liabilities” such as PFI contracts and finance leases.
31st March 2015 actual
31st March 2016 estimate
31st March 2017 estimate
31st March 2018 estimate
(ix)
Feb
2015
£m
23.6
22.4
22.6
Feb
2014
£m
21.2
21.2
20.0
20.2
Sep
2015
£m
20.5
22.6
24.9
Adoption of CIPFA Code of Practice for Treasury Management in the Public
Services
The Authority agreed to adopt this Code at its meeting on 24th April 2002 with the
updated Code issued in November 2011 being adopted on 8th February 2012.
NORTH YORKSHIRE FIRE AND RESCUE AUTHORITY
(x)
Interest Rate exposures
Indicators which limit the extent to which the Authority is exposed to interest rate
changes.
Limits
(February
2015)
%
Actual
Position
31/9/2015
%
Actual
Position
31/9/2015
£m
Borrowing
Fixed
Variable
60 to 100
0 to 40
100
0
16.27
0
Investments
Fixed
Variable
0 to 30
70 to 100
0
100
0
13.85
It should be noted that whilst cash balances held on investment were £13,580,000 on
30th September 2015, these are forecast to decrease to £7,000,000 due to receipt
and payment profiles of both revenue and capital monies up to 31st March 2016.
Nevertheless, a review of the levels of long term borrowing continues to be
undertaken as reported in Section 4 above.
(xi)
Maturity Structure of borrowing
The amount of projected borrowing maturing in each period as a percentage of total
projected borrowing that is fixed rate.
under 12 months
between 12 months and 2 years
between 2 and 5 years
between 5 and 10 years
between 10 and 20 years
over 20 years
(xii)
Upper
Limit
%
10.0
10.0
20.0
50.0
100.0
100.0
Actual as at
30th Sep 2015
%
3.2
4.5
4.8
11.4
67.2
8.8
Total principal sums invested for periods longer than 364 days
A maximum of 20% of funds available for investment will be held in aggregate in Non
Specified Investments over 364 days. Based on estimated levels of funds and
balances, the need for liquidity and day to day cash flow requirements, it is forecast
that £1,600,000 of the overall balances can be considered for longer term
investments over 364 days.
NORTH YORKSHIRE FIRE AND RESCUE AUTHORITY
7.0
Impact of Treasury Management Activity on the Revenue Budget
7.1
The overall impact of Treasury Management Activity to date in 2015/16 on the Revenue
Budget is:
Item
Capital Financing Charges
Revenue Provision for debt repayment
Interest Paid
Interest Earned
Short Term Investments
2015/16
Budget
£m
Forecast
Outturn
£m
Variation
1.55
1.14
1.52
1.11
-0.03
-0.03
2.69
2.63
-0.06
-0.08
-0.08
-0.07
-0.07
0.01
0.01
2.61
2.56
-0.05
£m
Overall net cost
7.2
There is therefore a net saving of £50,000 being forecast in 2015/16 principally as a result
of use of capital receipts (£151,000) and insurance proceeds (£258,000) to fund elements
of capital expenditure in 2014/15 rather than undertake further borrowing.
7.3
£45,000 of this saving will be used to fund the purchase of nine vehicles in year, previously
leased as Community Safety Vehicles on expiry of the lease.
8.0
Approved Lending List
8.1
The approved Lending List as at 30th September 2015 is attached at Appendix A with
changes made since June 2015 being detailed in Appendix B. These appendices are drawn
from the County Council’s most recent 2015/16 Treasury Management Update Report.
9.0
Recommendation
9.1
The contents of the report be noted.
I R YOUNG
Director of Finance & Technical Services
ian.young@northyorksfire.gov.uk
Tel: 01609 788505
Contact Officer:
Clare Godfrey
clare.godfrey@northyorksfire.gov.uk
Tel: 01609 788580
North Yorkshire Fire and Rescue Service Headquarters, Thurston Road, NORTHALLERTON
DL6 2ND
26th November 2015
NORTH YORKSHIRE FIRE AND RESCUE AUTHORITY
Appendix A
APPROVED LENDING LIST AS AT 30 SEPTEMBER 2015
Maximum sum invested at any time (The overall total exposure figure covers both Specified and
Non-Specified investments)
Country
UK "Nationalised" banks / UK banks with UK Central
Government involvement
Royal Bank of Scotland
GBR
Natwest Bank
GBR
Bank of Scotland
GBR
Lloyds
GBR
UK "Clearing Banks", other UK based banks and
Building Societies
Santander UK plc (includes Cater Allen)
GBR
Barclays Bank
GBR
HSBC
GBR
GBR
Clydesdale Bank (trading as Yorkshire Bank)
Goldman Sachs International Bank
Nationwide Building Society
Leeds Building Society
GBR
GBR
GBR
Specified
Investments
(up to 1 year)
Non-Specified
Investments
(> 1 year £20m
limit)
Total
Exposure
£m
Tim e
Lim it *
Total
Exposure
£m
Tim e
Lim it *
85.0
364 days
-
-
85.0
6 months
-
-
40.0
75.0
30.0
30.0
6 months
6 months
364 days
-
-
-
-
40.0
40.0
20.0
6 months
6 months
6 months
-
-
364 days
-
-
364 days
364 days
-
-
-
-
(Shared
w ith NAB)
Temporarily
suspended
High quality Foreign Banks
30.0
(Shared
w ith
Clydesdale)
National Australia Bank
AUS
Commonwealth Bank of Australia
Canadian Imperial Bank of Commerce
AUS
CAN
Deutsche Bank
DEU
20.0
Temporarily
suspended
Nordea Bank Finland
Credit Industriel et Commercial
BNP Paribas Fortis
Nordea Bank AB
Svenska Handelsbanken
FIN
FRA
FRA
SWE
SWE
20.0
20.0
20.0
20.0
40.0
364 days
364 days
6 months
364 days
364 days
-
-
Local Authorities
County / Unitary / Metropolitan / District Councils
Police / Fire Authorities
National Park Authorities
20.0
20.0
20.0
364 days
364 days
364 days
5.0
5.0
5.0
2 years
2 years
2 years
Other Deposit Takers
Money Market Funds
UK Debt Management Account
20.0
100.0
364 days
364 days
5.0
5.0
2 years
2 years
20.0
20.0
NORTH YORKSHIRE FIRE AND RESCUE AUTHORITY
Appendix B
Organisation
Original
Investment
Limit/Term
Date
Amended
Revised
Investment
Limit/Term
Amendments made to Investment Limits
None
Amendments made to Investment Terms
Goldman Sachs
3 months
29/09/2015
6 months
Temporary Suspensions for Lending List
Ulster Bank Plc
364 days
01/07/2015
nil
Reason for
Amendment
Due to perceived decrease in credit
quality. This has now changed back to 3
months wef 09/10/15
Due to perceived decrease in credit
quality
The above shows changes to the Lending List as at 1 July compared to 30 September 2015. It should be
noted however, that changes can be made on a daily basis in reaction to market sentiment, with maximum
investment durations being adjusted accordingly.