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ITEM EX5

EXECUTIVE – 4 SEPTEMBER 2002

REVIEW OF THE COUNCIL’S TREASURY MANAGEMENT ACTIVITY IN 2001/02

Report by Director for Business Support & County Treasurer

Introduction

  1. The CIPFA "Code of Practice for Treasury Management in Local Authorities" recommends the formal reporting of Treasury Management matters to the appropriate body of members, specifying in particular the annual strategic plan and the annual review of activity. This report, reviewing the Council’s Treasury Management activity during 2001/02, is submitted in accordance with this recommendation.

    2. Debt Financing 2001/02

  2. Annex 1 gives the Council’s debt financing for 2001/02. The notes attached to Annex 1 explain the table but the more important features are considered below.

  3. The Public Works Loan Board (PWLB) is a government agency. Money market loans are loans borrowed in the London money market. Internal balances include provisions, reserves, revenue balances, capital receipts unapplied and the excess of creditors over debtors. Where internal balances are not required to fund the Council’s debt they are lent out short term.

  4. The change in the Council’s debt for the five years ended 31 March 2002 is shown in the table below. This shows that over the five-year period the percentage of fixed debt has increased from 74% to 86%. The current fixed interest weighting is within the Council’s agreed fixed interest range of 75-100%.

    5. Composition of Oxfordshire County Council’s Debt

     

    Year Ended 31 March

     

    1998

    %

    1999

    %

    2000

    %

    2001

    %

    2002

    %

    Public Works Loan Board (Fixed Interest)

    65

    70

    74

    79

    81

    Money Market Loans (Fixed Interest)

    9

    9

    6

    6

    5

    Internal Balances (Variable Interest)

    26

    21

    20

    15

    14

  5. The table at Annex 1 shows the Council’s debt increased from £168.89 million at 1 April 2001 to £197.72 million at 31 March 2002. This was based upon the 2001/02 capital programme and the rules of repayment of debt laid down by the government in the Local Government and Housing Act 1989.

    6. Economic and Market Background to 2001/02

  6. The financial year started against the backdrop of a sharp slow-down in the global economy. The US was suffering from overcapacity, Japan from deflation and the Eurozone from sluggish economic growth.

  7. The UK was not immune from this slow down and although personal consumption remained strong the industrial sector seemed to be slipping into recession. As a consequence the Bank of England cut the bank base rate in both April and May, by a quarter of a percentage point on each occasion. However, the Bank remained very cautious in the light of a tight labour market and soaring house prices and there were no further cuts in June or July.

  8. Whilst we saw a fall in short term interest rates this was not the position with longer term interest rates. The redemption yield on Treasury 8 per cent 2021 climbed from 4.62% to 5.16% during the April to June quarter. The UK bond market began to take fright at the possibility of rising inflation and an increase in public spending.

  9. In August the Bank of England cut the base rate by a further one quarter of a per cent to 5% because of further concern of the economic slowdown. Whilst the industrial sector seemed to be weakening further consumption and house prices continued to rise. By early September year on year house price inflation had reached 14.6%, according to the Nationwide Building Society.

  10. On 11 September the terrorist atrocities in the US took place, which rocked the markets. Equity markets fell sharply but government bond markets benefited as bonds were viewed as a safe haven by investors. As a consequence we saw long-term interest rates falling.

  11. Amid this uncertainty we saw the Bank of England cut the base rate to 4.75% in mid September, which was its lowest level for 37 years. This was followed by a further quarter point reduction in early October. During this period the two-tier UK economy was at its most prominent. Whilst consumers were stoking up a record spending boom job losses began to emerge, from big employers including British Airways, Consignia and Marconi. In November as a consequence of falling global stock markets the Bank of England cut the base rate by one half of a per cent to 4%.

  12. In the first quarter of 2002 the global equity stock markets started to make a fragile recovery, partly at the expense of bond markets, and as a consequence we saw long-term interest rates edge back upwards again. With bank base rate remaining at 4% markets became increasingly concerned with the buoyant housing market and strong retail spending. Both the futures sterling market and City economists started to take the view that the next move in short term interest rates would be upwards.

    13. Normal Debt Financing

  13. The Council borrowed £31 million in longer-term loans during 2001/02 as part of its normal debt-financing programme. All the borrowing was done through the Public Works Loan Board, which was the most attractive source of borrowing available, and taken between the end of August 2001 and January 2002. Three-quarters of the borrowing was undertaken at the longer end of the market, which was the most favourable borrowing period. Annex 2 provides details of the loans taken and annexes 3 to 5 show the timing of the Council’s borrowing. All the loans raised during the year were below the average rate.

    Annexes 3-5 (download as .xls file)

    14. Special Debt Restructuring

  14. The Council undertook £25 million of debt restructuring during the year, maintaining its policy of only replacing prematurely repaid debt with loans of a similar maturity period. The restructuring generated a real interest saving of £380,000, which under capital accounting rules has to be spread over the maturity period of the replacement loans, which in this instance averaged 18 years.

    15. Review of the Council’s External Lending

  15. The Council’s internal balances (see paragraph 4), which are not required to fund the Council’s debt, are lent out short term in the money market.

  16. The Council only lends to institutions with a good credit rating and has drawn up its own approved lending list, which includes maximum lending limits for each institution. The list includes UK and foreign banks, building societies and other local authorities. All the banks on the Council’s list are authorised institutions i.e. authorised by the bank of England to accept deposits under the Banking Act 1987, or European Union authorised banks with branches in the UK.

  17. The Council uses the seven-day interbank sterling rate as its benchmark to measure its own investment performance. This is considered the most appropriate rate taking into account the Council’s average level of deposits and cash flow considerations. During 2001/02 the average seven day interbank sterling rate was 4.33% and the Council’s average lending rate was 4.64%, which beat the bench mark by 0.31%.

  18. During the year the Council reviewed its call account arrangements. A call account is where a cash deposit can be withdrawn with immediate notice. The operation of these accounts enables the smooth and efficient management of the Council’s day-to-day cash flow. They can also be used as a tactical management tool.

  19. Prior to the review the Council operated a single call account with LloydsTSB, but as a consequence of other deposit takers offering more competitive rates of interest, further call accounts were opened with the Abbey National and Bank of Scotland. As a result of this exercise savings of £67,000 were made during 2001/02.

    20. Appointment of External Manager

  20. In March 2001 the then Operations Sub-Committee gave the County Treasurer delegated authority to appoint an external manager to manage up to £15 million with the initial view of investing this sum over a minimum three year period. The decision was made on the basis of the desirability of diversifying risk and seeking to enhance the investment return on the Council’s surplus cash balances.

  21. During the year an extensive tender exercise was undertaken which culminated in the selection of Alliance Capital. Alliance Capital was chosen on the strength of its consistently above average performance and low risk style. The management and custody agreements have now been signed and funds will be transferred to Alliance Capital shortly.

    22. External Performance Indicators and Statistics

  22. Each year CIPFA publish annual capital expenditure and treasury management statistics. The statistics for the 2001/02 financial year are not expected to be published until February 2003. The statistics in respect of the 2000/2001 financial year have been summarised in Annex 6 and Annex 7 (download as .rtf file).

    23. Financial and Staff Implications

  23. The debt restructuring carried out during 2001/02 produced a real interest saving of £380,000 and the opening of two new call accounts made savings of £67,000. The Council’s Treasury Management administration costs are significantly lower than the average of other local authorities. The appointment of Alliance Capital to manage £15 million of the Council’s balance was made with the objectives of diversifying risk and producing a higher investment return.

    24. RECOMMENDATION

  24. The Executive is RECOMMENDED to note the Council’s Treasury Management activity in 2001/02 described in the report.

CHRIS GRAY
Director of Business Support & County Treasurer

Background papers: CIPFA Capital Expenditure and Treasury Management statistics 2000/2001. CIPFA Treasury Management Benchmarking Club 2001.

Contact officer: Tony Wheeler, Tel 01865 815287.

July 2002

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