|
Return
to Agenda
ITEM EX14
EXECUTIVE
– 8 JULY 2003
REVIEW OF
THE COUNCIL’S TREASURY MANAGEMENT ACTIVITY IN 2002/03
Report by
Head of Finance
Introduction
- The CIPFA "Code
of Practice for Treasury Management" recommends an annual report on
the performance of the treasury management function after the close
of the financial year.
The following
report has been written in accordance with this recommendation and reviews
the Council’s Treasury Management activity carried out during 2002/03.
The following annexes are attached:
Debt
Financing
- The change in
the Council’s debt for the five years ended 31 March 2003 is shown in
the table below. This shows that over the five-year period the percentage
of fixed debt has increased from 79% to 91%. The Council has taken the
opportunity over this period of borrowing long term from the PWLB at
good rates of interest. In 1997/98 PWLB 25 year rates were between 7.75%
and 5.875%. Since 1998/99 most of the Council’s borrowing has been taken
at rates below 5%. The current fixed interest weighting is within the
Council’s agreed fixed interest range of 75-100%.
|
Composition
of Oxfordshire County Council’s Debt
|
|
|
Year
ended 31 March
|
|
1999
%
|
2000
%
|
2001
%
|
2002
%
|
2003
%
|
|
Public
Works Loan Board (Fixed Interest)
|
70
|
74
|
79
|
81
|
89
|
|
Money
Market Loans (Fixed Interest)
|
9
|
6
|
6
|
5
|
2
|
|
Internal
Balances (Variable Interest)
|
21
|
20
|
15
|
14
|
9
|
- The table at Annex
2 (download as .doc file) shows
the Council’s debt increased from £197.7m at 1 April 2002 to £228.5m
at 1 April 2003. This was based upon the 2002/03 capital programme and
the rules of repayment of debt laid down by the government in the Local
Government and Housing Act 1989.
Normal
Debt Financing
- The Council borrowed
£48 million in longer-term loans during 2002/03 as part of its normal
debt-financing programme. All the borrowing was done through the PWLB.
The Council held the view that interest rates would fall in the later
part of the year. However, as a hedge against the possibility of interest
rates rising one loan was taken in July when rates on 15-20 year loans
had fallen from 5.5% to 5.125%. 70% of the total borrowed was taken
in the second half of the year, which produced the most favourable interest
rates. In March 2003 the PWLB changed its policy of issuing borrowing
rates from weekly to daily. The PWLB rates are now more responsive to
actual market conditions. As a result, it is now more difficult to predict
when rates are at their lowest.
- Time series graphs
showing PWLB interest rates compared to when the Council took its borrowing
are attached at Annex 6.(download
as .doc file)
Special
Debt Restructuring
- The Council undertook
£8 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 £124,932,
which under
capital accounting rules has to be spread over the maturity period of
the replacement loan, in this instance 20 years.
Maturing
Debt
- The Council repaid
£5 million of maturing PWLB debt and £5 million of Fixed Interest Money
market debt during the year. The interest rates on the matured loans
averaged 8.36%.
Review
of the Council’s External Lending
- The Council’s
internal balances include provisions, reserves, revenue balances, capital
receipts unapplied and the excess of creditors over debtors. Where the
balances are not required to fund the Council’s debt they are lent out
short-term in the money market in accordance with the Council’s approved
lending list and cash flow obligations
- The Council uses
the seven-day interbank sterling rate as its benchmark to measure its
own performance. This is considered the most appropriate rate taking
into account the Council’s average level of deposits and cash flow considerations.
During 2002/03 the average seven day interbank sterling rate was 3.65%
and the Council’s average lending rate was 3.93%, which beat the benchmark
by 0.28%.
- During February
the Council was in a temporary borrowing position as a result of long
term debt financing and capital receipt income being received late in
the year. The Council borrowed 3 short-term loans totalling £14.965m
with an average interest rate of 3.82%.
All three
loans were taken between 31 January and 4 February and were repaid by
5 February.
- In August 2003,
the Council transferred £15 million to Alliance Capital, the external
fund manager appointed after an extensive tender exercise in the previous
financial year. This sum was transferred on the basis of the desirability
of diversifying risk and to enhance the investment return on the Council’s
cash balances
- The market value
of the fund at 31 March was £15,383,938 equating to an investment return
of 4.27% (4.12% net of fees). Although this was marginally below the
fund’s benchmark it achieved a net investment income of £21,648 above
that which would have been achieved if the sum had remained in-house.
- Due to the nature
of the investment the initial view was that performance of the fund
should be reviewed after three years. It is therefore, too early to
draw any conclusions about the fund managers’ performance. However,
regular review meetings are taking place.
External
Performance Indicators and Statistics
- Each year CIPFA
publish annual capital expenditure and treasury management statistics.
The statistics for the 2002/03 financial year are not expected to be
published until February 2004. The statistics in respect of the 2001/02
financial year have been summarised in Annexes 4 and 5.
Financial
Implications
- The debt restructuring
carried out during 2002/03 produced a real saving of £124,932
and the transfer
of funds to Alliance Capital produced a net increase in investment income
of £21,648.
RECOMMENDATION
- The Executive
is RECOMMENDED to note the Council’s Treasury Management activity in
2002/03.
CHRIS
GRAY
Head of Finance
Background
papers: Nil
Contact
officer: Donna Ross Telephone No: 01865 815684
June
2003
Return to TOP
|