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ITEM EX11

EXECUTIVE – 6 JULY 2004

TREASURY MANAGEMENT OUTTURN 2003/04

Report by Head of Finance

1. The CIPFA "Code of Practice for Treasury Management" recommends "an annual report on the performance of the treasury function..." The report has been written in accordance with this recommendation and reviews the Council’s Treasury Management activity during 2003/04. It also reviews the Council’s lending list and makes proposals for additions to the list.
2. The Strategy for 2003/04 reported to the Executive on 2 April 2003, forecast an increase in the Council’s debt to £261 million, with the percentage of fixed debt rising to 95%. Base rates and long-term PWLB rates were predicted to rise by the end of the financial year.

Market Background

3. The Market background to the year’s activity is set out at Annex 1.

Treasury Management Activity

Debt Financing

4. The Council’s debt financing for 2003/04 is analysed in Annex 2 (download as .doc file).
5. The change in the Council’s debt for the five years ended 31 March 2004 is shown in the table below. This shows that over the five-year period the percentage of fixed debt has increased from 80% to 96%. 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 31st March
	2000 %	2001 %	2002 %	2003 %	2004 %
Public Works Loan Board (Fixed Interest)	74	79	81	89	96
Money Market Loans (Fixed Interest)	6	6	5	2	0
Internal Balances (Variable Interest)	20	15	14	9	4

6. The table at Annex 2 (download as .doc file) shows the Council’s debt increased from £225.27m at 1 April 2003 to £256.5m at 1 April 2004, an increase of £31.2m. This was based upon the 2003/04 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

7. The Council borrowed £47.38 million in longer-term loans during 2003/04 as part of its normal debt-financing programme. All the borrowing was done through the Public Works Loan Board and was taken at fixed rates. New borrowing was undertaken giving due consideration to the debt maturity profile, ensuring that an acceptable amount of debt is due to mature in any one financial year.
8. The Council held the view that interest rates were likely to rise in the later part of the year, so took advantage of low long-term rates in the first quarter of the year. £20 million was borrowed during May and June for maturities of 10-25 years. During December the council considered longer-term rates to be unattractive, so during the next few months borrowed a further £18m in medium term loans of 6 and 7 year maturities. Longer-term rates eased again towards the end of the year and the remaining quota of £9.4m was borrowed at 4.7% for 26 years. Annex 3 (download as .doc file) shows borrowing undertaken during the year.

Special Debt Restructuring

9. 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 discount of £172,023.11, which under capital accounting rules has to be spread over the maturity period of the replacement loan, in this instance 20 years. The discount equated to a real saving of £47,036.

Maturing Debt

10. The Council repaid £5 million of maturing PWLB debt and £5 million of maturing Fixed Interest Money market debt during the year. The interest rates on the matured loans averaged 8.24%.

Review of the Council’s External lending

11. The Council’s internal balances include provisions, reserves, revenue balances, capital receipts unapplied and the excess of creditors over debtors. Where temporary cashflow surpluses 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 cashflow obligations.
12. The Council uses the seven-day inter-bank 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 cashflow considerations. During 2003/04 the average seven day interbank sterling rate was 3.52% and the Council’s average lending rate was 3.66%, which beat the benchmark by 0.14%.

The Council’s Lending List

13. The Council’s lending list has become so restrictive that on a number of occasions during the year, dealers were prevented from placing fixed rate deposits in the money market due to a limited number of available counterparties. It is likely that higher returns could have been achieved if the list had included a higher number of authorised institutions. As a result of the dealing difficulties experienced during the year the lending list has been reviewed.
14. A report on this review is attached in an Exempt Appendix. This should be considered in exempt session because its discussion in public might lead to the disclosure to members of the public present of information relating to the financial or business affairs of particular persons (other than the authority).
15. Banks or building societies whose credit ratings fall so that they no longer meet the authority’s credit rating criteria are immediately removed from the lending list. Occasionally, The Head of Finance may also temporarily suspend an institution following news or advice from other sources. During January, UniCredito Italiano was temporarily suspended from the lending list as a precaution while news unfolded about the Italian Parmalatt scandal. This action was a precautionary measure and as the bank did not suffer any change in its credit rating and was not put on a ratings watch alert, the suspension was lifted one month later.
16. In the last few years the County Council has used only 2 brokers, the minimum required to comply with the Treasury Management Code of Practice. However, during 2003/04 it was felt that the addition of a third broker could be beneficial to the authority. In November Tradition were appointed on a six-month trial and have since been added to the authority’s list of brokers. As a result of using Tradition the authority was able to lend to an increased number of local authorities.
17. During October the Council was in a temporary borrowing position. One short-term loan of £4m was borrowed for 4 days with an interest rate of 3.375%.
18. In August 2002, the Council transferred £15 million to Alliance Capital, the Council’s appointed external fund manager. During 2003/04 the performance of the external portfolio has been monitored both in-house and by the Council’s independent advisors, SECTOR. The purpose of the externally managed fund is to diversify risk and enhance the investment return on the Council’s cash balances in the medium to long term.
19. The market value of the fund at 31 March 2004 was £15,915,282 equating to an annual investment return of £531,344 (3.31% net of fees). The benchmark for the fund which is based on the average 7 day rate and the Merrill Lynch Gilt index was 3.20% for 2003/04. The fund outperformed the benchmark by 0.11%.
20. For the majority of 2003/04 the fund manager believed that Gilts were generally overpriced and structured the portfolio so that it would be protected if interest rates rose. At the year-end 5% of the fund was held in cash, 15% in supranationals and 80% in certificates of deposit.
21. While 2003/04 was generally believed to be a bad year for gilts, producing relatively low yields compared to cash, it is anticipated that better returns should be achievable in 2004/5. Alliance Capital believe that the economic recovery will continue, with household consumption holding up in the face of further modest interest rate rises. Bond yields are likely to move up as a result of an end to very low official interest rates, predictions for a significant reduction in official institutions’ purchases of government bonds; and a greater pick up in business investment. Oxfordshire County Council’s portfolio is predicted to return between 4.2% and 5.0% in 2004/05 and is expected to outperform cash over a 3 year period.

External Performance Indicators and Statistics

22. The County Council is a member of the CIPFA Treasury and Debt Management Benchmarking Club and completed returns for the financial year 2003/04. IPF’s draft report comparing the results of 90 members was issued in June. Initial indications show that the authority’s treasury management and debt management costs per £m invested and borrowed are well below average.
23. The average interest rate for our long-term borrowing was 5.5%, 1.1% below the group average. Average interest returns for combined in-house and external investments were 3.61% compared to the average of 3.60%.

Financial and Staff Implications

24. The debt restructuring carried out during 2003/04 produced a real saving of £47,036.

RECOMMENDATION

25. The Executive is RECOMMENDED to:

CHRIS GRAY
Head of Finance

Background Papers: Nil

Contact officer: Donna Ross ,Tel: 01865 815684

June 2004

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