ITEM CA6
CABINET –
Treasury
Management outturn 2006/07
Report by Head of Finance & Procurement
Introduction
1.
On
Market Background
2.
The most significant feature of the market
during 2006/07 was the fact that there were three rises in the Bank of
England’s official bank rate, as set out in the table below. When the rate
reached 5.25% on
3.
Such a significant increase in the bank rate
had not been widely anticipated by the market. The main impact of the increase
was that the Council was able to earn substantially greater interest on its
surplus cash balances than had been budgeted. This is explored further in
‘Investment Outturn’ section at paragraphs 15 to 18, below. The Council looked
to take its long-term borrowing for the year at advantageous rates, mainly in
the money market.
Treasury Management Activity
Debt Financing
4.
The Council’s debt financing for 2006/07 is
analysed in Annex 1.
5.
The table at Annex 1 shows that the
Council’s cumulative total debt increased during the year from £348.06m on
6.
The Council’s borrowing activity during
2006/07 can be classified into two categories. First, there is ‘normal’
borrowing to finance capital expenditure. During the year, new borrowing
amounted to £34m. Of the £34m, £4m was raised from the Public Works Loan Board
(PWLB). A further £30m was arranged through the money market in the form of
LOBO (Lender’s Option/Borrower’s Option) loans. The Council’s treasury strategy
for 2006/07 had authorised that LOBO loans could form up to 20% of the total
debt portfolio, an increase from 10% in the previous year, 2005/06. There was a
small increase (£0.16m) in funding from internal balances. The second category
of borrowing activity, and by far the most significant during 2006/07, is debt
restructuring. This is explained in paragraphs 11 and 12 below.
7.
By
8.
Temporary, overnight borrowing of £2.47m and
£1.65m respectively was required on two occasions during the year, at an
average interest rate of 5.19%. The total cost of short-term borrowing was
£596.69 including brokerage.
Maturing Debt
9.
The Council repaid £5 million of maturing
PWLB debt during the year. The weighted
average interest rate payable on the matured loans was 5.475%. These are analysed in Annex 2
Debt Restructuring
10.
During the year, officers took advantage of
a widening gilt yield curve to restructure several PWLB loans. Such an
environment presents opportunities to make savings by replacing existing loans
at a lower rate of interest, through lengthening the period of the replacement
debt. Premiums and discounts can be generated as part of this activity. Overall, £161m was repaid early to the PWLB
during the year (including £6m where the replacement loan had been raised in
2005/06) and £155m was raised in the form of replacement loans. All loans were
restructured to slightly longer maturity bands with no change in the type of
loan instrument. Debt restructuring will lead to ongoing annual savings of
around £200,000. PWLB debt restructuring activity is analysed in Annex 3
11.
At
Investment Strategy
12.
The Council’s in-house cash balances are
deposited with institutions on the Council’s approved lending list. At the core
of the Council’s investment strategy is the need to ensure both the security
and the liquidity of the Council’s cash assets. These requirements are
prioritised above the requirement to maximise returns. The authority aims to spread
its investments over a wide range of maturity periods, from overnight to 3
years. Within that context, individual decisions as to the length of a deposit
are determined by a variety of factors, including: the current year’s
investment strategy; the cash flow forecast; the interest rate forecast; and,
the interest rates on offer. The average maturity period of short-term in-house
deposits increased in 2006/07 to 64 days from 23 days in the previous financial
year. The Council also arranged three fixed deposits totalling £5m with
maturities in excess of one year and increased its exposure to structured
deposits in line with the 2006/07 strategy. At
The Council’s Lending List
13.
The Council’s lending list is regularly
updated during the year to reflect changes in bank and building society credit
ratings. Annex 4 shows the amendments
incorporated into the lending list during 2006-07, in accordance with the
approved credit rating criteria.
Investment Outturn
14.
The average daily investment of temporary
surplus cash invested in-house was £155m in 2006/7. The Council achieved an in-house return for
the year of 4.89%, producing gross interest receivable of £7.6million. Temporary surplus cash includes: pension fund
cash (approximately £8.56m at year-end); developer contributions; Council
balances; trust fund balances; and, various other funds to which the Council
pays back the interest earned on the average fund balance at each financial
year end.
15.
The Council uses the seven-day inter-bank
sterling rate as its benchmark to measure its own in-house investment
performance. This is considered the most appropriate rate taking into account
the Council’s average level of deposits and cashflow considerations. During 2006/07 the average seven-day interbank
sterling rate was 4.84%. The Council’s average in-house return was 4.89%, thus
exceeding the benchmark by 0.05%. The return for callable deposits specifically
was 4.87% and that for fixed deposits of 365 days or more, 5.12%.
16.
To ensure liquidity to meet operational
requirements, the Council operates a number of call accounts to deposit
short-term cash surpluses with banks on its approved lending list. During 2006/07 the average balance held on
call was £12.7million.
17.
The authority continued to use a Money
Market Fund during 2006/07, the Standard Life Sterling Liquidity Plus Fund.
This had been opened in September 2004. The Council invested an average daily
balance of £6.4million in the Money Market Fund and generated a return of
£307,000.
External Fund Managers
18.
During the year, two external fund managers
were appointed: Investec Asset Management Limited and Scottish Widows
Investment Partnership Limited (SWIP). The fund with Investec began on
19.
The performance of the two managers has been
mixed. SWIP’s estimated annualised return of 5.34% net of management charges
exceeds their benchmark return of 5.16% by 0.18%. On the other hand, Investec’s
estimated return for the year net of management charges was 3.96%, compared
with a benchmark of 4.20%, a difference of 0.24%. Investec’s performance has
been adversely affected by their investment in gilts at a time when interest
rates and gilt yields have been rising. In such an environment, opportunities
for selling gilts at a profit are extremely limited. In contrast, SWIP have relied heavily upon
investment in cash or near-cash vehicles. The Treasury Management Strategy Team
will continue to monitor the performance of the fund managers very closely and
take the action necessary to ensure an acceptable level of return on these
externally managed funds.
External Performance Indicators and
Statistics
20.
The County Council is a member of the CIPFA
Treasury and Debt Management Benchmarking Club and completed returns for the
financial year 2006/07. The results of
this exercise have not yet been published. In the previous year 2005/06, the
exercise showed that the Council’s average in-house investment returns was
4.682% compared with the average for Club members of 4.738%. Whilst this was
disappointing, the mean return had been skewed by very high returns for the
four top-performing authorities. When those four were excluded, Oxfordshire’s
in-house return matched the average for the remaining authorities. On the basis
of the information we receive from the Benchmarking Club it appears that the
main factors behind the returns earned by the top-performing authorities were:
their greater willingness to invest in callable deposits (with their attendant
higher levels of risk); and, their greater willingness to invest longer-term
using larger individual deposit sizes.
Prudential Indicators for Treasury
Management
21.
During the financial year the Council
operated within the Treasury limits and Prudential Indicators set out in the
Council’s Treasury Management Strategy Report. The outturn for the Prudential Indicators is shown in Annex 5.
(Annex 6 - (download as .doc file))
Financial and Staff Implications
22.
The combined activities of debt management
and investments form the strategic measures element of the Council’s budget. In
the Medium Term Financial Plan, the income budget for ‘Interest on Balances’ in
2006/07 was £3.008m. The actual outturn for 2006/07 is £5.960m, an increase of
£2.952m. The main factors behind this increase are: higher cash balances due in
part to slippage on the capital programme; higher than budgeted interest rates;
a lower than budgeted rate for determining developer contribution interest
payments; and, savings from debt restructuring.
23.
Two new members of staff joined the Treasury
Management Team during the year, Linda Arch (job sharing with Donna Ross as the
Treasury Manager) and Tim Chapple as an Assistant Treasury Manager. On
RECOMMENDATION
24.
The
SUE SCANE
Head of Finance &
Procurement
Corporate Core
Background Papers:
Contact officers: Mike Petty, Tel: 01865 815622
Linda
Arch Tel: 01865 815684
June
2007
|