Agenda item

Report by the Director of Finance.

The Treasury Management Strategy & Annual Investment Strategy for 2023/24 outlines the Council’s strategic objectives in terms of its debt and investment management for the financial year 2023/24.

The Committee is RECOMMENDED to endorse the Treasury Management Strategy for 2023/24.

The Committee received a report outlining the Council’s strategic objectives in terms of its debt and investment management for the financial year 2023/24.  Tim Chapple, Treasury Manager, presented the report.  He stated that the Strategy was based on having an annual cash balance for the year of £480m.  This figure was net of £178m of internal borrowing this financial year.

Mr Chapple affirmed that the Treasury Management Strategy team would prioritise security and liquidity above all other considerations in relation to investments.  They had sought to take advantage of the peaking interest rates.  They were proposing a small increase in the long term lending limit from £185m to £200m.  The forecasted return for the year was around 3%.  In house interest receivable for 2023/24 was budgeted to be at £11.02m for the financial year.

In respect of external funds, no change was proposed to the Council’s holding for 2023/24 and this was expected to produce income of £3.81m.  Mr Chapple brought to the Committee’s attention that the Government had extended the IFRS9 statutory override which meant that any fluctuations to the value of the external funds would not impact on the revenue account.  They would continue to be reflected in the balance sheet and that would be rolled over for a further two years.  In the meantime, the team would consider its approach to the override and it was likely that a reserve would be built up for future years to address any fluctuations.

Mr Chapple explained that the internal borrowing position was impacted by the very high level of cash balances coupled with the higher borrowing rates in the short term, which were forecasted to drop by about 2% over the next 18 months.  This meant that it was not the right time to borrow right now.  The current approach was to use internal balances to fund the capital programme and it would be re-financed at a more suitable time.  A combined long term lending and internal borrowing limit of £380m was proposed for the financial year. 

In response to questions, Mr Chapple and Lorna Baxter, Director of Finance, made the following points:

• It was anticipated that the cash balance would fall with the Council borrowing internally, deliver the capital programme and the Unusable Dedicated Schools Grant Reserve (DSG) deficit increased.  It was noted that the Council was spending more slowly than expected and this had resulted in the cash balance increasing.
• The risk was likely to have lessened recently of any lenders calling in any of the Lender’s Option Borrower’s Options.  It reflected the position in the bond yield market and the bond yields had reduced significantly since the Autumn.
• It was forecasted that the DSG would cost the Council in the region of £2.5m to £3m in interest per annum.  There was a lot of work being undertaken by the directorate in relation to a high needs deficit recovery plan.  The Council was part of the DfE’s Delivering Better Value programme involving 50 local authorities with the aim of identifying ways to bring the budget back into balance.  There was a significant difference between the funding received from the Government and the spend being incurred in respect of the high needs budget.  The challenge was when the deficit currently being held off the balance sheet impacted on the reserves.  This was a national issue with over half the 151 local authorities in England with education responsibilities having significant deficits arising from high needs costs.
• Any Council investments had to meet the very strict security and liquidity criteria.  It was confirmed that the Treasury Management Strategy team did due diligence on borrowers, including if they were perceived to have poor financial management practices or were invested in aspects that the Council would not wish to invest in.  It was also confirmed the Council did not invest in derivatives.
• There was a proposed capital programme going to Cabinet for their consideration the following week and then was scheduled for Council in February.  It was ensured that there was a balanced programme with some headroom to allow for some further investments to be made.
• It was queried what the position would be if the rating of the Council’s bank, currently Lloyds Bank Plc, was downgraded.  The Committee was advised that it had been decided in 2008 that the Council might not place its deposits with the bank but it was satisfied that banking with them was lower risk due to there being different risks with holding a bank account than in lending to them.  The position would likely be similar today.
• The capital financing requirement was due to go up to approximately £600m in the medium term based on the current trajectory of expenditure.  The team was confident it could borrow affordably to fund that either internally or externally.  There had been a review of the capital programme in the Summer of 2022 to see what the impact might be of higher inflationary costs over the total programme.  Specific principles had resulted from the review including that the programmes need to manage within their own funding envelopes.  There was also a contingency within the capital programme which allowed for 3% of the total programme to pick up any unforeseen costs.  The capital programme was over a ten year period and there was an ability during that period to make adjustments if there was a priority which needed to be delivered.

RESOLVED: That the Committee endorsed the Treasury Management Strategy for 2023/24 as outlined in the report.