Treasury Management Annual Activity Report - 2021-2022
North Lanarkshire Council · 14 September 2022
Back to Finance and Resources Committee — 14 September 2022 and its agenda
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North Lanarkshire Council Report Finance and Resources Committee Does this report require to be approved? ☐ Yes ☒ No Ref EK/KS/RMcN Date 14/09/22 Treasury Management Annual Activity Report – 2021/2022 From Elaine Kemp, Head of Financial Solutions E-mail kempe@northlan.gov.uk Telephone 07939 280 601 1. Background 1.1 The Council is required to meet a number of key reporting requirements for Treasury Management in accordance with the CIPFA Code of Practice on Treasury Management and the CIPFA Prudential Code for Capital Finance in Local Authorities. 1.2 This report fulfils one of these requirements, outlining the treasury management activity undertaken during 2021/2022 and the resulting impact on the Council’s borrowing and Executive Summary This report fulfils the key requirements of the Council’s reporting procedures for Treasury Management in accordance with the CIPFA Code of Practice on Treasury Management and the CIPFA Prudential Code for Capital Finance in Local Authorities in that it: • Outlines the treasury management activity undertaken during 2021/2022 and the resulting impact on the Council’s borrowing and investment strategy. • Reports on the Council’s performance in complying with the mandatory prudential indicators. • Provides a detailed summary of the Council’s performance, making reference to those targets and prudential indicators set at the start of the year within the approved strategy. Recommendations It is recommended that the Finance and Resources Committee: (1) acknowledges the Treasury Management Activity undertaken during 2021/2022 and its resulting impact on the Council’s borrowing and investment strategy set out within Appendix 1 to this report. The Plan for North Lanarkshire Priority Improve North Lanarkshire's resource base Ambition statement (25) Ensure intelligent use of data and information to support fully evidence based decision making and future planning
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investment strategy and the Council’s performance in complying with the mandatory treasury and prudential indicators. 2. Report 2.1 The Treasury Management Strategy Statement 2021/2022 approved by Committee on 11 March 2021, set out the Treasury Management policies, practices and activities to be undertaken by the Treasury Management function during 2021/2022 2.2 Appendix 1 provides a detailed summary of the Council’s performance, referencing those targets and prudential indicators set at the start of the year within the approved strategy. 2.3 It focuses on the key areas of Treasury Management activity during 2021/2022 including: • External Borrowing • Interest Rates & Payments • Debt Maturity Profile • Investment Performance • Sources of Borrowing • Leasing • Regulatory Framework, Risk and Performance 2.4 The Council’s Treasury Management activity continued to be managed in the light of the market conditions, to take advantage of lower interest rates for borrowing, while minimising the level of investment balances held, with the Council’s average loans pool rate falling from 3.03% to 2.55%. 3. Measures of success 3.1 Overall the approach adopted by the Council’s Treasury Management team met the key requirements of the 2021/2022 Treasury Management Strategy. 4. Supporting documentation 4.1 Appendix 1: Treasury Management Annual Activity Report 2021/2022 Elaine Kemp Head of Financial Solutions
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5. Impacts 5.1 Public Sector Equality Duty and Fairer Scotland Duty Does the report contain information that has an impact as a result of the Public Sector Equality Duty and/or Fairer Scotland Duty? Yes ☐ No ☒ If Yes, please provide a brief summary of the impact? If Yes, has an assessment been carried out and published on the council’s website? https://www.northlanarkshire.gov.uk/your-community/equalities/equality-and-fairer- scotland-duty-impact-assessments Yes ☐ No ☐ 5.2 Financial impact Does the report contain any financial impacts? Yes ☒ No ☐ If Yes, have all relevant financial impacts have been discussed and agreed with Financial Solutions? Yes ☒ No ☐ The financial impact is outlined within the report. 5.3 HR policy impact Does the report contain any HR policy or procedure impacts? Yes ☐ No ☒ If Yes, have all relevant HR impacts have been discussed and agreed with People and Organisational Development? Yes ☐ No ☐ If Yes, please provide a brief summary of the impact? 5.4 Legal impact Does the report contain any legal impacts (such as general legal matters, statutory considerations (including employment law considerations), or new legislation)? Yes ☐ No ☒ If Yes, have all relevant legal impacts have been discussed and agreed with Legal and Democratic Solutions? Yes ☐ No ☐ If Yes, please provide a brief summary of the impact? 5.5 Data protection impact Does the report / project / practice contain or involve the processing of personal data? Yes ☐ No ☒ If Yes, is the processing of this personal data likely to result in a high risk to the data subject? Yes ☐ No ☐ If Yes, has a Data Protection Impact Assessment (DPIA) been carried out and e- mailed to dataprotection@northlan.gov.uk Yes ☐ No ☐ 5.6 Technology / Digital impact Does the report contain information that has an impact on either technology, digital transformation, service redesign / business change processes, data management, or connectivity / broadband / Wi-Fi? Yes ☐ No ☒ If Yes, please provide a brief summary of the impact?
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Where the impact identifies a requirement for technology, has an assessment been carried out (or scheduled) by the Enterprise Architecture Governance Group (EAGG)? Yes ☐ No ☐ 5.7 Environmental / Carbon impact Does the report / project / practice contain information that has an impact on any environmental or carbon matters? Yes ☐ No ☒ If Yes, please provide a brief summary of the impact? 5.8 Communications impact Does the report contain any information that has an impact on the council’s communications activities? Yes ☐ No ☒ If Yes, please provide a brief summary of the impact? 5.9 Risk impact Is there a risk impact? Yes ☒ No ☐ Treasury Management activity by its very nature has a number of inherent risks including interest rate, liquidity and refinancing risks. To minimise risk for its treasury management activities the Council adopts and operates in accordance with the guidelines for best practice prescribed within the CIPFA “Treasury Management in the Public Services” Code of Practice and the CIPFA Prudential Code for Capital Finance in Local Authorities.
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Appendix 1 Treasury Management Annual Activity Report 2021/2022
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Appendix 1 Index 1. Introduction 2. Background 3. Borrowing Requirement 2021/2022 4. Economic Background & Interest Rates 2021/2022 5. Interest Payments 2021/2022 6. Debt Maturity Profile 7. Sources of Borrowing 8. Debt Rescheduling 9. The Prudential Code for Capital Finance 10. Temporary Funds Investment Performance 11. Leasing 12. Soft Loans 13. Financial Guarantee 14. Treasury Management Advisory Service 15. Policy on Repayment of Loans Fund Advances 2021/2022 16. Regulatory Framework, Risk and Performance
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Treasury Management Annual Activity Report 2021/2022 Appendix 1 1. Introduction 1.1 Treasury Management deals with the borrowing and investment activity of the Council and is an integral part of the Council’s Financial Strategy. It seeks to ensure that both capital borrowing requirements and day to day revenue transactions are fully funded. Its importance has increased as a result of the additional freedoms provided by the Prudential Code. 1.2 The Council’s treasury activities are strictly regulated by statutory requirements and a professional code of practice. Revised editions of the CIPFA Prudential Code and CIPFA Treasury Management Code of Practice were issued in December 2017 and December 2021. In accordance with the Council’s financial regulations, the Council adopts the fully revised CIPFA “Treasury Management in the Public Services” Code of Practice (the Code) including the key principles and the Treasury Management Policy statement. 1.3 Within the Council, the Audit and Scrutiny Panel ensures the effective scrutiny of the treasury management strategy and policies, while the Finance and Resources Committee remains responsible for the development of the Strategy, its implementation and monitoring. The Council also promotes members’ responsibility in this area, requiring greater member scrutiny of treasury management activity. 1.4 The Code of Practice requires the Council to produce reports on its Treasury Management policies, practices and activities, including, as a minimum, an annual strategic plan at the beginning of the financial year, a mid-year review, followed by an annual report on the measurement of success at the year-end. To ensure compliance with the Code of Practice, Treasury Management procedures are continually reviewed with any amendments reported to Committee as appropriate. Prudential arrangements and treasury management performance information is submitted to Committee on a quarterly basis. 2. Background 2.1 The Council has adopted the CIPFA Code of Practice in Treasury Management and operates its treasury services to mitigate the effect of possible risk in this function, while undertaking borrowing and investment activities that are prudent, affordable and sustainable. 2.2 As noted in 1.4 above, the Code of Practice requires the Council to produce reports on its Treasury Management policies, practices and activities on a regular and ongoing basis. This includes the preparation of an annual activity report providing a detailed summary of the Council’s performance, making reference to those targets, limits and indicators set at the start of the year within the approved strategy. 2.3 In accordance with the Council’s Treasury Management policy, the report focuses on activities undertaken during the year in the following key areas:- 3. Borrowing Requirement 2021/2022 Capital Borrowing Requirement 3.1 The Strategy Statement for 2021/2022, approved by the Finance & Resources Committee on 11 March 2021, indicated a capital programme of £209.2m. The capital expenditure programme was budgeted to be funded by external grants & contributions of £41.6m and capital contributions from revenue of £27.1m, resulting in a projected increase in the capital financing requirement of £140.5m. • External Borrowing • Interest Rates • Interest Payments • Debt Maturity Profile • Sources of Borrowing • Debt Rescheduling • Temporary Investments • Leasing • Compliance with the Prudential Code • Regulatory Framework, Risk and Performance
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Treasury Management Annual Activity Report 2021/2022 Appendix 1 3.2 The actual total investment in council assets during 2021/2022, amounted to £170.3m, which was partially funded by grants and receipts of £98.1m, resulting in a capital financing requirement totalling £72.2m to support this capital investment, which is £68.3m less than the initial estimate and £32.3m less than the revised estimate. 3.3 This reduction in capital expenditure and reduced capital financing requirement is primarily a result of the Council experiencing challenges in delivering the Strategic Capital Investment Programme in light of a number of external factors affecting the wider economy including external labour supply, materials shortages and the on-going impact of both Brexit and Covid- 19. As a result, decisions were taken by the Policy & Strategy Committee on 30th September 2021 and Strategic Capital Delivery Group (SCDG) at its meeting on the 8 December 2021, to re-profile the capital programme to reflect revised delivery timescales. 3.4 The revised estimates contained within this report when compared to the initial estimates reflect the impact of Policy & Strategy and SCDG decisions and were approved within the Treasury Management Strategy 2022/2023 and Prudential Indicators 2022/23 to 2024/2025, approved by the Finance & Resources Committee on the 10 March 2022. For comparison of the estimate to actual outturn, unless otherwise stated, the comparator adopted within this report is the actual outturn to the revised estimate. 3.5 Members have received reports throughout the year advising them of anticipated variations to the capital expenditure programmes and resource levels. 3.6 As highlighted in Table 3 included within Section 9 which outlines the Prudential Code for Capital Finance requirements, the resource mix to finance the 2021/2022 capital expenditure programme varied from the original estimate, primarily due to an increase in net capital grants and external contributions available of £21.2m, CFCR contributions of £7.2m and Capital receipts of £0.1m. Capital Financing Requirement 2021/2022 3.7 The 2021/2022 capital financing requirement of £72.2m was funded primarily by a combination of internal balances/reserves and short-term borrowing(<1year) with no additional long-term borrowing from the Public Works Loan Board (PWLB). A full summary is provided within Section 7 Sources of Borrowing. 4. Economic Background & Interest Rates 2021/2022 4.1 The continuing economic recovery from coronavirus pandemic, together with the war in Ukraine, higher inflation, and higher interest rates were major issues over the period. 4.2 Bank Rate was 0.1% at the beginning of the reporting period. April and May saw the economy gathering momentum as the shackles of the pandemic restrictions were eased. Despite the improving outlook, market expectations were that the Bank of England would delay rate rises until 2022. Rising, persistent inflation changed that. 4.3 UK CPI was 0.7% in March 2021 but thereafter began to steadily increase. Initially driven by energy price effects and by inflation in sectors such as retail and hospitality which were re- opening after the pandemic lockdowns, inflation then was believed to be temporary. Thereafter price rises slowly became more widespread, as a combination of rising global costs and strong demand was exacerbated by supply shortages and transport dislocations. The surge in wholesale gas and electricity prices led to elevated inflation expectations. CPI for February 2022 registered 6.2% year on year. 4.4 The government’s jobs furlough scheme insulated the labour market from the worst effects of the pandemic. The labour market began to tighten and demand for workers grew strongly as employers found it increasingly difficult to find workers to fill vacant jobs. Having peaked at 5.2% in December 2020, unemployment continued to fall and the most recent labour market data for the three months to January 2022 showed the unemployment rate at 3.9% while the employment rate rose to 75.6%. Average annual growth rate for wages were 4.8% for total pay and 3.8% for regular pay. In real terms, after adjusting for inflation, total pay growth was up 0.1% while regular pay fell by 1.0%.
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Treasury Management Annual Activity Report 2021/2022 Appendix 1 4.5 Having increased Bank Rate from 0.10% to 0.25% in December, the Bank of England hiked it further to 0.50% in February and 0.75% in March. At the meeting in February 2022, the Monetary Policy Committee (MPC) voted unanimously to start reducing the stock of its asset purchase scheme by ceasing to reinvest the proceeds from maturing bonds as well as starting a programme of selling its corporate bonds. 4.6 In its March 2022 interest rate announcement, the MPC noted that the invasion of Ukraine had caused further large increases in energy and other commodity prices, with the expectation that the conflict will worsen supply chain disruptions around the world and push CPI inflation to around 8% later in 2022, even higher than forecast only a month before in the February Monetary Policy Report. The Committee also noted that although GDP in January was stronger than expected with business confidence holding up and the labour market remaining robust, consumer confidence had fallen due to the squeeze in real household incomes 4.7 Reflecting the impact of the economic volatility throughout 2021/22, the graph below confirms for the period April to September the lending interest rates were relatively stable, remaining at historically low levels, before starting to rise from September anticipating and reflecting Bank of England base rate increases announced in December, February and March to stand at 0.75% in March 2022. The fluctuation in the short-term borrowing rates payable by the Council for temporary funds (less than 1 year) is influenced by the prevailing market lending rates, the margin representing the relative supply and demand on any given day for local authority to local authority borrowing, and the term of borrowing profiled to the Council’s cashflow requirements. 4.8 The change in the perception as to how the economy is progressing is more readily explained by an analysis of the fluctuations in the PWLB medium to long term rates. See graph below. 4.9 Bond yields were similarly volatile as the tension between higher inflation and flight to quality from the war pushed and pulled yields, but with a general upward trend from higher interest rates dominating as yields generally climbed. The 5-year UK benchmark gilt yield began the quarter at 0.82% before rising to 1.41%. Over the same period the 10-year gilt yield rose from 0.97% to 1.61% and the 20-year yield from 1.20% to 1.82. 0.000 0.250 0.500 0.750 1.000 1.250 1.500 1.750 2.000 Interest Rate % 2021/2022 Monthly Average market lending rates for 7 day, 3 months, and 12 months Base rate 7 day 3 Mths 12 Mths
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Treasury Management Annual Activity Report 2021/2022 Appendix 1 4.10 The spread between the highest and lowest daily interest rates payable for PWLB 10, 25 and 50 year borrowing periods throughout 2021/2022 were almost 1.13% for the 10 year range, 1.08% for 25 year range with greatest volatility of 1.24% for the 50 year range. 5. Interest Payments 2021/2022 5.1 The Council made interest payments in 2021/22 of £22.3m (£25.4m in 2020/2021). This includes both the external and internal elements of interest payable and the annual write-off associated with premiums and discounts. This decrease of £3.1m from 2020/2021 levels represents the saving from using primarily a combination of internal balances/reserves and short-term borrowing(<1yr) which was sourced at historically low interest rates, to meet the in- year capital financing requirement and the refinancing of long-term debt maturing, in lieu of future long-term borrowing. This reflecting the borrowing strategy adopted in 2021/2022, which is complimented by efficient cashflow management and balance sheet analysis and ensures the nature and timing of new borrowing remains efficient and effective, achieving value for money. 5.2 The Council’s average cost of servicing its debt and investment portfolio has fallen consistently over the last ten years with the weighted average loans fund pool rate for 2021/2022 being 2.55%, a decrease of 0.48% when compared to the average rate of 3.03% for 2020/2021. 5.3 Given the term structure of interest rates prevailing throughout the year, the borrowing strategy adopted minimised carrying costs (see paragraph 9.14 below), whilst managing liquidity. It is pleasing to report a continuing downward movement in the weighted average loans fund pool rate of the Council’s loan portfolio, manifesting itself in debt costs being retained at prudent levels despite the significant increase in prudential borrowing in recent years. 0.000 0.500 1.000 1.500 2.000 2.500 3.000 Interest Rate % 2021/2022 Monthly Average PWLB rates or periods up to 10, 25 and 50 years up to 10 years up to 25 years up to 50 years
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Treasury Management Annual Activity Report 2021/2022 Appendix 1 6. Debt Maturity Profile 6.1 Debt maturity profiles are continually monitored in the management of Treasury Management risk and in particular refinancing, liquidity and interest rate risk. 6.2 A summary of the current debt maturity profile is contained in Table 1 below. Maturity Profile 2021/2022 2020/2021 £m % £m % Temporary Borrowing < 1yr 193.1 28.24% 218.9 29.30% Long term borrowing: Maturing in less than 1 Year 50.6 7.40% 37.4 5.00% Maturing in 1 - 2 Years 26.6 3.89% 50.9 6.81% Maturing in 2 - 5 Years 56.5 8.27% 61.0 8.16% Maturing in 5 - 10 Years 54.5 7.97% 67.8 9.08% Maturing in 10 - 20 Years 106.7 15.61% 115.3 15.44% Maturing in 20 - 40 Years 169.9 24.85% 169.9 22.75% Maturing in more than 40 Years 25.8 3.77% 25.8 3.46% 683.7 100.00% 747.0 100.00% Table 1 6.3 A graphical presentation of the current debt maturity profile on an annual basis is shown below. 5 10 15 20 25 30 35 40 45 50 55 Millions FINANCIAL YEAR Forecast Long term Debt Maturity Profile as at 31 March 2022 Public Works Loan Board (PWLB) Market Loans
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Treasury Management Annual Activity Report 2021/2022 Appendix 1 6.4 It should be noted that the maturity profile includes variable rate debt which can be repaid in whole or part at any time up until the maturity date without penalty, further increasing the flexibility within the repayment profile. It is currently assumed this debt will be held to maturity, subject to certain conditions. 6.5 The graph highlights that for the period 2028/2029 until 2031/2032, the average debt maturing is lower than earlier years, and after these periods and in a number of later years there is little or no debt due to be repaid. This may offer opportunities for sourcing debt within this maturity spectrum as part of future capital financing or debt restructuring/replacement strategies, dependent upon interest rates and in compliance with the overall Treasury Management strategy. 6.6 The graphical presentation of the debt maturity profile excludes short-term borrowing which was originally sourced to be repaid within 12 months (temporary borrowing < 1 year) per Table 1 above. It also includes principal outstanding for LOBO (Lender’s Option Borrower’s Option) loans based on their maturity date as opposed to the potential maturity date in the year where options or calls exist. A LOBO is called when the lender exercises its right to amend the interest rate on the loan at which point the Council can accept the revised terms or reject them and repay the loan. 6.7 At 31 March 2022 the Council had an exposure of £13.0m to LOBO loans, all of which have call dates falling within less than one year, with interest rates payable ranging from 6.4% to 10.937%. With £10.0m of these loans having an average interest rate of 6.40% with the remaining balance of £3.0m, taken out in the mid 1980’s to early 1990’s, having average interest rates of 10.73%. Based on the current and the forecast interest rates the likelihood of these loans being called has been assessed as minimal. In the event that the call option were to be exercised, the default position will be the repayment of the LOBO without penalty with the associated treasury management risks (refinancing/interest rate/liquidity) managed in line with the borrowing strategy for other maturing debt. 6.8 The graphical presentation below provides a further analysis of the average annual rate of interest payable on maturing long-term debt. This analysis highlighting opportunities for savings in interest costs over the coming years, as the refinancing strategy adopted, will look to replace these loans at lower average interest rates than the historic interest rates currently being paid on the respective debt reaching maturity. In the years where no loans fall due for repayment this shows as 0.00% within the graph below. 0.00% 2.00% 4.00% 6.00% 8.00% Average Interest Rate of Interest Payable on Maturing Long term Debt
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Treasury Management Annual Activity Report 2021/2022 Appendix 1 7. Sources of Borrowing 7.1 At the 31 March 2022 the Council’s total external debt, defined as actual gross borrowing (excluding interest accrued) plus obligations outstanding in respect of finance leases and PPP liabilities had fallen from £928.2m to £857.7m, a decrease of £70.5m as shown in Table 2 below. Sources of Finance 2021/2022 2020/2021 £m % £m % Public Works Loan Board 407.4 59.6% 434.6 58.2% Money Market Loans 67.0 9.8% 77.0 10.3% Other Local Authorities 15.0 2.2% 15.0 2.0% Temporary Borrowing 174.0 25.4% 197.0 26.4% Energy Efficiency Loan – Salix 1.2 0.2% 1.5 0.2% Municipal Bank 19.1 2.8% 21.9 2.9% Total Debt Outstanding 683.7 100.0% 747.0 100.0% Finance Lease Liabilities 1.7 1.0% 1.9 1.1% PPP Liabilities 172.3 99.0% 179.3 98.9% Total Long-term Liabilities 174.0 100.0% 181.2 100.0% Total External Debt 857.7 928.2 Annual Movement (70.5) Table 2 7.2 The decrease in external debt of £70.5m is primarily due to movements in the total debt outstanding with repayments of principal for PWLB of £27.2m falling due for repayment in 2021/2022 per the terms of the original loan agreements, a decrease of £23.0m in temporary borrowing with transactional activity in terms of temporary borrowing being £375.5m in total, comprising £176.0m of cash received and £199.0m of cash being repaid during 2021/2022, repayments of market loans of £10.0m and repayments of £0.3m in respect of energy efficiency loans from Salix. 7.3 During the year the municipal bank balances available to the Council on a temporary borrowing basis decreased by £2.8m due to the public announcement in October 2021 that the municipal bank would close in September 2022 and customers had started to transfer their accounts to other banking providers by the end of the financial year. 7.4 In 2021/22 there was a decrease total in long term liabilities of £7.2m which was due to principal repayments in respect of the finance lease liabilities for buildings, vehicles, plant and equipment and PPP liabilities. 7.5 The above approach to borrowing in 2021/2022 was underpinned by: • interest rate expectations; • the management of carrying costs; • the spend profile of the Capital Programme; and • managing reserves and balances at prudent levels in lieu of external borrowing. 8. Debt Rescheduling 8.1 Debt rescheduling is defined as the reorganisation of existing debt in such a way as to amend the debt repayment profile of the authority, reduce the principal sum borrowed, alter the degree of volatility of the debt or vary the interest charge payable.
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Treasury Management Annual Activity Report 2021/2022 Appendix 1 8.2 During 2021/2022, the economic climate in relation to our financial targets and Treasury Management strategy was monitored. The interest rates prevailing throughout the period resulted in no beneficial opportunities for debt restructuring/rescheduling of the PWLB debt portfolio. 8.3 A decision taken by the PWLB in October 2010 to increase interest rates, by an average of 0.90% above UK Government gilts, across the whole maturity spectrum for new PWLB fixed and variable rate loans from 1 year up to 50 years continues to significantly limit opportunities.. 9. The Prudential Code for Capital Finance Prudential Indicators 9.1 Following the introduction of the Local Government in Scotland Act 2003 and the Prudential Code for Capital Finance in Local Authorities, the Treasury Management Strategy Statement 2021/2022 detailed the mandatory prudential indicators, essential for ensuring that the Council's capital programmes were affordable, prudent and sustainable. 9.2 The Council approved a variety of indicators, including revised estimates for the financial years 2021/2022 through to 2024/2025. The total capital investment in 2021/2022 was £170.3m. A summary as to how this was financed is provided in Table 3 below. Table 3 9.3 The Capital Financing Requirement (CFR) which is a measure of the Council’s underlying borrowing need, comprising borrowing and credit arrangements, was £32.4m less than anticipated as at 31 March 2022, compared to the revised estimate as shown in Table 4. The CFR is split between General Services and HRA which reflects actual debt outstanding as at 31 March 2022. Capital Financing Requirement 31 March 2022 Initial Estimate (£m) 31 March 2022 Revised Estimate (£m) 31 March 2022 Actual (£m) Variance (£m) General Services 736.8 722.2 714.4 (7.8) HRA 414.4 415.8 391.2 (24.6) Total CFR 1,151.3 1,138.0 1,105.6 (32.4) Table 4 9.4 This 2021/2022 decreased borrowing requirement (CFR) of £32.4m per Table 4 above comprises the reduced borrowing for capital expenditure on assets. Capital Expenditure 2021/2022 Initial Estimate (£m) 2021/2022 Revised Estimate (£m) 2021/2022 Actual (£m) Variance (£m) Expenditure on assets 209.2 189.7 170.3 19.4 Credit Arrangements - - - - Total Capital Investment 209.2 189.7 170.3 19.4 Financed by Borrowing 140.5 104.5 72.2 (32.3) Capital receipts - 1.0 1.0 - Grants & External Contributions 41.6 56.0 62.8 6.8 CFCR 27.1 28.2 34.3 6.1 Credit Arrangements - - - -
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Treasury Management Annual Activity Report 2021/2022 Appendix 1 9.5 Per Table 5 below, the external debt position of the Council at the 31 March 2022 was £115.5m less than expected compared to the revised estimate. The total debt outstanding was £115.6m lower than anticipated as planned. Healthy cash balances resulted in a reduced requirement for temporary borrowing of £36.0m, with an additional £2.8m reduction in relation to municipal bank balances available for use, to meet daily cashflow requirements and manage liquidity risks. 9.6 This reduction in debt outstanding was partially offset by total long-term liabilities being £0.1m higher than the revised estimate. The actual outturn reflecting the incorporation of lease liabilities due to the consolidation of CLNL within the Council. Sources of Finance 31 March 2022 Initial Estimate 31 March 2022 Revised Estimate 31 March 2022 Actual Variance £m £m £m £m Public Works Loan Board 588.3 484.2 407.4 (76.8) Money Market Loans 62.0 67.0 67.0 - Other Local Authority 15.0 15.0 15.0 - Energy Efficiency Loan –Salix 1.2 1.2 1.2 - Municipal Bank 21.1 21.9 19.1 (2.8) Temporary Borrowing 199.6 210.0 174.0 (36.0) Total Debt Outstanding 887.3 799.3 683.7 (115.6) Finance Lease Liabilities 1.7 1.7 1.7 - PPP Liabilities 171.0 172.2 172.3 0.1 Total Long-term Liabilities 172.7 173.9 174.0 0.1 Total External Debt 1060.0 973.2 857.7 (115.5) Table 5 9.7 As a result of the movements in the capital financing requirement and the external debt position described above, there is a healthy prudential margin of £248.0m (the need to borrow versus actual borrowing) at the end of 2021/2022, as shown in Table 6 below. This is consistent with the Council approach to use internal reserves and balances to fund the cumulative capital financing position at the 31 March 2022 as an alternative to undertaking additional external borrowing. 31 March 2022 Initial Estimate (£m) 31 March 2022 Revised Estimate (£m) 31 March 2022 Actual (£m) Total CFR 1,151.3 1,138.0 1,105.6 Total External Debt 1,060.0 973.2 857.6 Prudential Margin 91.3 164.8 248.0 Table 6 9.8 Table 7 below shows the ratio of capital financing costs to total income for General Services and HRA were lower than anticipated due to the profile for interest and principal repayments on borrowings and long-term liabilities being lower than anticipated. The significant reduction is primarily a result of the revised loans fund repayment policy implemented in 2021/22 outlined within Section 15 below, whilst it also reflects the efficient management of investment and borrowing activity demonstrated throughout this report.
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Treasury Management Annual Activity Report 2021/2022 Appendix 1 Proportion of Financing Costs/Income 31 March 2022 Initial Estimate 31 March 2022 Actual General Services 7.04% 5.03% HRA 16.03% 12.79% Table 7 9.9 The Authorised Limit is the ‘Affordable Borrowing Limit’ required by S35 of the Local Government Act 2003. The Council does not have the power to borrow above this level. The Operational Boundary is the expected borrowing position of the Council during the year. Periods where the actual position is either below or above the Operational Boundary are acceptable subject to the Authorised Limit not being breached. 9.10 Table 8 below shows in 2021/2022 the Council has maintained its gross borrowing and its long-term liabilities within the Authorised Limit and Operational Boundary. Approved Limit 2021/2022 (£M) Maximum held per 2021/2022 Activity (£M) Limit Breached (Yes/No) Authorised Limit : Borrowing 1,040.0 751.3 No : Long-term Liabilities 190.0 179.3 No Operational Boundary : Borrowing 1,035.0 751.3 No : Long-term Liabilities 190.0 179.3 No Total Gross Borrowing at 31.03.2022 683.7 Total Long term Liabilities at 31.03.2022 174.0 External Debt at 31.03.2022 857.7 Table 8 9.11 The external debt includes both the actual gross borrowing and long-term liabilities held at a specific point in time (i.e. 31 March 2022). Treasury Management Indicators 9.12 The Council approved a variety of Treasury Management indicators for the financial years 2021/2022 through to 2023/2024. Tables 9 and 10 below provide a comparison of the estimated and actual 2021/2022 Treasury Management indicators. Interest Category Estimate 2021/2022 (£m) Actual 2021/2022 (£m) Variance (£m) % Interest payable on Fixed Rate Debt 22.5 19.1 (3.4) 15.1% Interest payable on Variable Rate Debt 1.4 1.2 (0.2) 14.3% Total External Interest Payments 23.9 20.3 (3.6) 15.0% Interest Receivable Funds Invested (0.1) (0.2) 0.1 100% Net Loan External Interest Charges 23.8 20.1 (3.5) 14.7% Table 9 9.13 Table 9 above provides prudential information in respect of external payments due and income receivable only as these are under the direct control of the Treasury Management section. In 2021/2022 there was a one-off reduction of £3.5m in net loan external interest payments
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Treasury Management Annual Activity Report 2021/2022 Appendix 1 compared to initial estimates for 2021/2022. This favourable variance was achieved due to the borrowing strategy adopted to meet the General Services and HRA Capital Programme. 9.14 This interest saving representing the difference between the estimated cost of new long term and temporary borrowing based on an interest rate of 2.75% and 0.75% respectively compared to the actual average interest rates of approximately of 0.28% for temporary undertaken throughout 2021/2022. This being further supported by the level of long-term borrowing being significantly less than expected as no long-term borrowing was undertaken compared to an anticipated initial estimate of £174.0m, this being due to cash balances and reserves, in line with TM Strategy, being utilised in lieu of future long-term borrowing and the impact of the challenges to the Capital Programme due to external supply, Brexit and Covid19. 9.15 Table 10 below provides a summary of the Capital Financing charges for both General Fund and HRA in respect of the loans fund which includes; • external payments due and income receivable per Table 9 above • the annual premium/discount written off for historic rescheduling/refinancing • the internal interest payable on revenue balances • the capital advance repayments made in the year Capital Financing Charges Initial Estimate 2021/2022 (£m) Final Outturn 2021/2022 (£m) Variance (£m) % Loans Fund Interest Payments 27.1 22.2 4.9 18.08% Loans Fund Expenses 0.4 0.3 0.1 25.0% Total Loans Interest Payments & Expenses 27.5 22.5 5.0 18.18% Loans Funds Investment Income (0.1) (0.2) 0.1 100.0% Total Loans Fund Interest Payments Investment Income & Expenses 27.4 22.3 5.1 18.61% Loans Fund Advances Repayments 20.2 16.5 3.7 18.32% Capital Budget Reprofiling 2.9 - 2.9 100.00% Total Loans Fund Charges 50.5 38.8 11.7 23.17% Table 10 9.16 The table above highlights a loan charge saving of £11.7m compared to the prudential estimates for 2021/2022 taking into account the treasury management activity, the loans fund advances repayment policy adopted in 2021/22 and the decisions of the P&S Committee, on 30 September 2021, to reprofile the capital programme in response to the significant Covid-19 and Brexit related challenges. 9.17 Overall a treasury management saving of £5.1m was achieved reflecting the cashflow management techniques adopted, directing the timing of new borrowing, managing investment security, liquidity and interest rate risk and the identification of short-term borrowing opportunities. This resulting in reduced loans fund interest payments and expenses. 9.18 The reduction in the Loans Fund advance repayments of £3.7m is primarily the result the Council benefiting from, in 2021/22, the revised loans fund advance repayment policy approved at the Finance and Resources Committee on the 26 November 2020, whereby the Council continues to use the annuity model, apply a fixed average life to the loans fund advances, and apply a prudent annuity rate. 9.19 The Council has also accrued an additional net saving of £2.9m in loan charges in relation to the Ambition projects reflecting resources being put in place ahead of expenditure commitments. These resources set-aside to provide funding assistance to this programme going forward, as opposed to increasing the 2021/22 one off resources available for consideration, as part of the budget setting process.
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Treasury Management Annual Activity Report 2021/2022 Appendix 1 9.20 The Council sets interest rate exposure limits to manage the Council’s exposure to the effects of interest rate changes by limiting the amount of total loans whose interest rate is not fixed. Table 11 shows the interest exposure at 31 March 2022. During 2021/2022 at no point were the limits breached with the average levels being below the limits for fixed rate exposure. Maturity Structure of Borrowing <12m 12m to 2yrs 2 to 5yrs 5 to 10yrs 10 to 20yrs 20 to 40yrs >40 yrs Upper Limit on Fixed Rate debt 20.0% 15.0% 25.0% 30.0% 35.0% 45.0% 30.0% Lower Limit on Fixed Rate debt 0.0% 0.0% 5.0% 5.0% 5.0% 10.0% 10.0% 2021/2022 Average Profile 8.3% 7.6% 11.9% 11.4% 21.9% 33.8% 5.1% Maturity Structure at 31/03/2022 10.3% 5.4% 11.4% 11.1% 21.8% 34.7% 5.3% Table 11 10. Temporary Funds Investment Performance 10.1 During 2021/2022 the primary principle governing Council investment criteria was the security of the investment. After this, the Council ensured that it held sufficient liquidity in its investments, carefully selecting the maximum periods for which funds could prudently be committed whilst also applying the Council’s prudential and treasury management indicators covering the maximum principal sums invested. 10.2 The Council complied fully with the ratings criteria outlined within the 2021/2022 Treasury Management Strategy, minimising risk in this area by adopting a Lowest Common Denominator (LCD) approach having a criteria-based counterparty list. This restricted the Council to only using those counterparties that met a pre-determined credit-rating level, to which monetary limits were applied. This meant that the counterparty had to meet all the relevant rating requirements being assessed by its weakest set of ratings, rather than the strongest. 10.3 Throughout 2021/2022 the Council continued to utilise the research of the world’s foremost providers of independent credit ratings (Fitch, Moodys and Standard & Poors). The ratings provided by these bodies define the likelihood of an investor such as the Council receiving their money back on the terms in which it was invested. 10.4 The credit ratings of counterparties were monitored regularly. The Council receives credit rating information from Arlingclose (the Council’s advisors) as and when ratings change and the counterparties are checked promptly. If a ratings change results in a counterparty failing to meet the Council’s strict criteria they are removed immediately from the list. Similarly if a counterparty rating is updated and they meet the Council’s strict criteria they would be added to the list. 10.5 To supplement credit rating information the Council used other operational market information in line with good practice identified within the Code of Practice this includes: • Credit Default swap prices • Quality financial press • Share prices • Government support status • Annual Reports • Statements to the market 10.6 In 2021/2022 the Council’s borrowing strategy assisted in minimising counterparty exposure to the financial markets, the Council strategically deciding the timing of temporary borrowing and the postponement of longer term borrowing, taking into account the levels of liquidity in conjunction with efficient cashflow management techniques and balance sheet analysis. 10.7 The approved 2021/2022 Treasury Management Strategy enabled investment activity for a period up to a maximum limit of 364 days and for certain types of investment up to 30 years, for permitted investments per the investment strategy. In ‘normal’ market circumstances the Council, would identify its liquidity requirements and the core funds within its daily balances that could be locked in over a longer period, thus achieving the optimum performance,
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Treasury Management Annual Activity Report 2021/2022 Appendix 1 spreading investment periods and security of return, subject to the overriding credit counterparty security. 10.8 During 2021/2022, the Council, restricted its maximum investment periods to approximately three months, with in reality this period being even shorter. In terms of investment types the Council primarily deposited funds in call, instant access accounts and money market funds, dealing directly with approved UK financial institutions. These accounts offered greater liquidity whereby the Council is allowed instant access whilst still being offered relatively attractive interest rates compared to sector averages. 10.9 A comparison of North Lanarkshire Council investment performance for the period April 2021 to March 2022 is shown in the graph below. 10.10 As shown in the graph above, despite the overnight market bid rates remaining in negative territory during the majority of 2021/22, the Council still managed to achieve a positive return on its investments, although returns remain at historically low levels as a result of the on- going challenges due to the economic volatility, Brexit and the Covid 19 pandemic. With security and liquidity factors considered when determining cash-flow requirements and investment opportunities, the Council only utilised overnight investment options during 2021/22 using its approved counterparties. Despite this, the Council continued to demonstrate good performance levels in investment activity when compared to these reliable benchmarks for assessing performance on temporary investments. 10.11 During 2021/2022, positive cashflows enabled short-term investments in total of £843.7m to be undertaken whilst during the same period, £842.5m of short-term investments matured representing over £1.686 billion in investment activity. 10.12 The graph below shows the average level of investment balances held throughout 2021/2022, managed on a weekly basis in accordance with the investment strategy, adhering to the underlying principle of security liquidity and yield supported by robust cashflow management. -0.15% -0.05% 0.05% 0.15% 0.25% 0.35% 0.45% 0.55% 0.65% Interest Rate 2021/22 Comparison of NLC Average Interest Rates to the average Overnight, and 7 Day Bid rates NLC Interest Rate Overnight Bid rate 7 Day Bid Rate
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Treasury Management Annual Activity Report 2021/2022 Appendix 1 10.13 Investment balance levels, forming part of the cash and cash equivalents, are influenced by a number of factors. Liquidity is monitored in conjunction with the Councils cashflow management reporting system, to manage and forecast future cash balances available to support the investment and borrowing strategy. 10.14 The Council prides itself on its cashflow management approach with receipts and payments data recorded daily with forecasts of cash balances readily available. The cashflow incorporating actual and estimated diary entries for a number of variables including: 10.15 At 31 March 2022, the total balance of cash and cash equivalents amounted to approximately £114.3m, an increase of £3.5m from last year’s position. A detailed breakdown is provided below in Table 12, elements of which have been referenced throughout this report. Cash and Cash Equivalents at 31/03/2021 £110.8m 2021/2022 Borrowing for Capital Expenditure purposes (£72.2m) Cash Outflow Repayments of Maturing Long-term debt (£37.5m) Cash Outflow Finance Lease Principal repayments (£7.2m) Cash Outflow Scheduled principal repayments from service departments £23.8m Cash Inflow New Long-term borrowing £0.0m Cash Inflow Decrease in Temporary borrowing (<1yr) (£25.8m) Cash Outflow Increase in Revenue Reserves & Cash Balances £122.4m Cash Inflow Cash and Cash Equivalents at 31/03/2022 £114.3m Movement in year +£3.5m Table 12 £0 £20,000,000 £40,000,000 £60,000,000 £80,000,000 £100,000,000 £120,000,000 1 5 9 13 17 21 25 29 33 37 41 45 49 Weeks 1 - 52 Average Weekly Investment Balances held during 2021/2022 • Payments to Suppliers • Precept Payments • House Rents • Staff Salaries & Wages • Loan Repayments and Interest • Council Tax • General Government Grants • Sales Fees & Charges • DWP Payments
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Treasury Management Annual Activity Report 2021/2022 Appendix 1 10.16 Cash and cash equivalents are represented by cash in hand and deposits held with financial institutions repayable without penalty on notice of not more than 24 hours including call accounts and money market funds. This also includes investments that mature in three months or less from the date of acquisition provided they are assessed as readily convertible to known amounts of cash with an insignificant risk of a change in value. The Council’s bank overdraft is also included as this is treated as an integral part of the council’s day to day cash management procedures. 11. Leasing 11.1 During 2021/22 the Council used external borrowing to fund its vehicle requirements with no vehicles plant and equipment being acquired under operational leasing agreements in 2021/22. 11.2 At 31 March 2022, the Council is committed to making minimum lease payments of approximately £2.3m under finance leases with £0.3m due in the next 12 months. These payments comprise settlement of the long-term liability for the interest in the asset and the finance costs that will be payable by the Council in future years while the liability remains outstanding. 11.3 During the year, the Council, for the remaining operating leases for vehicles and equipment, made actual payments of £3.5m, met from the revenue budget. 12. Soft Loans 12.1 Within the Council’s 2021/2022 annual accounts, the Council has recorded a net amount receivable of £2.365m from service users receiving Social Care for which a charging order has been placed on the recipient’s property as a method of recovering the debt. 12.2 For these amounts payable the Council is charging interest at less than the market rate applicable for similar advances and as such these balances are notionally recognised as soft loans. However, on grounds of materiality, no adjustment for loss of interest has been made to the balances reported within the annual accounts. 13. Financial Guarantee 13.1 In 2013/2014 the Council agreed to provide North Lanarkshire Properties LLP (NLP LLP) with a financial guarantee, underwriting the debt service costs of the NLP LLP loan of £45.0m to the lender, up to a limit of 80% of the total debt service costs. The Council considers the likelihood of the guarantee being called as minimal. However, the Council, in recognition of this financial guarantee made an initial provision of £1.1m which is assessed annually with a prudent provision being £0.152m at 31 March 2022. 13.2 The financial impact upon the Council of providing this guarantee is negated as the Council has agreed with the NLP LLP that a premium is payable to the Council for providing this guarantee, paid in annual instalments, on a fair value basis, over the term of the loan. The Council has therefore included a long-term debtor of £0.055m and a short-term debtor of £0.097m totalling £0.152m within the Balance Sheet to reflect this arrangement. 14. Treasury Management Advisory Service 14.1 During 2021/2022 the Council in line with the recommendations of the CIPFA Code of Practice for Treasury Management continued to use Arlingclose Ltd to provide, as required, additional specialist skills and resources in managing the Council’s loan debt and investment portfolio including strategic, economic advice and assistance with the investment policy. The current contract due to run until 1 July 2023 with the option of a one-year extension.
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Treasury Management Annual Activity Report 2021/2022 Appendix 1 15. Policy on Repayment of Loans Fund Advances 2021/2022 15.1 The Local Authority (Capital Finance and Accounting) (Scotland) Regulations 2016 within Regulation 13 require the Council to make a loans fund advance equal to the amount of capital expenditure that the Council has determined will be financed by borrowing. The timing of the borrowing being in accordance with treasury management principles with the timing not informing when a loans funds advance has been made. The Capital Expenditure definition being that adopted by proper accounting practice, the statutory control framework and the Prudential Code. 15.2 The statutory guidance requires the Council to approve a policy on loans fund repayments each year. After carrying out an in-house review, of the existing Loans Fund Advance Repayment Policy, in light of the legislation, towards the end of the financial year 2019/2020, it was decided that to support this exercise that the Council appoint Link Asset Services (LAS) to carry-out a fuller review of the Council’s loan fund repayment model in 2020/21. LAS having specific expertise in this area and have carried out similar process for a number of other Scottish Local Authorities. 15.3 The main objective of the review was to explore options to re-profile loans fund repayments in order to assist with a prudent, sustainable and deliverable medium-term financial plan, whilst ensuring that the provision remains prudent and appropriate to the benefits that accrue to the community from the associated expenditure and is consistent with the prudential framework. 15.4 Following the review exercise being completed, a revised approach was recommended which was approved at the Finance and Resources Committee on the 26 November 2020 with further updates provided within the Treasury Management Strategy 2022/23 and Prudential Indicators 2022/2023 to 2024/2025 report approved at the Finance and Resources Committee on the 10 March 2022. 15.5 The revised approach adopting provisions within the 2016 Regulations which allow a local authority to subsequently vary either the period or the amount of the repayment (or both) if it considers it prudent to do so. 15.6 As a result of the revised policy loans fund advance repayment policy, the repayments of loans fund advances in 2021/22 were £2.3m and £148m less for the General Fund and Housing Revenue Account respectively, than they would have been adopting the previous methodology. 16. Regulatory Framework, Risk and Performance 16.1 The Council’s treasury management activities are regulated by a variety of professional codes and statutes and guidance. 16.2 The Local Government in Scotland Act 2003 (the Act) provides the powers to borrow and invest as well as providing controls and limits on this activity. The Act permits Scottish Ministers to set limits either on the Council or nationally on all local authorities restricting the amount of borrowing which may be undertaken (although no restrictions were made in 2021/2022). 16.3 Statutory Instrument (SSI) 29 2003 develops the controls and powers within the Act. The SSI requires the Council to undertake any borrowing activity with regard to the CIPFA Prudential Code for Capital Finance in Local Authorities. It also requires the Council to operate the overall treasury function with regard to the CIPFA Code of Practice for Treasury Management in the Public Services. 16.4 The Council continues to meet the conditions to opt up to professional status and has done so in order to maintain this MiFID II status. The Council’s ability to opt up is due to it having an investment balance of at least £10 million and the person(s) authorised to make investment decisions on behalf of the authority have at least a year’s relevant professional experience and the expertise, experience and knowledge to make investment decisions and understand the risks involved. This status allows the Authority to access a greater range of products including money market funds, pooled funds, treasury bills, bonds and shares.
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Treasury Management Annual Activity Report 2021/2022 Appendix 1 16.5 The Council has complied with all of the above relevant statutory and regulatory requirements. This limits the levels of risk associated with its treasury management activities. In particular, its adoption and implementation of both the Prudential Code and the Code of Practice for Treasury Management means that its capital expenditure is prudent, affordable and sustainable and its treasury practices demonstrate a low risk approach. 16.6 The Council is aware of the risks of passive management of the treasury portfolio and has proactively managed its treasury management position. The Council has continued to monitor movements in interest rates and has complied with its internal and external procedural requirements. There is little risk of volatility of costs in the current debt portfolio as the interest rates are mainly fixed. Shorter-term rates and likely future movements in these rates predominantly determine the Council’s investment return. Since these returns can be volatile, accurately forecasting future returns can be difficult and the treasury management section monitor and manage the surplus balances available for investment by efficient cashflow and liquidity management. 16.7 Overall the approach adopted by the Council’s Treasury Management section throughout the year under review met the key requirements of the 2021/2022 Treasury Management Strategy with the performance and results described above demonstrating the effectiveness of the Council’s Treasury Management activity.