Treasury Management Monitoring Report for Quarter Ended 30 June 2022
North Lanarkshire Council · 14 September 2022
Back to Finance and Resources Committee — 14 September 2022 and its agenda
Text extracted from the council's PDF. Layout and reading order may differ from the original.
Page 1
North Lanarkshire Council Report Finance & Resources Committee Does this report require to be approved? ☐ Yes ☒ No Ref EK/KS/RM/GM Date 14/09/22 Treasury Management Monitoring Report for quarter ended 30 June 2022 From Elaine Kemp, Head of Financial Solutions E-mail mcnameer@northlan.gov.uk Telephone Ryan McNamee, Finance Manager 1. Background 1.1 The Council manages its treasury activities in line with the CIPFA Code ‘‘Treasury Management in the Public Services’. The Code requires the Council to produce reports on its Treasury Management policies, practices and activities on a regular and ongoing basis. The Council fulfils these obligations, in part, by the preparation of this Treasury Management Monitoring report produced on a quarterly basis, encompassing a review of performance. 1.2 The Treasury activity undertaken in the first quarter of 2022/23 reflects the key requirements of the Council’s 2022/23 Treasury Management Strategy, with the Public Works Loan Board (PWLB) and Long-term Money Market being the prime source of long- term funds. In terms of investment activity, this is conducted in accordance with the approved 2022/23 investment strategy. 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. It informs on the quarterly Treasury Management activity for the period 1 April 2022 to 30 June 2022 and compliance with the mandatory treasury and prudential indicators. Recommendations It is recommended that Committee note the Treasury Management Activity for the quarter ended 30 June 2022 including the positive performance against the key treasury and prudential indicators. 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
Page 2
2. Report 2.1 Summary Position 2.1.1 The net overall borrowing position to 30 June 2022 is £766.1m, this is an increase of £16.5m from the position at the 31 March 2022 with a detailed breakdown of the net cash movement shown in column (6) within Appendix 1. 2.2 Borrowing 2.2.1 At the end of the quarter, total external debt amounted to £813.1m which represented a reduction of £44.5m. This was mainly due to a net reduction in temporary borrowing activity of £17.0m as the £40.0m falling due for repayment was offset by £23.0m of new temporary borrowing, and there was also a decrease of £9.9m in the municipal bank balances available to the Council as customers began to withdraw monies following public announcement of the impending closure of the bank on 30th September 2022. In addition, net long-term borrowing reduced by £15.8m due to a net reduction in PWLB borrowing of £0.7m and £15.0m reduction in market loans. Lease payments under existing finance lease and PPP obligations of £1.8m also fell due for repayment during the quarter. 2.2.2 The reduction in temporary borrowing has been due to a combination of grant income profiles returning to normal intervals and associated expenditure gradually recovering to pre-pandemic activity levels. This continues to be managed in line with the approved TM Investment Strategy. 2.2.3 The approach to borrowing is in line with the approved strategy, with the Council sourcing long-term borrowing, taking advantage of temporary (short-term) borrowing at attractive rates and use of internal cash balances to meet the principal repayments, daily revenue account requirements and the capital financing requirement in lieu of future borrowing for capital purposes. The strategy adopted reflects interest rate forecasts, the management of carrying costs and the retention of cash balances at appropriate levels whilst managing the associated investment, interest, and liquidity risk. 2.2.4 The Council made a successful application to the PWLB to access the certainty rate which allows a 20 basis point (bps) (0.20%) discount on loans from the PWLB under the prudential borrowing regime. This will continue to provide the Council with an opportunity to borrow from the PWLB at more beneficial rates until 31 March 2023 and beyond subject to a further successful application. 2.3 Debt Restructuring 2.3.1 During the quarter under review, in conjunction with our Treasury advisors, we monitored the economic climate in relation to our financial targets and Treasury Management strategy. The interest rates prevailing throughout the period resulted in no beneficial opportunities for debt restructuring /rescheduling of the existing PWLB debt portfolio arising. 2.3.2 The Council continued to hold £13.0m of LOBO (Lender’s Option Borrower’s Option) loans where the lender has the option to propose an increase in the interest rate at set dates, following which the Authority has the option to either accept the new rate or to repay the loan at no additional cost. No banks exercised their option during the quarter. However, on assessment of the LOBO portfolio by our treasury advisor, Arlingclose, loans from some banks presented restructuring opportunities. Therefore, a full options appraisal exercise was undertaken to assess the risks and benefits, including reducing the exposure to medium/long-term optionality and potential restructuring savings. As a result, a £10.0m LOBO loan has been repaid.
Page 3
2.3.3 Arlingclose, were instructed to act on the Councils behalf to arrange and negotiate terms for early redemption. The financial appraisal undertaken detailed the total redemption cost, replacement loan options and financial benefits. Successful discussions resulted in an agreed exit on 6th April 2022, with beneficial redemption terms offered by the lender. The agreement reached results in estimated net financial savings to the Council of £2.4m on a Net Present Value basis, when assessed over the remaining loan period of the original loan i.e. to 2060. Therefore, it was deemed prudent to redeem the loan and replace with new funding, which was secured from PWLB. 2.3.4 Further reports regarding future activity will be presented to Committee as appropriate. 2.4 Investments 2.4.1 At the end of the first quarter of 2022/23, there was a net decrease of £61.0m in cash and cash equivalents mainly due to a £60.2m decrease in short-term investments and an increase in the bank overdraft including cash in transit of £0.8m, as shown within column 6 of the attached Appendix 1. 2.4.2 The decrease in short term investments reflects repayment of maturing temporary borrowing of approximately £395.8m and undertaking new short-term investments of £335.6m. 2.4.3 At quarter end, the bank overdraft including cash in transit was £13.6m an increase of £0.8m on the net overdrawn position at the end of the previous quarter of £12.8m. The negative net cash movement reflects BACS payroll and creditor payment runs which fell due for clearance at the quarter end date. The balance at 30 June 2022 comprises of £13.6m net BACS payments outstanding due for clearance within 3 days of the quarter end date, cheques unpresented of £0.3m partially, offset by a balance of £0.4m of cash in transit. 2.4.4 In line with the approved strategy to manage liquidity, the Council maintained a minimum balance of £3.0m available on an overnight basis (instant access), ensuring a prudent level of funds is maintained to meet all service requirements. 2.4.5 On 4 May 2022, the Bank of England Base Rate was increased from 0.75% to 1.00% and then by a further 0.25% to 1.25% on 15 June 2022, to mitigate the economic impact of the pandemic recovery, Brexit and the war in Ukraine. Despite the increases, investments also continue to offer historically low returns. On 1 January 2022 SONIA (Sterling Overnight Index Average replaced LIBID (London Inter-bank Bid Rate)) as the new interest rate benchmark. There is no noticeable difference between the 7 day and 1-month SONIA bid rates and generally available investment rates offered by financial institutions and money market funds. Despite this, the Council will endeavour to achieve good performance levels in investment activity. 2.4.6 Overall the Treasury Management team continues to take a prudent approach to investing surplus funds in line with the approved 2022/23 Investment Strategy. Security of investment followed by ensuring sufficient liquidity are key investment criteria governing Council investment decisions. This approach is aligned to the prudent management of liquidity to meet current commitments and future cash demands based on the latest cashflow projections.
Page 4
Non Treasury Management Investments 2.4.7 During the quarter, there were no repayments made in respect of third-party advances in connection with the Cumbernauld Academy DBFM and Greenfaulds DBFM. 2.5 Interest Rate Movements 2.5.1 Having increased interest rates by 0.25% in May, the Bank of England’s Monetary Policy Committee on the 15th of June 2022 voted 6-3 to increase the official Bank Rate by a further 0.25% to 1.25%. Rises in the input and output producer price measures suggest further inflationary pressure is in the pipeline. The Bank of England is therefore unlikely to become complacent, so further rate rises look likely in the near term. Subsequently in August, the Bank of England announced a further increase of 0.5% increasing the base rate to 1.75%, with market forecasts of further increases later in the year. 2.5.2 Following Russia’s invasion of Ukraine in February, global inflationary pressures have intensified sharply, leading to a sizeable deterioration in the outlook for world and UK growth The economic backdrop in the April-June quarter was characterised by higher oil, gas and commodity prices, fears of rising and persistent inflation and its damaging impact on consumers’ cost of living, little indication of an imminent end to Russia-Ukraine hostilities and supply chain bottlenecks exacerbated by war in Ukraine and lockdowns in China. In the UK inflation remained elevated. Ofgem, the energy regulator, increased the energy price cap by 54% in April, equivalent to around £700 for a household with average energy consumption. May data showed CPI edging higher to 9.1% while the core CPI rate, which removes energy, fuel and food was 5.9%. RPI rose to 11.7% Unsurprisingly, with disposable income squeezed and another energy cap increase due in October, consumer confidence plummeted to the level last seen during the 2008/09 financial crisis. Quarterly GDP growth was 0.8% in the January- March quarter and the Bank of England now expects a decline of 0.3% in Q2 2022. 2.5.3 Following the increases in the base rate in April and June, short-term borrowing interest rates increased between 0.5% and 0.9%. These rates are still at historically relatively low levels, with the short term 7-day offer rate around the 1.33% level. Despite the increase in rates, during the quarter the Authority considered it to be more cost effective in the near term to either use internal resources or to borrow rolling temporary / short-term loans instead. This will manifest itself in increased temporary borrowing costs for the Council partially offset by increased investment income earned on surplus balances and within budgetary forecasts. 2.5.4 Heightened uncertainty characterised financial market sentiment, and bond yields were similarly volatile but with a general upward trend, as concern over higher inflation and higher interest rates dominated. Over the quarter the 5-year UK benchmark gilt yield rose from 1.41% to 1.89%, the 10-year gilt yield rose from 1.61% to 2.35% and the 20-year yield from 1.82% to 2.60%. This resulted in the PWLB 10 year borrowing rate increasing from 2.69% at the start of the quarter to 3.38% at the end of the quarter, showing a spread of 1.05% between the highest and lowest interest rate which were 3.61% and 2.56% respectively, averaging 3.04%. 2.5.5 The Treasury Management Section will continue to monitor financial and economic policy and their impact upon the Council’s investment and borrowing activity.
Page 5
2.6 The Prudential Code for Capital Finance in Local Authorities 2.6.1 The Local Government in Scotland Act 2003 requires the Council to undertake its Treasury activities in line with the Prudential Code for Capital Finance in Local Authorities. 2.6.2 Committee, at its meeting on 10 March 2022, approved a report titled, “Treasury Management Strategy 2022/2023 and Treasury and Prudential Indicators 2022/2023 to 2024/2025”. This report detailed a variety of mandatory and local indicators aimed at assisting members to determine that proposed capital investment levels and treasury management decisions satisfied the key requirements of affordability, prudence and sustainability. Performance against key prudential indicators for 2022/23 to date is detailed within Appendix 2. 2.6.3 Committee will wish to note the following salient points:- (i) Indicator 1(a) illustrates that investment on capital expenditure is higher than anticipated by £5.5m. In summary there has been a net increase of £32.7m in the General Fund capital investment and a decrease of £27.2m related to Brexit/Covid challenges for the HRA Mainstream and New Build programmes. For further information, this is monitored in detail as part of the Council's capital programme reporting mechanisms which will provide spend details including any revisions to the estimates approved in 2022/23. (ii) The changes to the mix of resources used to finance the capital expenditure in 2022/23 reflect the updates to the planned capital investment outlined in the previous paragraph. The level of in-year borrowing is anticipated to be lower by £22.4m due to a £24.2m reduction in HRA projects offset by a £1.8m increase for the General Fund programme. The forecast level of borrowing also reflects a net increase in capital grants and external contributions of £24.0m, with a £3.0m reduction for HRA projects offset by an additional £27.0m available for the General Fund programme. An additional £3.9m of CFCR is also available for the General Fund programme. (iii) As a result of accounting issues arising from the pandemic recovery, the implementation of IFRS 16 Lease Accounting has been delayed yet again. Therefore, a restatement of existing liabilities for operating leases to the credit arrangement category will not be applied in 2022/23, therefore the spend and associated financing under credit arrangements will be £3.5m lower than anticipated. (iv) The Prudential Code requires the Council’s capital investment to be affordable and prudent. To demonstrate this, a Prudential Margin (the need to borrow versus actual borrowing) is calculated. Indicator 1(b) demonstrates a healthy prudential margin at the 30 June 2022. The timing and profile of external borrowing to replenish cash reserves and balances are being managed, giving full consideration to liquidity, interest rate and refinancing risk whilst minimising the potential carrying costs. (v) Indicator 2 illustrates that both the overall authorised and operational borrowing limits for borrowing and long-term liabilities have not been exceeded, with the maximum borrowing undertaken within the period being well below the approved boundaries. (vi) Indicator 3(a) highlights the proportion of external interest payable by the Council which is fixed and external interest payable which may vary over the term of the
Page 6
borrowing and which exposes the Council to the effects of interest rate changes. At the 30 June 2022 the level of borrowing subject to variability is deemed to be within acceptable levels. (vii) Indicator 3(b) highlights a projected loan charge underspend of £1.2m compared to the prudential estimates for 2022/23. This projection takes 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. This loan charge underspend is made up of: • A treasury management saving of £0.8m is projected, £0.1m for General Fund and £0.7m for HRA. This saving reflects the cashflow management techniques adopted, directing the timing of new borrowing, managing investment security, liquidity and interest rate risk. This resulted in reduced loans fund interest payments and expenses. During the quarter short-term borrowing and investment rates have risen as detailed above and incorporates prudent forecasts of further increases in borrowing rates for the remainder of the financial year. Depending on actual market rates as the financial year progresses which may accrue the Council further net treasury savings or costs and will be continually monitored throughout the year. • In 2022/23 it is anticipated there will be reduction in anticipated loans fund advance repayments of £0.1m and £0.3m for the General Fund and HRA respectively. This primarily due to the Council benefiting from 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. (viii) Indicator 3(c) relates to the level of fixed debt due to mature within time periods. The level of debt maturing remains within the upper limits set for each category at the beginning of the financial year. 3.1 Overall the approach adopted by the Council’s Treasury Management team during the quarter under review met the key requirements of the 2022/23 Treasury Management Strategy. Prudential indicators have remained in accordance with those approved by Committee on 10 March 2022. The projected final outturn illustrates a healthy prudential margin and borrowing levels that are below sustainable limits, ensuring that the projected capital investment levels remain affordable and sustainable. 4. Supporting documents 4.1 Appendix 1: Loans, Long term Liabilities & Investments as at 30 June 2022 Appendix 2: Summary of Treasury and Prudential Indicators as at quarter ended 30 June 2022 Elaine Kemp Head of Financial Solutions
Page 7
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 ☐ If Yes, please provide a brief summary of the impact? 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 ☒
Page 8
If Yes, please provide a brief summary of the impact? 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.
Page 9
LOANS , LONG TERM LIABILITIES & INVESTMENTS AS AT 30 JUNE 2022 Appendix 1 DEBT RESTRUCTURING BALANCE 1-April-22 EARLY REDEMPTION REFINANCING NEW BORROWING / LONG-TERM LIABILITIES PRINCIPAL REPAYMENTS NET CASH MOVEMENTS BALANCE 30-June-22 (1) (2) (3) (4) (5) (6) (7) LONG-TERM LOANS PWLB 407,349,082 0 17,375,141 0 (18,087,186) (712,045) 406,637,037 MONEY MARKET LOANS 82,000,000 (10,000,000) 0 0 (5,000,000) (15,000,000) 67,000,000 ENERGY EFFICIENCY LOAN 1,225,694 0 0 0 (98,006) (98,006) 1,127,687 490,574,775 (10,000,000) 17,375,141 0 (23,185,192) (15,810,051) 474,764,724 SHORT-TERM LOANS TEMPORARY 174,000,000 0 0 23,000,000 (40,000,000) (17,000,000) 157,000,000 MUNICIPAL BANK 19,021,861 0 0 0 (9,924,043) (9,924,043) 9,097,818 INTERNAL LOANS 6,280 0 0 0 0 0 6,280 193,028,141 0 0 23,000,000 (49,924,043) (26,924,043) 166,104,098 LONG -TERM LIABILITIES FINANCE LEASE OBLIGATIONS 1,764,119 0 0 0 (207,897) (207,897) 1,556,222 LONG TERM LIABILITY 172,194,200 0 0 0 (1,553,058) (1,553,058) 170,641,142 173,958,320 0 0 0 (1,760,955) (1,760,955) 172,197,365 TOTAL EXTERNAL DEBT 857,561,236 (10,000,000) 17,375,141 23,000,000 (74,870,191) (44,495,050) 813,066,187 INVESTMENTS THIRD PARTY ADVANCES 1,196,671 0 0 0 0 0 1,196,671 BANKS & OTHER FINANCIAL INSTITUTIONS 119,543,138.82 0 0 0 0 (60,236,963) 59,306,175.77 BANK OVERDRAFT INCL CASH IN TRANSIT (12,766,267) 0 0 0 0 (775,470) (13,541,737) CASH & CASH EQUIVALENTS 107,973,543 0 0 0 0 (61,012,433) 46,961,110 NET BORROWING 749,587,693 (10,000,000) 17,375,141 23,000,000 74,870,191 16,517,384 766,105,077
Page 10
Summary of Treasury and Prudential Indicators as at quarter ended 30 June 2022 Appendix 2 1. Capital Expenditure, Capital Financing Requirement and Prudential Margin (a) Capital Expenditure Initial Estimate 2022/2023 (£m) Projected Outturn 2022/2023 (£m) Total spend : Capital Expenditure 296.5 302.0 Total Capital Investment 296.5 302.0 Financed By: Borrowing 207.2 184.8 Capital receipts 1.0 4.5 Capital receipts transfer to Capital Fund 0.0 -3.5 Capital Grants & Other External Contributions 61.2 85.2 Capital from Current Revenue 27.1 31.0 (b) Prudential Margin Calculation Initial Estimate 2022/2023 (£m) Projected Outturn 2022/2023 (£m) Capital Financing Requirement 1,321.8 1,264.9 Gross Borrowing 1,194.3 968.7 Prudential Margin 127.5 296.3 2. Au Authorised Limit and Operational Boundary Initial Authorised Limit 2022/2023 (£m) Initial Operational Boundary 2022/2023 (£m) Maximum Borrowing Level Q1 2022/2023 (£m) Borrowing 1,215.0 1,240.0 683.6 Other Long-term Liabilities 185.0 185.0 170.6 Totals 1,400.0 1,425.0 854.2 3. Treasury Management Indicators a) Interest Rate Exposures on External Interest Payments Position as at 30/06/2022 (£m) % External Interest Payable on Fixed Rate Loan Debt 25.95 93.0% External Interest Payable on Variable Rate Loan Debt 0.41 7.0% b) Loans Fund Revenue Account Initial Estimate 2022/2023 (£m) Projected Outturn 2022/2023 (£m) Variance £m) %age Loans Fund Interest Payments 30.0 29.6 0.4 1.3% Loans Fund Expenses 0.4 0.4 0.0 7.0% Total Loans Interest Payments & Expenses 30.4 30.0 0.4 1.4% Loans Funds Investment Income -0.2 -0.6 0.4 -200.0% Total Loans Fund Interest Payments Investment Income & Expenses 30.2 29.4 0.8 2.7% Allocated as follows : Loans Fund Interest Payments Investment Income & Expenses:General Fund 17.6 17.5 0.1 0.4% Loans Fund Interest Payments Investment Income & Expenses:HRA 12.6 11.9 0.7 5.2% Capital Advances Repayments - General Fund 8.8 8.7 0.1 1.1% Capital Advances Repayments - HRA 10.1 9.8 0.3 3.3% Total Capital Advances 18.9 18.5 0.4 2.2% Total Loan Charges 49.1 47.9 1.2 2.5% c) Maturity Structure of Borrowing <12months 12 months to 2 years 2 to 5 years 5 to 10 years 10 to 20 years 20 to 40 years >40 years Upper Limit maturing :Fixed & Variable Rate Debt 15.0% 15.0% 25.0% 30.0% 35.0% 45.0% 30.0% Lower Limit maturing :Fixed & Variable Rate Debt 0.0% 0.0% 5.0% 5.0% 5.0% 10.0% 5.0% Maturity structure at the start of Q1 8.1% 7.7% 11.5% 11.1% 21.7% 34.6% 5.3% Maturity structure at the end of Q1 6.8% 5.0% 12.0% 13.2% 21.1% 36.5% 5.4%