Treasury Management Monitoring Report for Quarter Ended 30 September 2022
North Lanarkshire Council · 30 November 2022
Back to Finance and Resources Committee — 30 November 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/RM/GM Date 30/11/22 Treasury Management Monitoring Report for quarter ended 30 September 2022 From Elaine Kemp, Head of Financial Solutions E-mail mcnameer@northlan.gov.uk Telephone Ryan McNamee, Finance Manager 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 July 2022 to 30 September 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 September 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
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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 second 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. 2. Report 2.1 Summary Position 2.1.1 The net overall borrowing position to 30 September 2022 is £744.2m, this is a decrease of £21.9m from the position at the 30 June 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 £807.7m which represented a reduction of £5.4m. This was mainly due to a net increase in temporary borrowing activity of £8.0m as £60.0m falling due for repayment was offset by £68.0m of new temporary borrowing, and there was also a decrease of £8.3m in the municipal bank balances available to the Council as customers continued to withdraw monies in the run up to the closure of the bank on 30th September 2022. In addition, net long-term borrowing reduced by £3.1m due to the repayment of existing PWLB borrowing. Lease payments under existing finance lease and PPP obligations of £12.0m also fell due for repayment during the quarter. 2.2.2 The approach to borrowing is in line with the approved strategy, which is to take 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 long-term 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. 2.2.3 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
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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 £3.0m 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. 2.3.3 Further reports regarding future activity will be presented to Committee as appropriate. 2.4 Investments 2.4.1 At the end of the second quarter of 2022/23, the Council held total investments of £63.5m, which is a net increase of £16.5m in cash and cash equivalents, mainly due to an £8.7m increase in short-term investments and a reduction in the bank overdraft including cash in transit of £7.8m, as shown within column 6 of the attached Appendix 1. 2.4.2 The increase in short term investments reflects repayment of maturing temporary borrowing of approximately £345.3m and undertaking new short-term investments of £354.0m. 2.4.3 At quarter end, the bank overdraft including cash in transit was £5.7m a reduction of £7.8m on the net overdrawn position at the end of the previous quarter of £13.5m. The net cash movement reflects BACS payroll and creditor payment runs, which fell due for clearance at the quarter end date. The balance at 30 September 2022 comprises of £5.7m net BACS payments outstanding due for clearance within 3 days of the quarter end date, cheques unpresented of £0.4m 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 3 August 2022, the Bank of England Base Rate was increased from 1.25% to 1.75% and then by a further 0.50% to 2.25% on 21 September 2022, to help combat ongoing high inflation, fuelled by high energy costs and its impact on consumers cost of living due to the continuing war in Ukraine, and the associated impact on supply chains. The increases in the Bank of England Base Rate over the period under review, with the prospect of more increases to come, short-dated cash rates ranging between 0.7% - 1.5% at the end of March, rose by around 1.5% for overnight/7-day maturities. 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
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prudent management of liquidity to meet current commitments and future cash demands based on the latest cashflow projections. Non Treasury Management Investments 2.4.7 During the quarter, repayments of £0.010m were made in respect of third-party advances in connection with the Cumbernauld Academy DBFM and Greenfaulds DBFM. 2.5 Interest Rate Movements & Other Economic Updates 2.5.1 The ongoing conflict in Ukraine has continued to put pressure on global inflation and the economic outlook for UK and world growth remains weak. The UK political situation towards the end of the period following the ‘fiscal event’ increased uncertainty further. The Bank of England, Federal Reserve and the European Central Bank all pushed up interest rates over the period and committed to fighting inflation, even when the consequences were, in all likelihood, recessions in those regions. 2.5.2 As outlined above, the Bank of England increased the official Bank Rate to 2.25% over the period. The Monetary Policy Committee (MPC) pushed through rises of 0.50% in August and in September. The MPC noted that domestic inflationary pressures are expected to remain strong. Therefore, given the strong rhetoric around tackling inflation, further Bank Rate rises are expected, with market forecasts of an additional increase of 1% to be announced in November. 2.5.3 UK inflation remained extremely high. Annual headline CPI hit 10.1% in July, the highest rate for 40 years, before falling modestly to 9.9% in August and increasing to 10.1% in September and is expected to rise further and peak at around 13% in Q4 this year. RPI registered 12.3% in both July and August and rose to 12.6% in September. The energy regulator, Ofgem, increased the energy price cap by 54% in April, while a further increase in the cap from October, which would have seen households with average energy consumption pay over £3,500 per annum, was dampened by the UK government stepping in to provide around £150 billion of support to limit bills to £2,500 annually until 2024. However, this support has been reduced to 6 months to April 2023 by the new Chancellor, pending review of future support. 2.5.4 The labour market remained tight through the period but there was some evidence of easing demand and falling supply. The unemployment rate for April fell to 3.8% and declined further to 3.6% in July and 3.5% in August. Although now back below pre-pandemic levels, the recent decline was driven by an increase in inactivity rather than demand for labour. Pay growth in July was 5.5% for total pay (including bonuses) and 5.2% for regular pay. 2.5.5 As a result of the ‘mini budget’ in September and little detail on how government borrowing would be returned to a sustainable path, financial markets reacted negatively. As a result, gilt yields rose dramatically by between 0.7% and 1% for all maturities. The swift rise in gilt yields left pension funds vulnerable and risked triggering large scale redemptions of assets across their portfolios. This resulted in the Bank of England intervening to help preserve market stability. However, uncertainty remained in control of financial market sentiment and bond yields remained volatile, continuing their general upward trend as concern over higher inflation and interest rates continued to dominate. Towards the end of September,
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volatility in financial markets was significantly exacerbated by the UK government’s fiscal plans, leading to an acceleration in the rate of the rise in gilt yields and decline in the value of sterling. 2.5.6 Over the period the 5-year UK benchmark gilt yield rose from 1.41% to 4.40%, the 10-year gilt yield rose from 1.61% to 4.15%, the 20-year yield from 1.82% to 4.13% and the 50-year yield from 1.56% to 3.25%. This resulted in the PWLB 10 year borrowing rate increasing from 3.38% at the start of the quarter to 5.15% at the end of the quarter, showing a spread of 2.77% between the highest and lowest interest rate which were 2.78% and 5.55% respectively, averaging 3.61%. 2.5.7 Following the increases in the base rate in August and September, short-term borrowing interest rates increased with the short term 7-day offer rate ranging between 1.35% and 2.75% over the period. Taking account of the increase in borrowing rates and advice from our treasury management advisors, it was considered more cost effective in the near term to use a combination of internal resources or to borrow rolling temporary / short-term loans, at lower interest rates than long term borrowing. This will manifest itself in increased temporary borrowing costs for the Council partially offset by increased investment income earned on surplus balances but remains within budgetary forecasts. 2.5.8 The Treasury Management Section will continue to monitor financial and economic policy and their impact upon the Council’s investment and borrowing activity. 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 forecast to be lower than anticipated by £19.5m. This reflects a net increase of £8.1m in the General Fund capital investment and a decrease of £27.6m 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 mix of resources used to finance the capital expenditure in 2022/23 reflect the updates to the forecast capital investment outlined above. Therefore, the level of in-year borrowing is anticipated to be lower by £46.6m due to a reduction in HRA and General Fund programmes, of £26.2m and £20.4m respectively. The forecast level of borrowing also reflects a net increase in capital grants and external contributions of £21.6m, with an additional £23.1m available for the General Fund programme offset by with a £1.5m reduction for HRA projects. An additional £5.5m
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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, with the spend and associated financing under credit arrangements estimated to 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 of £296.9m as at the 30 September 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 borrowing, and which exposes the Council to the effects of interest rate changes. At the 30 September 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 £1.8m 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 and the SCDG to reprofile the capital programme in response to the significant delivery related challenges. However, given the current economic and financial market volatility this will be kept under review. This current loan charge underspend is made up of: • A net treasury management saving of £1.4m is projected (£0.5m General Fund and £0.9m HRA), which is a reflection of the cashflow management techniques adopted, directing the timing of new borrowing, managing investment security, liquidity and interest rate risk. As a result, there is a net forecast reduction in loans fund interest payments and expenses. However, during the quarter short-term borrowing and investment rates have risen as detailed above therefore the forecast incorporates prudent further increases in borrowing rates for the remainder of the financial year. This will be kept under review as the financial year progresses and depending on how actual market rates perform, there may be further movements in borrowing costs compared with forecast. • 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.
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(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. Measures of success 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. However, the current financial volatility and increased borrowing costs has resulted in an assessment being undertaken of the potential impact on future years of the current capital programme. This will continue to be monitored to determine if any further review of the programme is required to ensure that it remains sustainably affordable. 4. Supporting documents 4.1 Appendix 1: Loans, Long term Liabilities & Investments as at 30 September 2022 Appendix 2: Summary of Treasury and Prudential Indicators as at quarter ended 30 September 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 ☐ 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 ☒ 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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LOANS , LONG TERM LIABILITIES & INVESTMENTS AS AT 30 SEPTEMBER 2022 Appendix 1 DEBT RESTRUCTURING BALANCE 1-July-22 EARLY REDEMPTION REFINANCING NEW BORROWING / LONG-TERM LIABILITIES PRINCIPAL REPAYMENTS NET CASH MOVEMENTS BALANCE 30-September-22 (1) (2) (3) (4) (5) (6) (7) LONG-TERM LOANS PWLB 406,637,037 0 0 0 (3,083,432) (3,083,432) 403,553,604.14 MONEY MARKET LOANS 67,000,000 0 0 0 0 0 67,000,000 ENERGY EFFICIENCY LOAN 1,127,687 0 0 0 (26,023) (26,023) 1,101,665 474,764,724 0 0 0 (3,109,455) (3,109,455) 471,655,269 SHORT-TERM LOANS TEMPORARY 157,000,000 0 0 68,000,000 (60,000,000) 8,000,000 165,000,000 MUNICIPAL BANK 9,097,818 0 0 0 (8,298,143) (8,298,143) 799,675 INTERNAL LOANS 6,280 0 0 0 0 0 6,280 166,104,098 0 0 68,000,000 (68,298,143) (298,143) 165,805,955 LONG -TERM LIABILITIES FINANCE LEASE OBLIGATIONS 1,556,222 0 0 0 (4,440) (4,440) 1,551,782 LONG TERM LIABILITY 170,641,142 0 0 0 (1,981,019) (1,981,019) 168,660,124 172,197,365 0 0 0 (1,985,459) (1,985,459) 170,211,906 TOTAL EXTERNAL DEBT 813,066,187 0 0 68,000,000 (73,393,057) (5,393,057) 807,673,129 INVESTMENTS THIRD PARTY ADVANCES 1,196,671 0 0 0 (9,016) (9,016) 1,187,655 BANKS & OTHER FINANCIAL INSTITUTIONS 59,306,175.77 0 0 0 0 8,685,017 67,991,192.28 BANK OVERDRAFT INCL CASH IN TRANSIT (13,541,737) 0 0 0 0 7,815,954 (5,725,783) CASH & CASH EQUIVALENTS 46,961,110 0 0 0 (9,016) 16,491,954 63,453,064 NET BORROWING 766,105,077 0 0 68,000,000 73,384,041 (21,885,012) 744,220,065
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Summary of Treasury and Prudential Indicators as at quarter ended 30 September 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 296.5 277.0 Total spend : Credit Arrangement 0.0 0.0 Total Capital Investment 296.5 277.0 Financed By: Borrowing 207.2 160.6 Capital receipts 1.0 2.7 Capital receipts transfer to Capital Fund 0.0 -1.7 Capital Grants & Other External Contributions 61.2 82.8 Capital from Current Revenue 27.1 32.6 (b) Prudential Margin Calculation Initial Estimate 2022/2023 (£m) Projected Outturn 2022/2023 (£m) Capital Financing Requirement 1,321.8 1,241.2 Gross Borrowing 1,194.3 944.3 Prudential Margin 127.5 296.9 2. Authorised Limit and Operational Boundary Initial Authorised Limit 2022/2023 (£m) Initial Operational Boundary 2022/2023 (£m) Maximum Borrowing Level Q2 2022/2023 (£m) Borrowing 1,215.0 1,240.0 651.7 Other Long-term Liabilities 185.0 185.0 168.7 Totals 1,400.0 1,425.0 820.3 3. Treasury Management Indicators a) Interest Rate Exposures on External Interest Payments Position as at 30/09/2022 (£m) % External Interest Payable on Fixed Rate Loan Debt 25.42 98.3% External Interest Payable on Variable Rate Loan Debt 0.45 1.7% b) Loans Fund Revenue Account Initial Estimate 2022/2023 (£m) Projected Outturn 2022/2023 (£m) Variance £m) %age Loans Fund Interest Payments 30.0 29.1 0.9 3.0% Loans Fund Expenses 0.4 0.4 0.0 7.0% Total Loans Interest Payments & Expenses 30.4 29.5 0.9 3.0% Loans Funds Investment Income -0.2 -0.7 0.5 -250.0% Total Loans Fund Interest Payments Investment Income & Expenses 30.2 28.8 1.4 4.7% Allocated as follows : Loans Fund Interest Payments Investment Income & Expenses:General Fund 17.6 17.1 0.5 2.8% Loans Fund Interest Payments Investment Income & Expenses:HRA 12.6 11.7 0.9 7.1% Capital Advances Repayments - General Fund 8.8 8.7 0.1 1.1% Capital Advances Repayments - HRA 10.1 9.8 0.3 3.0% Total Capital Advances 18.9 18.5 0.4 2.1% Total Loan Charges 49.1 47.3 1.8 3.7% 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 Q2 6.8% 5.0% 12.0% 13.2% 21.1% 36.5% 5.4% Maturity structure at the end of Q2 8.7% 4.5% 12.0% 11.8% 20.5% 36.5% 5.4%