Treasury Activity and Compliance Report 2024/25 - 6 months to 30 September 2024
Perth and Kinross Council · 20 November 2024
Back to Finance and Resources Committee — 20 November 2024 and its agenda
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PERTH & KINROSS COUNCIL Finance & Resources Committee 20 November 2024 TREASURY ACTIVITY AND COMPLIANCE REPORT 2024/25 – 6 Months to 30 September 2024 Report by Chief Finance Officer (Report No. 24/320) 1. PURPOSE 1.1 The purpose of this report is to update the Committee on Treasury Activity for the period 1 April to 30 September 2024 and to report on compliance with the Council’s Treasury Management Policy Statement (TMPS), Investment Strategy and Prudential Indicators. 2. RECOMMENDATION 2.1 It is recommended that the Committee note the contents of this report. 3. STRUCTURE OF REPORT 3.1 This report is structured over the following sections: • Section 4: Economic Background • Section 5: Treasury Activity • Section 6: Compliance • Section 7: Investment Strategy Compliance and Performance • Section 8: Prudential Indicators • Section 9: Conclusion 4. ECONOMIC BACKGROUND 4.1 The Bank of England’s Monetary Policy Committee (MPC) reduced the UK Bank Base Rate from 5.25% to 5% at their August meeting following reductions in the inflation rate. CPI Inflation had continued to fall from 3.2% in March, and then remained on target at 2% in May and June 2024, before increasing slightly to 2.2% in July and August 2024. 4.2 However, the September figures showed a reduction to 1.7% mainly due to air fares and motor fuels. Additionally, the core inflation rate, which excludes volatile items such as energy and food costs, also dropped. Consequently, the MPC reduced the Bank Base rate again on 7 November to 4.75%. 4.3 However, latest forecasts are now predicting that future cuts to the Base Rate will be at a slower rate than previously anticipated due to rising inflationary expectations. 4.4 UK GDP (Gross Domestic Product) expanded by 0.5% in quarter two of 2024, showing the UK has returned to growth since the start of 2024.
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4.5 Internationally, the Eurozone experienced growth of 0.2% in the 3 months to 30 June 2024. CPI Inflation continued to fall to 1.8% in September 2024 whilst interest rates were reduced to 3.65% by the end of the period. In the US, GDP fluctuated over the period closing at 3% at the end of June 2024, whilst inflation reduced over the period. The US interest rate was reduced by 0.5% to the range of 4.75% to 5.0% in September 2024 in response to the fall in inflation. 4.6 The Public Works Loan Board’s (PWLB) certainty fixed interest rates for the 6 months to 30 September 2024, which are based on yields on UK gilts, are shown in the graph at Appendix I. As a result of mixed economic data, borrowing rates showed continuing volatility over the period, however the rates were lower over the period in the shorter periods (up to 5 years) but increased for durations of 10 years and over. 5. TREASURY ACTIVITY 5.1 A summary of the Council’s treasury position and transactions is shown at Appendix II. The main activities are detailed below. 5.2 During the period no new PWLB borrowing was undertaken. However, there was one Local Authority loan of £20 million borrowed on the 28 August 2024 for 3 years at 4.35% in place of PWLB borrowing (the corresponding PWLB rate was 4.77% at that time). This was borrowed for a short duration due to the relatively lower rates, and with the expectation that longer term rates will fall. 5.3 There was also the repayment of two maturing fixed rate PWLB loans, the first one for £3 million at 4.25% over 15 years and the second for £2.5 million at 3.95% over 13 years. Therefore, the Council’s total long-term debt increased by £14.5 million from £628.2 million at an average interest rate of 2.64% to £642.7 million at an average interest rate of 2.68% as at 30 September 2024. 5.4 There were two short-term market loans borrowed in the period to manage daily cashflows, the first for £5 million was borrowed for 25 days at 5.25% in May 2024. The second for £5 million was borrowed for 7 days at 5.20% in July 2024. There were no such loans outstanding as at 30 September 2024. 5.5 Common Good and Charitable Fund balances held on fixed deposit with the Loans Fund remained at £2.415 million at 30 September 2024, however the average interest rate reduced from 4.81% to 4.80% at the end of the current period. Funds held from associated bodies and organisations increased from £2.248 million to £3.593 million over the period, in line with their own cash flow requirements, whilst the average rate paid on these funds decreased from 4.58% to 4.47% in line with the rates applicable on individual loans depending on the balance held. 5.6 Short term cashflow surpluses are invested in a mixture of fixed term deposits, instant access accounts and money market funds. All investments were made in accordance with the approved Investment Strategy and Permitted Investments.
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Fixed Term Deposits 5.7 Cashflow surpluses which arise during the year, and which are not immediately required, are generally invested in fixed term deposits for periods of up to 12 months, or up to 3 years where forecast cashflow requirements allow. 5.8 There were 20 fixed rate deposits made in the 6 months to 30 September 2024 (totalling £97 million) for an average amount of £4.85 million and at an average interest rate of 5.27% for an average term of 64 days. In comparison to the previous 6 months to the end of March, fixed deposit activity in the current period increased. The deposits were undertaken where the opportunities arose and were spread amongst other Local Authorities, UK Banks and Foreign Banks. The average rate on investments in the current period reduced from 6.53% to 5.27% due to the cut in base rate and the end of higher rates which were previously available in the local authority market. Fixed rate deposits continued to be undertaken for shorter durations (average 64 days), however this was longer than the previous period (27 days). The fixed deposits undertaken in the current period will generate interest of £890,128 at their maturity. Investments for Daily Cashflow Requirements 5.9 Cashflow surpluses which are required for more immediate needs were invested in the Council’s instant access and Money Market Funds. The investment transactions in the period can be summarised as follows: • The daily average amount of such funds increased slightly from £6.95 million in the previous quarter to £6.97 million at the end of the current period. • The average interest rate achieved on these accounts over the period reduced from 5.32% to 5.16%. • Money Market Funds, which operate on instant access terms, were used extensively over the period. The average amount invested increased from £9.4 million in the previous period to £9.7 million in the current period, whilst the average interest rate decreased from 5.34% to 5.16%. • The activity on these accounts reflects the need to keep a sufficient level of funds for more immediate cashflow purposes over the period. • Interest generated on these investments over the 6-month period amounted to £426,921. 5.10 The total amount of investments outstanding as at 30 September 2024 was £41.456 million compared to £65.533 million at the end of March 2024. The overall average rate of interest on the investments outstanding reduced from 6.48% to 5.09% over this period. This reflects the cut in base rate and reductions in the available rates over the period. 5.11 Total income generated on investments undertaken during the period totals £1.317 million (£670,472 in the 6 months to 31 March 2024). This measure reflects the total return on the investment activity undertaken in the period and is higher in comparison to the previous quarter as fixed term investments increased.
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5.12 All of the above investment activities are consistent with the Council’s current investment strategy and cashflow requirements. 6. COMPLIANCE 6.1 For the period ending 30 September 2024, there were no breaches in compliance with the Council’s approved Treasury Management Policy Statement, Treasury Management Practices (TMP’s) or lending limits as detailed in TMP 4 (Approved Instruments, Methods & Techniques). 6.2 Appendix III shows the list of approved counterparties, based on the Council’s current lending policy, as at October 2024. 6.3 For the period ending 30 September 2024 the average closing cleared bank balance was £21,627.83 in credit. This reflects the application of the Council’s “sweep facility” operated by the bank, with any credit balance in excess of £35,000 being “swept up” overnight to the Council’s instant access account. 7. INVESTMENT STRATEGY COMPLIANCE AND PERFORMANCE 7.1 The Treasury Investment Strategy for 2024/25 was approved by the Council at its meeting on 6 March (report 24/69 refers). 7.2 In the current period, the level of the Council’s investments peaked at £84.975 million on 17 April 2024 and reduced to £41.456 million by the end of September 2024. The average daily investment balance over the period was £62.145 million, which reduced from an average of £102.743 million in the previous 6 months and from £161.645 million in the same period of last year. This highlights the steady reduction in investment balances over the last year as funds are applied in financing the approved Capital programme. 7.3 The Investment Strategy was applied in full over the period, with liquidity being maintained using instant access accounts and Money Market Funds as detailed in paragraph 5.9 above. There were no other risks identified in the period. 7.4 The Investment Strategy also incorporates investments held by the Common Good Funds. All such investments during the period were with the Council’s Loans Fund. The only Council funds held by external fund managers relate to Council-administered Charitable Trusts and are, therefore, not covered by this Investment Strategy. 7.5 The budgeted income in 2024/25 for Commercial Property investments is £1.856 million whilst the latest projection is £1.927 million. There were no new property investments entered into during the current period. 8. PRUDENTIAL INDICATORS 8.1 Prudential Indicators for 2024/25 to 2029/30 were approved by the Council at its meeting on 6 March 2024 (report 24/69 refers) as part of the Annual Treasury & Investment Strategy report.
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8.2 The latest estimates of the Prudential Indicators are shown in Appendix IV and are based on the Council’s revised Capital Budget being considered at today’s Committee meeting. These show that the Council adhered to all Prudential Limits in the period. However, the annual Loan Charges relative to the Net Revenue stream and the Capital Financing (Borrowing) Requirement show an increasing trend, which reflects the latest estimates for the Capital Programme and interest rate forecasts over the period. These will therefore be kept under review. 9. CONCLUSION 9.1 The Bank of England’s MPC reduced the Bank Base Rate to 5% in August and again to 4.75% in November 2024 due to falling Inflation. However, expectations for future cuts in the Bank Base Rate have reduced due to increasing inflationary pressures. 9.2 Public Works Loans Board (PWLB) borrowing rates continued to be volatile over the period due to future inflationary expectations and economic growth prospects. Over the period, the rates decreased in the shorter durations and increased in longer durations (10 years and over). 9.3 There was repayment of two maturity fixed PWLB Loans, totalling £5.5 million, whilst there was a new local authority loan borrowed by the Council for £20 million for 3 years, at a lower rate than PWLB. 9.4 Investment activity in the period consisted of an increased level of fixed term deposits, whilst instant access and Money Market Funds were used to meet day- to-day cashflow requirements. Investment rates decreased over the period, whilst the total level of investments outstanding also reduced. 9.5 The Council adhered to its Investment Strategy and policies throughout the period, with no breaches in compliance. The Council’s Prudential Indicators were also adhered to throughout the period. Author(s) Name Designation Contact Details John Jennings Senior Accountant CHXFinance@pkc.gov.uk Approved Name Designation Date Scott Walker Chief Finance Officer 11 November 2024
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ANNEX 1. IMPLICATIONS, ASSESSMENTS, CONSULTATION AND COMMUNICATION Strategic Implications Yes / None Community Plan / Single Outcome Agreement None Corporate Plan Yes Resource Implications Financial Yes Workforce None Asset Management (land, property, IST) None Assessments Equality Impact Assessment Yes Strategic Environmental Assessment Yes Sustainability (community, economic, environmental) Yes Legal and Governance None Risk None Consultation Internal Yes External None Communication Communications Plan None 1. Strategic Implications Corporate Plan 1.1 The Council’s Corporate Plan 2022 – 2027 lays out seven outcome focussed strategic objectives which provide clear strategic direction, inform decisions at a corporate and service level and shape resources allocation. They are as follows: • Tackling Poverty • Tackling climate change and supporting sustainable places • Growing a sustainable and inclusive local economy • Enabling our children and young people to achieve their full potential • Protecting and caring for our most vulnerable people • Supporting and promoting physical and mental wellbeing • Placing communities at the heart of how we work 1.2 This report relates to all of these objectives. 2. Resource Implications Financial 2.1 There are no direct financial implications arising from this report other than those reported within the body of the main report. Workforce 2.2 There are no direct workforce implications arising from this report.
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Asset Management (land, property, IT) 2.3 There are no direct asset management implications arising from this report other than those reported within the body of the main report. 3. Assessments Equality Impact Assessment 3.1 Under the Equality Act 2010, the Council is required to eliminate discrimination, advance equality of opportunity, and foster good relations between equality groups. Carrying out Equality Impact Assessments for plans and policies allows the Council to demonstrate that it is meeting these duties. 3.2 The information contained within this report has been considered under the Corporate Equalities Impact Assessment process (EqIA) and has been assessed as not relevant for the purposes of EqIA. Strategic Environmental Assessment 3.3 The Environmental Assessment (Scotland) Act 2005 places a duty on the Council to identify and assess the environmental consequences of its proposals. 3.4 The information contained within this report has been considered under the Act. However, no action is required as the Act does not apply to the matters presented in this report. Sustainability 3.5 Under the provisions of the Local Government in Scotland Act 2003 the Council has to discharge its duties in a way which contributes to the achievement of sustainable development. In terms of the Climate Change Act, the Council has a general duty to demonstrate its commitment to sustainability and the community, environmental and economic impacts of its actions. 3.6 The information contained within this report has been considered under the Act. However, no action is required as the Act does not apply to the matters presented in this report. 4. Consultation 4.1 The Council’s Treasury advisors, Link Asset Services, have been consulted in the preparation of this report. 2. BACKGROUND PAPERS 2.1 No background papers, as defined by Section 50D of the Local Government (Scotland) Act 1973 (other than any containing confidential or exempt information) were relied on to any material extent in preparing the above report.
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3. APPENDICES • Appendix I – PWLB Fixed Maturity Interest Rates from 1 April to 30 September 2024 • Appendix II – Summary of the Treasury Position and Transactions from 1 April to 30 September 2024 • Appendix III – Approved Investment Counterparty List • Appendix IV – Monitoring of Prudential Indicators – Period ending 30 September 2024