Annual Treasury Report 2024-25
Perth and Kinross Council · 7 May 2025
Back to Perth and Kinross Council — 7 May 2025 and its agenda
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Our vision is a Perth and Kinross where everyone can live life well, free from poverty and inequality ___________________________________________________________________ Committee or Board: Perth and Kinross Council Date of Meeting: 7 May 2025 Report Title: Annual Treasury Report 2024/25 Report Number: 25/112 Report Author: John Jennings, Senior Accountant Organisational Lead: Scott Walker, Chief Finance Officer ___________________________________________________________________ 1. Purpose 1.1 A requirement of the Council’s approved Treasury Management Practice 6 (TMP6 – Reporting Requirements & Management Information Arrangements) is the reporting to Council of the expected treasury activity for the forthcoming year (i.e. the Treasury and Investment Strategy) and the subsequent reporting of the actual results and activities (i.e. the Annual Treasury Report). 1.2 The Council meeting on 6 March 2024 approved the Treasury Strategy for the 6 financial years 2024/25 to 2029/30 and the annual Investment Strategy for 2024/25 (Report No. 24/69 refers). The consideration of this Annual Treasury Report for 2024/25 ensures compliance with the latter requirement. 1.3 This Annual Treasury Report covers: The Council’s treasury position The forecast economic outlook and borrowing strategy for 2024/25 The actual economic situation for 2024/25 Actual long-term borrowing and repayments in 2024/25 The Investment Strategy and outturn for 2024/25 Compliance with treasury policies and limits during 2024/25 The Statutory Loans Fund position 2. Recommendations 2.1 It is recommended that the Council notes the contents of this report.
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3. Background Historic Information/Context 3.1 In order to place this report in context, the Council’s Treasury position at the beginning and at the end of the year is shown below: Principal 31 Mar 2024 £M Average Rate % Principal 31 Mar 2025 £M Average Rate % Fixed Rate/Long Term Funding Public Works Loan Board (PWLB) 585.0 2.50 652.0 2.76 Market & Local Authority Bonds 43.2 4.59 63.2 4.51 Other Loans & Bonds 0.0 0.00 0.0 0.00 628.2 2.64 715.2 2.92 Variable Rate/Short Term Funding Temporary Loans 2.2 4.58 2.8 3.82 Internal Loans 2.4 4.81 2.7 4.02 4.6 4.69 5.5 3.92 TOTAL DEBT 632.8 2.66 720.7 2.93 TOTAL INVESTMENTS 65.5 6.48 24.1 5.50 4. The Forecast Economic Outlook and Borrowing Strategy 2024/25 4.1 Following a period of significant rises in inflation to over 10%, the Bank of England’s Monetary Policy Committee (MPC) increased the Bank Base Rate to 5.25% in August 2023. By the start of 2024/25, inflation had fallen significantly to 3.2% and was expected to continue to fall over the year. Therefore, the forecast was that the Bank Base Rate had peaked and would start to fall later in the year. Gilt yields, which determine the UK Government’s borrowing costs and are used to set PWLB rates, were also expected to fall gradually over the year, subject to economic data and volatility. Further, shorter-term borrowing rates were expected to remain cheaper than longer- term rates. 4.2 The estimated capital borrowing requirement for 2024/25 at the start of the year was £219.8 million, with further significant borrowing totalling £507.0 million required in the subsequent 5 years. These amounts reflected the need to borrow for the Council’s Capital Budget approved in February 2024 to fund the capital expenditure, however they do not take account of the Council’s overall cash position and therefore borrowing which may be deferred. With the advanced borrowing in previous years having now been applied to the Capital Programme, the Council resumed its new borrowing at the end of 2023/24, and it was anticipated that this would continue throughout 2024/25. However, it was further anticipated that some of the 2024/25 borrowing requirement may be deferred as a result of the Council’s overall positive cash position.
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4.3 Therefore, the Council’s Treasury Strategy for 2024/25 assumed that there was a need to borrow throughout the year. With short term rates expected to remain cheaper than medium and long-term rates, short term borrowing would be undertaken where required, with long-term borrowing being deferred until rates were more favourable. Whilst the use of short-term borrowing would be initially cheaper, the use of longer-term borrowing gives cost certainty and would reduce the refinancing risk in later years. However, if longer term rates stayed high, new long-term borrowing would be delayed and short-term borrowing used to meet immediate cashflow requirements. 4.4 The approved Treasury Strategy also allowed for consideration of other market borrowing instruments where they offered favourable rates, or the ability to arrange borrowing to be drawn down at a given future date. However, the associated risks due to their variable rate nature and/or less flexible terms in comparison to the Public Works Loan Board would also need to be considered. 4.5 Consideration has previously been given to borrowing for future year requirements earlier than immediately required, if rates reached a forecast low point. This approach is consistent with the Prudential Code but should be considered in conjunction with the assessment of the additional risks and potentially lower returns from the resultant short-term increase in the level of investments. However, given the interest rate projections, advance borrowing was unlikely to be undertaken in 2024/25. 4.6 Whilst minimising risk by favouring fixed longer-term borrowing, it was acknowledged that there were several factors which could impact on interest rates over the year. Therefore, the Council applies an approach of managing risk and monitoring interest rates on an ongoing basis with a view to reviewing this strategy should circumstances change. 5. Actual Economic Situation 2024/25 5.1 The Bank Base Rate was 5.25% at the start of year. With inflation falling significantly since its peak of over 10% in 2023 to around 2% by August 2024, the MPC reduced the Bank Base Rate to 5%. Subsequently, there were two further reductions in the Bank Base Rate during the year, which currently stands at 4.5% since February 2025. Whilst inflation has since increased slightly to around 3%, it is still anticipated that there will be further reductions in the Bank Base Rate during 2025. Economic growth in the UK over the year has remained at a very low level, ranging from 0% to 0.5%. 5.2 The year was also affected by global political and economic events, with significant uncertainty and volatility within the financial markets.
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5.3 As Base Rate expectations remained on a reducing path, PWLB rates initially followed a falling trend but remained at higher levels. Whilst they fell gradually at the start of the year in line with Base rate expectations, they subsequently increased in the second half of the year in response to UK and global political and economic uncertainties. Whilst PWLB rates have since fallen from their high point in January 2025, they ended the year higher than the at the start. The PWLB rates for various periods over 2024/25 are shown at Appendix I. 5.4 The graph in Appendix I highlights the volatility and uncertainty that existed around interest rates as the year progressed. The 50-year rate was 5.01% at the start of the year and reduced to 4.89% by September 2024, before rising and peaking at 5.88% in January 2025. It subsequently reduced to 5.67% by 31 March 2025. All other durations followed a similar pattern, but with rates for 5 years or less being the lowest available for much of the year, and also being subject to high levels of volatility. By 31 March 2025 the 5-year rate was 4.97%. 5.5 Investment deposit rates also reduced over the first half of the year, in line with future interest rate expectations. This reflected the Bank base rate during the year, as well as expectations of reductions in the Bank Rate later in the future. The average rate on the Council’s investments at the start of the year was 6.48% and reduced to 5.50% by the end of the year. However, it should be noted that these rates are affected by the higher rates in the local authority borrowing and lending market, in comparison to rates available from banks. 6. Actual Long-Term Borrowing & Repayments 6.1 Treasury activity during 2024/25 is detailed in the Treasury Activity and Compliance reports previously submitted to the Finance & Resources Committee (Report No’s 24/320 and 25/101) and the Elected Member Briefing notes in July 2024 and January 2025. 6.2 As noted in paragraph 4.2 above, based on the approved Capital Programme before the start of the year, the Council’s estimated new capital borrowing for 2024/25 was £219.8 million. It was expected that some of this borrowing may be deferred due to the Council’s overall positive cash position, with the actual borrowing required to be undertaken throughout the year, unless interest rates remained high and it was also deferred by using short term borrowing. 6.3 With interest rates being relatively high at the start of the year, and taking longer to reduce than had been forecast, no new longer-term borrowing was undertaken until August 2024. Subsequently, with a growing borrowing requirement as the year progressed, further borrowing was undertaken in December 2024, February 2025 and March 2025. Interest rates over this period had risen, but opportunities were taken to borrow at the most preferential times during this period. A total of £100 million was borrowed during this period, summarised in the following table:
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Date Lender Type Term Amount Rate 28 Aug 2024 Local Auth Maturity 3 yrs £20,000,000 4.35% 20 Dec 2024 PWLB Maturity 3 yrs £10,000,000 4.91% 20 Dec 2024 PWLB Maturity 4 yrs £10,000,000 4.88% 21 Feb 2025 PWLB EIP* 3 yrs £30,000,000 4.47%** 11 Mar 2025 PWLB Maturity 1 yr £5,000,000 4.82% 21 Mar 2025 PWLB EIP 2 yr £25,000,000 4.82% TOTAL 2.7 yrs £100,000,000 4.636% Note * EIP denotes Equal Instalments of Principal, with the loan repaid equally over the term. ** borrowed at PWLB’s HRA Interest rate, with a discount of 40 bps from the Certainty Rate. 6.4 The amount borrowed is significantly lower than the estimated Borrowing Requirement. This is due to movements in the Capital Budget over the year, positive cashflows, as well as significant cash balances held relating to the Council’s short-term reserves. Consequently, an estimated £84 million of the borrowing Requirement for the year has been carried forward to be borrowed in subsequent years. 6.5 The new borrowing is also for relatively shorter terms than historic borrowing, at an average of 2.7 years. This is due to the strategy of borrowing for shorter periods whilst interest rates are high, with a view to refinancing these loans at their maturity at lower rates (based on current interest rate forecasts). This strategy also includes the use of EIP loans, where some of the principal sum borrowed is repaid equally each year over the term of the loan, and thus can also be refinanced over the period at lower rates. The Council also fully utilised the PWLB’s discounted HRA borrowing rate available during the year, in line with the Council’s capital programme. 6.6 The Council’s scheduled repayments to the PWLB during the year amounted £13 million covering 3 individual loans. These had been borrowed for an average of 12 years at an average rate of 2.83%. Therefore, over the year, the average PWLB debt portfolio rate for the Council increased from 2.5% at the start of the year, to 2.76% for the total of £652 million of PWLB debt held by the Council on 31 March 2025. 6.7 There was one loan borrowed during the year from a local authority for £20 million, for 3 years at 4.35%. Therefore, the total market loans outstanding, including LOBOS, increased to £63.2 million at an average rate of 4.51% at 31 March 2025. 6.8 As anticipated in the original Treasury Strategy, there were no premature repayments or restructuring of PWLB or long-term market debt. This reflects the structure and profile of the Council’s current debt portfolio, making any further restructuring not cost effective.
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6.9 In addition, a total of £47 million short term (temporary) borrowing was undertaken to cover more immediate day-to-day cash requirements. The borrowing was undertaken for an average of 40 days and at average of 5.04%. All such loans were repaid during the year with none outstanding at 31 March 2025. Other short term variable funding held relates to internal loans from local associated bodies and Common Good Funds, with the balances determined by their own cashflow requirements. At the year-end, these funds increased slightly from £4.6 million at 31 March 2024 to £5.5 million at 31 March 2025. The overall average rate for the Council’s external debt increased from 2.66% at 31 March 2024 to 2.93% at 31 March 2025. 6.10 The Council’s average Consolidated Loans Fund (CLF) interest rate, which includes other charges and is based outstanding Loans Fund advances, increased from 2.76% in 2023/24 to an estimated 3.22% in 2024/25 (based on applying statutory guidance). This increase reflects the amount of new borrowing and rising interest rates of the borrowing relative to previous years. 7. Investment Strategy and Outturn 2024/25 7.1 Investment rates reduced gradually from the start the year following the expectations of the Bank Base Rate. These rates continued to fall as the Bank Base rate was cut over the second half of the year, with expectations of further cuts in the coming year. 7.2 The original Strategy anticipated that the level of investments would continue to reduce gradually over the year unless, for example, new borrowing was undertaken early in the year or the Council’s expenditure during the year was later than anticipated. As outlined above in paragraph 6.3, no new borrowing was undertaken until August 2024, and so consequentially, the level of investments gradually reduced over the course of the year. The level of investments stood at £65.5 million at the start of the year, peaked at £84.975 million on 17 April 2024, before steadily reducing to their lowest level of £6.5 million on 11 February 2025. Following further new long-term borrowing, the level of investments initially rose, and stood at £24.1 million on 31 March 2025. 7.3 In the first half of the year, longer fixed deposit rates (up to 1 year) offered higher returns than shorter investment periods or notice and money market funds. Consequently, the opportunity was taken to invest in these periods where possible within cashflow requirements. As the year progressed, and the level of investments reduced, there were fewer opportunities within the Council’s cashflow and consequently any fixed deposits were for shorter durations. This coincided with the investment rates available also starting to reduce. However, by March 2025, as a result of positive cashflow balances (including new long-term borrowing), some loans to other local authorities were made, for periods of around one month. Due to very low liquidity in the local authority market, interest rates available increased significantly to over 6%.
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7.4 The various money market funds used by the Council were used to meet short term cashflow requirements and keep within counterparty limits. Notice accounts were not used during the year due to the less competitive rates offered on such investment products. 7.5 During the year, no investment was made for more than 12 months, and all investment activities were in line with the approved strategy for 2024/25. The average lending term for fixed deposits was significantly shorter than previous years at 53 days, and at an average rate of 5.27%. In comparison, the average temporary borrowing rate for the year was 4.62%. 7.6 The average rate on investments outstanding at 31 March 2025 was 5.50% (6.48% at 31 March 2024). This reduction in the average rate over the year reflected the shorter duration deposits undertaken and the need to maintain sufficient balances in instant access Money Market Funds to meet day-to-day requirements. However, it includes loans outstanding with other local authorities at higher than bank deposit rates. 7.7 Total interest receivable at maturity on investment activity in 2024/25 amounted to £2.062 million. This is lower than the previous year (£4.076 million in 2023/24), due to lower investment balances, a significant reduction in the level of investment activity and lower interest rates. On an accruals basis, the estimate of investment income to be credited in 2024/25 is £2.531 million (£6.422 million in 2023/24). 7.8 All financial investments by the Council’s Common Good Funds and Charitable Trusts were made through the Council’s Loans Fund, in accordance with the Council’s and Common Good Fund’s policy for Permitted Investments. As a result, £2.710 million of Common Good funds and Charitable Trusts were on deposit with the Loans Fund at 31 March 2025 for periods of between 1 and 12 months at an average rate of 4.02%. 7.9 Any investments held with external fund managers are outside the scope of the investment regulations, as they all relate to funds held by Council administered Charities or Trusts. 7.10 The Annual Property Investment Strategy for 2024/25 was also approved by the Council at its meeting on the 6 March 2024 and was complied with in full, with no breaches in compliance with permitted investment limits. The projected income from the Council’s property portfolio for 2024/25 was originally set at £1.817 million, whilst the latest estimate is £1.924 million. There were no additional risks identified or new property investments entered into over the year. The strategy action plan remained on programme. 8. Compliance With Treasury Policies and Limits 8.1 There were no breaches of compliance with the Council’s approved borrowing and investment policies and strategy in 2024/25. All aspects of the Prudential Code, including Prudential Indicators and limits, were also fully adhered to throughout the year.
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9. Statutory Loans Fund 9.1 The Loans Fund is an internal fund operated by the Council to manage: The write down (repayments or “amortisation”) of capital expenditure (capital advances) over the life of the various assets being funded by borrowing as part of the Council’s Loan Charges, and To manage the external borrowing raised to finance the capital expenditure. 9.2 Whilst both these elements of the Loans Fund operate independently of each other, because they are based on the same capital plans of the Council, they are consistent with each other over the long term. However, significant differences may arise in the short-term due to, for example, delaying external borrowing, or borrowing in advance in light of prevailing interest rates, or where the Council has significant levels of cash Reserves. 9.3 The approved Loans Fund policies allow the amortisation of capital expenditure (advances) for periods of up to 50 years in line with the asset useful lives, using the annuity method. The repayment of Loans Fund advances are also deferred until the asset being funded is completed and operational. As a result, some of the repayments may fall due after 50 years from the time of the original advance. 9.4 It is a requirement of the Loans Fund regulations that the outstanding amount of Loans Fund advances at the end of each financial year is reported as part of the annual report. The value of Loans Fund advances outstanding at 31 March 2025 is estimated as £799.118 million (subject to completion and audit of the Council’s Annual Accounts). This is made up as follows: Capital Advances outstanding 1 April 2024 - £667.120 million Add New capital Advances 2024/25 - £139.561 million Less Capital Advances repaid in the year - £7.563 million 9.5 The future repayment of these advances is summarised in the table below:
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Core Composite Programme Prudential Borrowing Sub-Total General Fund Housing Revenue account TOTAL (£'000) (£'000) (£'000) (£'000) (£'000) Within 1 year 2,714 3,068 5,782 3,529 9,311 Between 1 and 2 years 2,991 3,278 6,269 3,689 9,958 Between 2 and 5 years 10,080 8,369 18,449 11,955 30,404 Between 5 and 10 years 21,207 6,813 28,020 23,472 51,492 Between 10 and 15 years 28,387 4,864 33,251 21,772 55,023 Between 15 and 20 years 39,642 4,065 43,707 13,574 57,281 Between 20 and 25 years 55,272 4,363 59,635 13,443 73,078 Between 25 and 30 years 64,321 5,133 69,454 14,990 84,444 Between 30 and 35 years 79,350 4,706 84,056 14,685 98,741 Between 35 and 40 years 102,871 3,820 106,691 17,935 124,626 Between 40 and 45 years 93,159 2,319 95,478 19,542 115,020 Between 45 and 50 years 75,038 291 75,329 10,496 85,825 Over 50 years 3,915 0 3,915 0 3,915 GRAND TOTAL 578,947 51,089 630,036 169,082 799,118 9.6 Comparison of the outstanding capital advances above with the long-term external debt shown in paragraph 3.1 demonstrates that actual capital expenditure funded by borrowing is higher than the actual borrowing undertaken to date by around £84 milllion. This reflects the strategy adopted in recent years of deferring new borrowing whilst rates were at high levels, and utilising Reserves cash balances to meet immediate cashflow requirements. New borrowing would only be undertaken when there were insufficient available cash balances. The Council started the year in an “under -borrowed” position of around £34 million, whilst the position at the end of the year shows that this has more than doubled to £84 million, highlighting the strategy of deferring borrowing where possible. It should also be noted that the Council has approved a significant borrowing requirement over the next 6 years on its Capital programmes. 9.7 The Council approved its new Composite Capital Budget to 2030/31 on 26 February 2025 (Report No. 25/37 refers), whilst the Housing and Social Wellbeing Committee approved the HRA Capital Investment Programme to 2029/30 on 22 January 2025 (Report No. 25/09 refers). The last report to the Finance & Resources Committee on 30 April 2025 (Report No. 25/100 refers) approved adjustments to these Programmes. Consequently, the amount of approved capital expenditure to be funded by borrowing (ie new Loans Fund advances) in each of the next 6 years is as follows:
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Composite Programme Housing Investment Programme TOTAL (£'000) (£'000) (£'000) 2025/26 134,116 26,615 160,731 2026/27 102,443 12,865 115,308 2027/28 66,105 12,652 78,757 2028/29 48,178 10,063 58,241 2029/30 30,302 17,659 47,961 2030/31 27,966 - 27,966 TOTAL 409,110 79,854 488,964 9.8 All the above Loans Fund repayments and new borrowing have been included in the Loan Charge estimates within the approved Medium Term Financial Plan, and therefore remain affordable under the current Loan Charge Budget strategy. This also includes estimates of new borrowing in the years beyond 2030/31. 9.9 This borrowing will be funded through a combination of existing budgets, and the decisions taken by Council on 26 February 2025, i.e. to increase the loan charges budget by applying 1.25% of future Council Tax increases from 2025/26. 10. Conclusion 10.1 Global economic volatility meant that interest rates were higher than forecast during the year and remained at high levels. This was a result of global economic and political uncertainties, despite the reduction in the Bank Base rates during the period. However, the Bank base rate was also reduced at a slower rate than had been anticipated. 10.2 In light of the above economic conditions and interest rates, new long-term borrowing of £100 million was undertaken between August 2024 and March 2025, and with the Council also applying its cash reserves to meet day-to-day requirements. Consequently, the Treasury activity initially focussed on investment activity and the management of existing investment balances. As investment balances reduced over the first half of the year, investment interest rates also fell. In the second half of the year, the Investment activity moved to fixed deposits for shorter periods and extensive use of money market funds to manage immediate cashflow requirements. 10.3 There were no breaches of compliance with the lending policy and all Prudential Indicators were complied with throughout the year. As a result of the activities undertaken during 2024/25 the Council’s plans remain affordable, prudent and sustainable. The report also includes detailed information on the repayment profiles and future estimates of Loans Fund Advances.
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10.4 The estimate of Council’s Consolidated Loans Fund (CLF) rate for the year increased from 2.76% in 2023/24 to 3.22% in 2024/25. This was due to higher interest rates on the new borrowing and reducing returns as investment balances reduced. The CLF rate in future years is projected to gradually rise further in the next few years before levelling off around an estimated average of 3.4% over future years on current projections. 11. Impact Value Assessment Annual Treasury Report 2024/25 (Adobe PDF documents) 12. Appendices Appendix I – PWLB Interest rates 2024/25.