Treasury Management Annual Report 2023-24 Final
Renfrewshire Council · 27 June 2024
Back to Council — 27 June 2024 and its agenda
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1 ___________________________________________________________________ To: Council On: 27 June 2024 ___________________________________________________________________ Report by: Director of Finance and Resources ___________________________________________________________________ Heading: Treasury Management Annual Report for 2023/24 ___________________________________________________________________ 1. Summary 1.1 It is a requirement of the Local Government Investments (Scotland) Regulations 2010 that a report outlining the treasury management activity undertaken during the year is presented to Council at the end of each financial year. 1.2 This report meets the requirements of these regulations, as well as the CIPFA Code of Practice on Treasury Management (the Code) and the CIPFA Prudential Code for Capital Finance in Local Authorities (the Prudential Code). 1.3 All aspects of the Treasury Policy Statement were complied with in 2023/24. ___________________________________________________________________ 2. Recommendations 2.1 It is recommended that the Council approves the Treasury Management Annual Report for 2023/24. _________________________________________________________ 3. Review of 2023/24 Treasury Activities 3.1 Treasury Portfolio Position at 31 March 2024 The Council's external borrowing position at the beginning and end of the last financial year was as follows:
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2 Borrowing Position as at 31 March 2023 Borrowing Position as at 31 March 2024 Change £ m (a) Average Interest Rate £ m (b) Average Interest Rate (a) - (b) Long-term Borrowings Public Work Loans Board (PWLB) Fixed Interest 224.43 3.80% 243.59 3.84% 19.16 Market Loans 52.92 4.70% 46.77 4.70% (6.15) Total Long-term 277.35 3.97% 290.36 3.98% 13.01 Short-term Borrowings Common Good Funds 2.70 1.53% 3.27 4.30% 0.57 Other Partner Bodies 32.72 1.53% 26.51 4.30% (6.21) Total Short-term 35.42 1.53% 29.78 4.30% (5.64) Total Borrowings 312.77 3.81% 320.14 3.99% 7.37 Temporary Investments 178.38 3.05% 97.22 5.51% (81.16) 4. Review of Borrowing and Investment Outturn for 2023/24 4.1 Overall, the Council’s total external borrowings increased by £13.01m. There was an increase in borrowing through the PWLB by £20m although this was partially offset by the repayment of a £6m Market loan. 4.2 Temporary investments held by the Council decreased by £81.16 million. The decrease in investments is attributable to several factors, including spending through the capital programme, backdated pay awards, and Non-Domestic Rates refunds following the retrospective revaluation of some accounts. 5. Review of Borrowing Strategy during 2023/24 5.1 The strategy for 2023/24 was approved by Council on 2 March 2023. Based on the Council’s planned programme of investments and interest rate forecasts for the year, the Council’s borrowing strategy was to firstly use internal cash balances to finance the Capital Investment Programme. 5.2 This strategy was prudent, as borrowing rates continued to rise and remain high for the remainder of the financial year. The Council was also able to reinvest longer-term PWLB borrowing of £20m (undertaken towards the end of the financial year) utilising a higher interest rate on the investment account when compared to the interest rate on the loan itself. These gains have been reinvested back into the Council’s revenue budgets as interest income.
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3 5.3 Given the changing climate and the risks inherent in economic forecasts, a cautious approach was taken during the year regarding treasury operations. The Director of Finance and Resources monitored interest rates and adopted a pragmatic strategy based upon the following principles to manage interest rate risks: • if there was considered to be a significant risk of a sharp FALL in long and short-term rates, (e.g. due to a marked increase of risks around relapse into recession or of risks of deflation), then long-term borrowings would have been postponed, and potential rescheduling from fixed rate funding into short-term borrowing would have been considered. • if there was considered to be a significant risk of a much sharper RISE in long and short-term rates than initially expected, perhaps arising from an acceleration in the start date and in the rate of increase in central bank rates, an increase in world economic activity or a sudden increase in inflation risks, then the portfolio position would have been re-appraised. Fixed rate funding would have been considered whilst interest rates were lower than they were projected to be in the next few years. 6. Review of Investment Strategy and Investment Outturn for 2023/24 6.1 In carrying out investment activities, the Council will have regard to the Local Government Investment (Scotland) Regulations 2010, the accompanying Scottish Government Finance Circular 5/2010 and the CIPFA Treasury Management in the Public Services Code of Practice and Cross-Sectoral Guidance Notes (“the Treasury Management Code”). The Council’s investment priorities are: • the security of capital; and • liquidity of its investments. The Council’s investment policy was outlined in the Council’s Annual Investment Strategy Report 2023/24 which was approved by Council on 2 March 2023. This policy set out the Council’s approach for choosing investment categories and counterparties and is based on credit ratings provided by the three main credit rating agencies, supplemented by additional market data (such as rating outlooks, credit default swaps, bank share prices etc.). 6.2 The expectation for interest rates within the Treasury Management Strategy for 2023/24 was that the Bank Rate would peak at between 4.25% and 4.5% in the first half of 2023 before beginning to drop on the assumption inflationary pressures reduced. However, as the year progressed inflation remained stubbornly high with the Bank Rate peaking at 5.25% in August 2023. Since
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4 then, inflation has gradually decreased and the latest forecast from the Council’s treasury advisors expects the Bank Rate to start to drop from September 2024 and gradually reduce to 3% by September 2026. 6.3 During 2023/24, the Council only invested with institutions listed in the Council’s approved Counterparty list and in the permitted investment categories. The investment activity during the year conformed to the approved strategy and the Council had no liquidity issues. 6.4 The table below shows interest rates achieved by the Council on its temporary investments during the year and, for comparison, the benchmark rate. Temporary investments - internally managed 2022/23 2023/24 Average Investment £254.90m £182.99m Actual rate of return 1.53% 4.30% Benchmark return 2.26% 4.97% 6.5 The benchmark figure was higher than the actual rate of return because the Council had previously agreed to several fixed-term deposits based on the Bank Rate forecast available at the time. It is expected that during 2024/25 these two values will become more aligned given that the fixed term deposits with lower interest rates have now come to an end. 6.6 The current Treasury Strategy remains appropriate to the Council’s ongoing financial, investment and treasury requirements, and supports the Council’s overall financial position, investment priorities and medium-term financial forecasts. While the refreshed strategy was recently approved in March 2024, it is continually being reviewed to ensure, as the economic and political landscape changes and, as the Council’s financial strategy develops, that borrowing and investments are managed to accommodate both short to medium-term treasury requirements, and also to ensure that best value is secured from longer term investment in instruments appropriate for this purpose and consistent with the Council’s risk profile.
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5 *SONIA (Sterling Overnight Index Average) is based on actual transactions and reflects the average of the interest rates that banks pay to borrow sterling overnight from other financial institutions and other institutional investors. 7. Debt Rescheduling 7.1 Whilst it was considered, no debt rescheduling was undertaken during the year, as the differential between PWLB new borrowing rates and premature repayment rates meant that this would not have been economical. 8. Compliance with Treasury Limits 8.1 The Prudential Code for Capital Finance in Local Authorities, which came into force on 1 April 2004, allows greater local flexibility for investment decisions that are informed and supported by a suite of performance indicators. The 2023/24 indicators were approved by Council on 2 March 2023 and an update reported to the Council on 14 December 2023. 8.2 The Council’s overall performance on these indicators provides a firm basis for the monitoring and control of capital investment and borrowing and for determining that it is affordable. Certain headline indicators are sub-divided per recommended best practice into two programmes: housing and non- housing. 3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% Interest Rates Temporary Investment Rates Renfrewshire Vs Comparator (Backward looking 7 day SONIA* rate) SONIA Renfrewshire
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6 8.3 The key performance indicators for Treasury are: • An Operational Boundary for the Council’s external borrowing (the upper limit for the aggregate external borrowing needed), and an Authorised Limit for the Council’s external borrowing, being the upper limit of aggregate external borrowing that is affordable and prudent; • A ratio of financing costs to net revenue stream (an affordability measure for debt repayments); and • An upper limit for fixed rate borrowing maturing within the short, medium and long-term, to ensure that the Council is not exposed to a significant re-financing requirement in the short to medium term. In addition, it is a requirement of the Council's Treasury Policy Statement that the maximum amount of long-term borrowing maturing in any one year will be no more than 15%, and the maximum amount of long-term borrowing maturing in any five-year period will be no more than 45%. The objective of these limits is to ensure that the Council is not exposed to a significant re-financing requirement over a short period when interest rates could be relatively high. 8.4 The main source of the Council’s borrowing is from the Public Works Loan Board (PWLB). The borrowing rates are based on, and are determined by, the yield on UK Government bonds (gilts). The main influences on gilt yields are Bank Rate, inflation expectations, and movements in US treasury yields. 8.5 Gilt yields continued to be volatile during 2023/24. At 31 March 2024, all gilt yields (1-5 years) ranged between 5.56% and 4.88%, while the 10-year and 25-year yields were 4.97% and 5.42% respectively. 8.6 For PWLB rates, the various margins for borrowing are as follows: - • Standard Rate is gilt plus 100 basis points (G+100bps) • Certainty Rate is gilt plus 80 basis points (G+80bps) • Local Infrastructure Rate is gilt plus 60bps (G+60bps) • HRA Rate is gilt plus 40bps (G+40bps) 8.7 There is likely to be a gradual fall in short-dated gilt yields and PWLB rates over the next three years as the Bank Rate is forecast to gradually fall from 5.25% in September 2024 to around 3.00% in September 2026.
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7 8.8 External Borrowing at the Year-end The Council’s aggregate external debt was contained within both the Operational Boundary and the Authorised Limit. The final outturn position compared to the prudential limits forecast at 14 December 2023 is as follows: 2022/23 Outturn 2023/24 Borrowing Limits 2023/24 Outturn £m £m £m 347.52 Aggregate external debt of the Council at 31 March 2023 357.99 462 Operational Boundary 553 480 Authorised Limit 571 8.9 Ratio of Financing Costs to Net Revenue Stream This indicator is expressed as a proportion. Both the Housing and Non- housing programme were within the forecasts at 14 December 2023. 2022/23 Outturn 2023/24 Estimated Ratio 2023/24 Outturn % % % 32.53 Housing 28.97 27.68 3.02 Non-Housing 3.64 3.13 8.10 Fixed Rate Borrowing Maturing within the Short, Medium and Long-term This indicator is expressed as a proportion of the total debt of the Council. The maturity profile of the Council’s external debt is well within the approved limits. The outturn compared to the mid-year estimate is as follows: 2022/23 Outturn 2023/24 Approved Upper Limits 2023/24 Outturn % % % Short-term 0.30 Under 12 months 15 1.72 Medium term 1.80 12 months and within 24 months 15 1.72 1.81 24 months and within 5 years 45 0.00 0.02 5 years and within 10 years 50 0.01 Long-term 96.07 10 years and above 100 96.55
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8 8.11 Long-Term Borrowing Maturity Profile During the financial year, the Council operated within the treasury limits set out in the Council’s Treasury Policy Statement and Treasury Management Strategy Statement. The Council's debt maturity profile at 31 March 2024 was within these limits. The table below shows the maturity profile of the Council’s long-term borrowing. The solid black line shows the debt maturing, and therefore requiring to be replaced, during each year up to 2072. The lighter broken line shows the debt maturing in the prospective five-year period for each year up to 2072. All years are below 40% and well within our policy limits. 0% 10% 20% 30% 40% 50% Maturity Profile - Spread of Debt From 2024/25 through to 2071/72 1 Year % of total limit 5 Year % of total limit
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9 ___________________________________________________________________ Implications of the Report 1. Financial – As outlined in the report. 2. HR & Organisational Development – None arising from this report. 3. Community Planning – None arising from this report. 4. Legal – None arising from this report. 5. Property/Assets – None arising from this report. 6. Information Technology – None arising from this report. 7. Equality & Human Rights – None arising from this report. 8. Health & Safety – None arising from this report. 9. Procurement – None arising from this report. 10. Risk – The report outlines a range of measures taken during the course of 2023/24 to manage treasury risks and the risks associated with investment regulations in respect of the borrowing and investment activity of the Council, along with measures to manage these risks. 11. Privacy Impact – None arising from this report. 12. COSLA implications – None arising from this report. 13. Climate risk – None arising from this report. _________________________________________________________ List of Background Papers: Non-Housing Capital Investment Programme, Prudential Framework and Treasury Management Strategy, and Capital Strategy 2023/24 – 2027/28, Council, 2 March 2023. Treasury Management and Prudential Indicators Mid-Year Review 2023/24, Council 14 December 2023 ___________________________________________________________________ Author: Christine McCourt, Head of Finance and Procurement