Treasury Management Strategy and Annual Investment Strategy - Mid Year Review Report 2024/25
Argyll and Bute Council · 20 December 2024
Back to Argyll and Bute Council — 20 December 2024 and its agenda
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ARGYLL AND BUTE COUNCIL AUDIT AND SCRUTINY COMMITTEE FINANCIAL SERVICES 17 DECEMBER 2024 TREASURY MANAGEMENT STRATEGY AND ANNUAL INVESTMENT STRATEGY MID-YEAR REVIEW 2024/25 1.0 EXECUTIVE SUMMARY 1.1 The Local Government in Scotland Act 2003 requires the council to have regard to the CIPFA Code of Practice on Treasury Management (revised 2021), the Code. Key reporting requirements in this respect include a Treasury Management Strategy and Annual Investment Strategy Mid-year Review Report. 1.2 This mid-year report, prepared in compliance with the Code, covers the following: • An economic and interest rate update; • A review of the approved Treasury Management and Annual Investment Strategies; • An update on the capital position and Prudential Indicators; • An update on borrowing and investment activities; and • Compliance with Treasury and Prudential Limits 1.3 1.4 The report concludes that • All borrowing and investment activity during the period 1 April to 30 September 2024 has been undertaken in accordance with the approved 2024/25 Treasury Management Strategy and Annual Investment Strategy and the authority has operated within the treasury and prudential indicators set out therein; • The level of internal reserve fund balances has provided an opportunity to defer new external borrowing, whilst also minimising exposure to investment risk. This borrowing strategy will require to be regularly reviewed to achieve optimum value and minimise risk exposure in the longer term; and • The capital planning assumptions underpinning the approved 2024/25 Treasury Management Strategy have been updated. As such, the Prudential Indicators set out within the approved strategy require to be revised. The Audit and Scrutiny Committee is asked to recommend to Council: • Note the report, and the treasury activity during the period 1 April to 30 September 2024; and • Approve changes to the prudential indicators as set out in paragraph 5.2 of the report.
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ARGYLL AND BUTE COUNCIL AUDIT AND SCRUTINY COMMITTEE FINANCIAL SERVICES 17 DECEMBER 2024 TREASURY MANAGEMENT STRATEGY AND ANNUAL INVESTMENT STRATEGY MID-YEAR REVIEW 2024/25 2.0 BACKGROUND 2.1 The authority operates a balanced budget, which broadly means cash raised during the year will meet its cash expenditure. Part of the treasury management operations ensure this cash flow is adequately planned, with surplus monies being invested in low-risk counterparties, providing adequate liquidity initially before considering optimising investment return. 2.2 The second main function of the treasury management service is the funding of the authority’s capital investment plans. These capital plans provide a guide to the borrowing need of the authority, essentially the longer-term cash flow planning to ensure the authority can meet its capital spending obligations. This management of longer-term cash may involve arranging long or short-term loans, or using longer term cash flow surpluses, and on occasion existing debt may be restructured to meet authority risk or savings objectives. 3.0 INTRODUCTION 3.1 The Local Government in Scotland Act 2003, and supporting regulations, requires the authority to have regard to the CIPFA Code of Practice on Treasury Management (revised 2021), the Code. The Code requires full Council to receive an annual Treasury Management Strategy Statement, including the Annual Investment Strategy, for the year ahead; a Mid-year Review Report; and an Annual Report following the year end. 3.2 The regulatory environment requires the authority to delegate responsibility for the monitoring and scrutiny of treasury management activities, strategy and policies to a specific named body. For this authority, the appropriate delegation body is the Audit and Scrutiny Committee. Treasury management training was delivered to members of the committee during October 2024, to support its scrutiny role 3.3 Prudential and Treasury Indicators are designed to ensure capital investment plans are affordable, prudent and sustainable. There are clear linkages between the council’s capital planning and treasury management strategy, with the financing costs arising from capital investment plans considered as part of the overall revenue budget outlook.
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3.4 4.0 This mid-year report, prepared in compliance with the Code, covers the following: • An economic and interest rate update; • A review of the approved Treasury Management and Annual Investment Strategies; • An update on the capital position and Prudential Indicators; • An update on borrowing and investment activities; and • Compliance with Treasury and Prudential Limits RECOMMENDATIONS The Audit and Scrutiny Committee is asked to recommend the following to Council: • Note the report, and the treasury activity during the period 1 April to 30 September 2024; and • Approve changes to the prudential indicators as set out in paragraph 5.2 of the report. 5.0 DETAIL 5.1 5.1.1 Economic and Interest Rate Update The authority’s appointed treasury advisors, Link Group provide updates on the economic position. The third quarter of 2024 (July to September) saw: • GDP growth stagnating in July, however, this points more to a mild slowdown in GDP growth than a sudden drop back into a recession; • Further easing in wage growth, which will be welcomed by the Bank of England as a sign that labour market conditions are continuing to cool. On an annualised basis, average earnings growth eased from 3.0% to 1.8%, its lowest rate since December 2023; • CPI inflation hit its target 2.0% in June before edging above it to 2.2% in July and August; and • Bank rate was lowered from 5.25% to 5.00% in August 2024. 5.1.2 The 2024/25 strategy included market assumptions for long term 5, 10, 25 and 50 year PWLB interest rates decreasing to 4.2%, 4.2%, 4.5% and 4.3% respectively during 2024/25, with short term interest rates (Bank Rate of 5.25%) forecast to decrease to 4.00% during 2024/25. 5.1.3 The latest long term PWLB and short term rate forecasts, provided by Link Group, are outlined below. This sets out a view that medium and long-dated interest rates will fall back over the next year or two. Bank Rate is expected to continue to fall steadily throughout 2025, before levelling at around 3.0% towards the end of 2026.
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(a) Long term PWLB rates: 2024/25 2025/26 2026/27 PWLB rates Current % Low % High % Low % High % 5 year 5.0 3.9 4.3 3.8 3.9 10 year 5.2 4.1 4.4 3.9 4.1 25 year 5.6 4.4 4.8 4.3 4.4 50 year 5.4 4.2 4.6 4.1 4.2 (Based on the Certainty Rate, the standard rate minus 20 bps) (b) Short term borrowing 2024/25 2025/26 2026/27 Current % Low % High % Low % High % Bank Rate 5.00 3.25 4.00 3.00 3.25 5.2 Treasury Management Strategy Review The Treasury Management Strategy for 2024/25 was approved by Council on 22 February 2024. In light of movements in capital planning assumptions from those underpinning the previously approved strategy, the Prudential Indicators previously agreed require revision. The proposed changes are set out below: Prudential Indicator 2024/25 Original £m Revised Prudential Indicator £m Capital Expenditure 64 82 Capital Financing Requirement 351 366 Operational Boundary for External Debt 352 367 Authorised Limit 360 375
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5.3 5.3.1 Capital Position Update This part of the report is structured to update: • The authority’s capital expenditure plans; • How these plans are being financed; • The impact of the changes in the capital expenditure plans on the prudential indicators and the underlying need to borrow; and • Compliance with the limits in place for borrowing activity. 5.3.2 Prudential Indicator for Capital Expenditure The 2024/25 strategy estimated gross capital expenditure of £64.417m for the year. This estimate has now been updated to reflect revised assumptions within the council’s current capital plan. The 2024/25 probable outturn gross capital expenditure has been revised to £81.532m. The increase mainly relates to slippage from 2023/24 into 2024/25; and the requirement to recognise leasing arrangements as finance leases, through adoption of IFRS16 from 1 April 2024. This position is monitored on an ongoing basis, as part of the Capital Plan Monitoring, regularly reported to Policy and Resources Committee. The followings table shows the current revised estimates for gross capital expenditure incurred during 2024/25. Capital Expenditure by Service 2024/25 Original Estimate £000 2024/25 Revised Estimate £000 Education 5,006 8,690 Facility Services - Shared Offices 3,343 1,802 Major Projects/CHORD 2,461 4,509 ICT 1,593 1,611 Roads and Infrastructure 46,640 47,219 Development and Economic Growth 2,653 7,049 Live Argyll 636 1,125 Health and Social Care Partnership 2,085 3,527 Finance Lease Recognition (IFRS16) 0 6,000 Total Capital Expenditure 64,417 81,532 5.3.3 Financing of the Capital Plan The 2024/25 strategy estimated gross capital expenditure of £64.417m for the year, as outlined above, with £43.270m to be financed from new borrowing. As a result of the revised assumptions within the council’s current capital plan, including an increase the level of funding available from earmarked reserves/revenue, the new net borrowing requirement has been revised to £40.347m. It is worth noting that assets acquired through finance leases result in corresponding lease
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liabilities, repayable over the term of the lease, rather than being financed through direct borrowing. 5.3.4 The table below outlines the expected financing arrangements of the above capital expenditure plans. The borrowing element increases the council’s underlying indebtedness (Capital Financing Requirement), although this will be reduced in part by revenue charges for the repayment of debt (principal repayment). This direct borrowing need may also be supplemented by the replacement of maturing debt and to meet other treasury cashflow requirements. Capital Expenditure 2024/25 Original Estimate £000 2024/25 Revised Estimate £000 Gross Capital Expenditure 64,417 81,532 Financed by: Capital Receipts 1,689 612 Capital Grants 8,415 8,544 Revenue/Reserves 11,043 26,091 Total Financing 21,147 35,247 Borrowing Requirement 43,270 46,285 5.3.5 Changes to the Prudential Indicators for the Capital Financing Requirement (CFR), and the Operational Boundary for External Debt The level of capital activity also impacts the Capital Financing Requirement (CFR), the underlying need to borrow for capital purposes. In approving its strategy for 2024/25, Council noted an estimated CFR of £320m as at 31 March 2024 and £351m as at 31 March 2025 (£31m movement). The actual CFR as at 31 March 2024, reported in the 2023/24 annual accounts, was £332m, while the current projected CFR as at 31 March 2025 has been revised to £366m (£34m movement). The estimated increased movement of £3m in the CFR during the year reflects the increase in estimated borrowing outlined in the table above. The table below shows the CFR, together with the expected debt position over the period, which is termed the Operational Boundary.
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*Note: On balance sheet PFI schemes and finance leases etc. 2024/25 Original Estimate £m 2024/25 Revised Estimate £m Prudential Indicator - Capital Financing Requirement Closing CFR 351 366 Net Movement in CFR 31 34 Prudential Indicator – the Operational Boundary for external debt Borrowing 246 261 Other Long Term Liabilities* 106 106 Total Debt (year end position) 352 367 5.3.6 5.3.7 Limits to Borrowing Activity The first key control over the treasury activity is a prudential indicator to ensure that over the medium term, net borrowing (borrowings less investments) will only be for a capital purpose. Gross external borrowing should not, except in the short term, exceed the total of CFR in the preceding year plus the estimates of any additional CFR for 2024/25 and next two financial years. *Note: Includes on balance sheet PFI schemes and finance leases etc. The level of ‘under borrowing’ outlined in the table above reflects the level of internal borrowing, as described in paragraph 5.4.4. 2024/25 Original Estimate £m 2024/25 Revised Estimate £m Borrowing 191 130 Other Long Term Liabilities* 106 106 Total Debt 297 236 CFR* (year end position) 351 366 Under / (Over) Borrowing 54 130 5.3.8 A further prudential indicator controls the overall level of borrowing. This is the Authorised Limit which represents the limit beyond which borrowing is prohibited and needs to be set and revised by Members. It is the expected maximum borrowing need with some headroom for unexpected movements. This is the statutory limit determined under section 3 (1) of the Local Government Act 2003.
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*Note: Includes on balance sheet PFI schemes and finance leases etc. Authorised limit for external debt 2024/25 Original Indicator £m 2024/25 Revised Indicator £m Borrowing 251 266 Other Long Term Liabilities* 109 109 Total 360 375 5.3.9 The increase of £15m in the Authorised Limit reflects the increase in the estimated CFR as at 31 March 2025, as a result of increases in the actual 2023/24 and estimated 2024/25 capital position, from that estimated within the approved 2024/25 Strategy, as outlined in paragraph 5.3.5. 5.4 5.4.1 Borrowing activity PWLB loan principal of £0.840m has been repaid in the 6 month period to 30 September 2024, with a further £0.840m due to be repaid by 31 March 2025. These repayments of principal relate to a 10 year PWLB loan (original principal £21m), which was taken on a fixed Equal Instalments of Principal (EIP) basis. All other PWLB loans will be repayable on maturity. 5.4.2 The authority has one outstanding market or LOBO loan for £5.255m, with an interest rate of 4.75%, maturing 2048, with call dates every 6 months. This loan was not recalled at the 22 June 2024 call date. There is potential for this loan to be recalled before the end of the financial year, at the next call date of 22 December 2024. 5.4.3 Any PWLB or LOBO loans maturing during the year will ultimately require replacement borrowing to maintain the council’s cashflow position. In addition, the council will continue to actively monitor potential restructuring opportunities, in order to generate cash savings, at a minimum risk, and improve the balance of the loan debt maturity profile. 5.4.4 While there is an underlying need to borrow in respect of the Capital Financing Requirement and the replacement of maturing debt, this may involve arranging short or long term loans from external PWLB or market sources, or borrowing from internal reserve fund balances on a temporary basis, dependent on fund balance forecasts. The level of internal reserve fund balances has provided an opportunity to defer new external borrowing. The table at paragraph 5.3.6 shows the extent to which the council has utilised internal funds in lieu of borrowing. This is a prudent and cost effective approach in the current economic climate but will require ongoing monitoring. 5.4.5 As at 30 September 2024, the council’s debt totalled £113.562m, as summarised in the table below.
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Debt Amount £000 Annual Average Interest Rate Share of Total Debt Public Works Loans Board 108,037 4.42% 95.13% Market Loans (LOBO) 5,255 4.75% 4.63% Temporary Loans* 270 4.41% 0.24% Total Debt 113,562 4.44% 100.00% *Note: This represents short term borrowing from various institutions. 5.4.6 During the period 1 April to 30 September 2024, no new long term borrowing has been undertaken, due to the levels of internal balances held and the current interest rate market. Long term borrowing rates have been relatively high but forecast to steadily fall throughout next year and 2026/27, as outlined at paragraph 5.1.3. As such, any new borrowing required will be taken on a short term basis, to limit the exposure to the current high long term interest rates and also minimise investment risk. Further, as outlined in paragraph 5.3.2, the capital plan is being kept under regular review, and as such, our borrowing strategy will also be regularly reviewed to achieve optimum value and minimise risk exposure in the long term. 5.5 Debt Rescheduling Debt repayment and rescheduling opportunities have increased over the course of the past six months and will be considered if giving rise to long term savings. However, no debt repayments or rescheduling have been undertaken to date in the current financial year. 5.6 Compliance with Treasury and Prudential Limits It is a statutory duty for the authority to determine and keep under review the affordable capital expenditure limits. In the current financial year to 30 September 2024, the authority has operated within the treasury and prudential indicators set out in the approved Treasury Management Strategy for 2024/25. The Section 95 Officer confirms that no difficulties are envisaged for the current or future years, in complying with these indicators. All treasury management operations have also been conducted in full compliance with the authority's Treasury Management Practices. 5.7 5.7.1 Annual Investment Strategy Review In accordance with the CIPFA Treasury Management Code of Practice, the council’s approved Annual Investment Strategy sets out the council’s investment priorities as being: • Security of capital • Liquidity • Yield 5.7.2 The authority will aim to achieve the optimum return (yield) on its investments, commensurate with proper levels of security and liquidity and with the authority’s risk appetite. The risk appetite of the council is low, prioritising security and
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liquidity. In the current economic climate, it is considered appropriate to keep investments short term to cover cash flow needs, but also to seek out value available in longer periods with high credit quality financial institutions, using the Link suggested creditworthiness approach, including a minimum sovereign credit rating and Credit Default Swap (CDS) overlay information. 5.8 5.8.1 Investment Activity The council’s Section 95 Officer confirms that the principles of the investment strategy have been adhered to. During the period ended 30 September 2024, investments have only been made in line with the approved limits for specific investment instruments, and in accordance with the creditworthiness approach. 5.8.2 The limit of investments has reflected the level of available council reserve balances, together with provision for managing the council’s day to day cash flow requirements. As at 30 September 2024, the council’s investments totalled £63.932m, as summarised in the table below. Institution Type Amount £000 Return Clydesdale Bank Instant Access 632 4.90% Various Institutions Fixed Deposits 25,000 5.08% Money Market Funds (Various) Call Accounts 38,300 5.01% Total Investments 63,932 5.04% 5.8.3 The average rate of return on the above is 5.04%, with an average investment duration of 108 days. This compares to the benchmark SONIA rate of between 4.96% (3 month duration) and 5.06% (6 month duration) over the last 6 months. The Bank Rate started the year at 5.25% before being lowered to 5.00% in August. 6.0 CONCLUSION 6.1 6.2 All borrowing and investment activity during the period 1 April to 30 September 2024 has been undertaken in accordance with the approved 2024/25 Treasury Management Strategy and Annual Investment Strategy and the authority has operated within the treasury and prudential indicators set out therein. The level of internal reserve fund balances has provided an opportunity to defer new external borrowing, whilst also minimising exposure to investment risk. This borrowing strategy will require to be regularly reviewed to achieve optimum value and minimise risk exposure in the longer term. 6.3 The capital planning assumptions underpinning the approved 2024/25 Treasury Management Strategy have been updated. As such, the Prudential Indicators set out within the approved strategy require to be revised.
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7.0 IMPLICATIONS 7.1 Policy - None 7.2 Financial – Provides an update on 2024/25 treasury management activity and the approved strategy 7.3 Legal - None 7.4 HR - None 7.5 Fairer Duty Scotland: 7.5.1 Equalities – protected characteristics - None 7.5.2 Socio-economic Duty - None 7.5.3 Islands - None 7.6 Climate Change - None 7.7 Risk – Provides an overview of treasury management and investment risk 7.8 Customer Service - None 7.9 The Rights of the Child (UNCRC) - None Kirsty Flanagan Executive Director/S95 Officer 29 November 2024 Councillor Ross Moreland, Policy Lead for Finance and Commercial Services For further information contact: Carolyn Earl, Acting Head of Financial Services Carolyn.Earl@argyll-bute.gov.uk