Supplementary Pack 1
Argyll and Bute Council · 12 June 2025
Back to Audit and Scrutiny Committee — 12 June 2025 and its agenda
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Argyll and Bute Council Comhairle Earra-Ghàidheal Agus Bhòid Executive Director: Douglas Hendry Kilmory, Lochgilphead, PA31 8RT Tel: 01546 605522 DX 599700 LOCHGILPHEAD 6 June 2025 SUPPLEMENTARY PACK 1 AUDIT AND SCRUTINY COMMITTEE - BY MICROSOFT TEAMS on THURSDAY, 12 JUNE 2025 at 10:30 AM I enclose herewith item 12 (Treasury Management Annual Report 2024-25) which was marked to follow on the Agenda for the above meeting. Douglas Hendry Executive Director ITEM TO FOLLOW 12. TREASURY MANAGEMENT ANNUAL REPORT 2024-25 (Pages 3 - 20) Report by Section 95 Officer Audit and Scrutiny Committee Janice Wason Hall (Chair) Councillor Daniel Hampsey Councillor Graham Hardie Councillor Fiona Howard Councillor Reeni Kennedy-Boyle Councillor Gary Mulvaney (Vice-Chair) Councillor Andrew Vennard Contact: Shona Barton, Governance Manager Tel: 01436 657605 Public Document Pack
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ARGYLL AND BUTE COUNCIL AUDIT AND SCRUTINY COMMITTEE FINANCIAL SERVICES 12 JUNE 2025 TREASURY MANAGEMENT ANNUAL REPORT 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 Annual Report. 1.2 This annual report, prepared in compliance with the Code, covers the following: • 2024/25 Strategy; • Borrowing and investment activity; • 2024/25 capital expenditure and the Capital Financing Requirement (CFR); • Overall treasury position (debt and investments); and • Compliance with Prudential and Treasury Indicators. 1.3 The report concludes that 1) During 2024/25, the authority maintained an under-borrowed position. The significant level of internal reserve balances has provided an opportunity to defer new external borrowing, whilst also minimising exposure to investment risk. The level of internal borrowing as at 31 March 2025 stood at £113m. However, new PWLB borrowing totalling £22m was undertaken during the year, to provide an element of certainty in respect of funding the underlying borrowing requirement. 2) PWLB loan principal of £1.680m has been repaid during the year in respect of 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. 3) The authority has not borrowed more than, or in advance of its needs, purely in order to profit from the investment of the extra sums borrowed. Also, no debt rescheduling was undertaken during the year as the differential between PWLB new borrowing and premature repayment rates made rescheduling unviable. 4) The principles of the investment strategy have been adhered to during the year and no liquidity difficulties were experienced. Throughout the year, investments have only been made in line with the approved limits for specific investment instruments, and in accordance with the creditworthiness approach. However, a temporary technical breach of the £20m limit on deposits with any one bank Page 3 Agenda Item 12
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occurred during the year (£21m deposited with the Clydesdale bank from 3 to 6 January 2025). 5) 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. The average rate of return on these investments was 5.07%, compared to the benchmark overnight SONIA rate average of 4.90% over the year. 6) The actual 2024/25 gross capital expenditure was £49m, with £29m to be financed from new borrowing, compared to an estimated borrowing requirement of £46m. Due to significant slippage in the capital programme, it has also been possible to borrow for expenditure, previously assumed to be met from reserves, providing flexibility in the financing of future capital investment plans. 7) The element of capital expenditure to be financed from borrowing impacts the Capital Financing Requirement (CFR), the underlying need to borrow for capital purposes. The actual closing CFR as at 31 March 2025 is £344m, representing a movement of £12m in the CFR during the year, compared to an estimated movement of £34m. This decrease of £22m in the movement reflects a decrease in borrowing to finance capital (£17m) and special repayments of principal (£5m) in respect of prior year loans fund advances. It should be noted that the impact of additional special repayments of principal on the revenue account is entirely offset by the use of reserves, earmarked for capital purposes (£5m). 8) As at 31 March 2025, the council’s debt (excluding PPP and finance lease liabilities) totalled £129.774m, while net debt, after allowing for treasury investments of £14.548m, totalled £115.226m. The average interest rate payable on this gross debt was 4.48%, repayable over an average life of 24.5 years. 9) All borrowing and investment activity during the year 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, as revised by Council on 20 December 2024.The authority's Treasury Management Practices have also been complied with, notwithstanding a temporary technical breach in respect of the limit on bank deposits. 1.4 The Audit and Scrutiny Committee is requested to: • Consider the Treasury Management Annual Report 2024/25 and note the technical breach to the bank deposit limit outlined at paragraph 5.2.5 of the report; and • Refer the report to full Council for noting. Page 4
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ARGYLL AND BUTE COUNCIL AUDIT AND SCRUTINY COMMITTEE FINANCIAL SERVICES 12 JUNE 2025 TREASURY MANAGEMENT ANNUAL REPORT 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 council is required under the Local Government in Scotland Act 2003, and supporting regulations, to have regard to the CIPFA Prudential Code for Capital Finance in Local Authorities and the CIPFA Code of Practice on Treasury Management (revised 2021), the Code. This report meets the requirements of both, providing a review of treasury management activities and the actual prudential and treasury indicators for 2024/25. 3.2 For 2024/25, the minimum reporting requirements were that full Council should receive the following reports: • An annual treasury strategy in advance of the year (Council 22 February 2024); • A mid-year treasury update report (Council 20 December 2024); and • An annual review following the end of the year describing the activity compared to the strategy, (this report). In addition, a quarterly treasury management update report as at 31 December 2024 was considered by the Audit and Scrutiny Committee on 13 March 2025. 3.3 The regulatory environment places responsibility on members for the review and scrutiny of treasury management strategy, policy and activities. This authority has complied with this requirement by giving prior scrutiny by the Audit and Scrutiny Page 5
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Committee before reporting to full Council. Treasury management training was delivered to members of the Audit and Scrutiny Committee during October 2024, in order to support this scrutiny role. 3.4 This annual report, prepared in compliance with the Code, provides details of the outturn position for treasury activities and highlights compliance with the strategy strategy, previously approved by members. Information is included in respect of the following: • 2024/25 Strategy; • Borrowing and investment activity; • 2024/25 capital expenditure and the Capital Financing Requirement (CFR); • Overall treasury position (debt and investments); and • Compliance with Prudential and Treasury Indicators. 4.0 RECOMMENDATIONS 4.1 The Audit and Scrutiny Committee is requested to: • Consider the Treasury Management Annual Report 2024/25 and note the technical breach to the bank deposit limit outlined at paragraph 5.2.5 of the report; and • Refer the report to full Council for noting. 5.0 DETAIL 5.1 2024/25 Strategy 5.1.1 Mid-year Review The Treasury Management Strategy for 2024/25 was approved by Council on 22 February 2024. However, as part of the mid-year review, in light of movements in capital planning assumptions from those underpinning the previously approved strategy, revised Prudential Indicators were approved by Council on 20 December 2024. The revised Prudential Indicators 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 5.1.2 The increase of £15m in the Authorised Limit reflected 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 original approved 2024/25 Strategy. Page 6
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5.1.3 Borrowing During 2024/25, the authority maintained an under-borrowed position. This meant that the capital borrowing need (the Capital Financing Requirement) was not fully funded with loan debt, as the authority’s significant internal reserve balances provided the opportunity for new external borrowing to be deferred, on a temporary basis. This is referred to as ‘internal borrowing’. Internal borrowing was a prudent and cost effective strategy in the current economic climate, with long term borrowing costs expected to fall back throughout 2025 and 2026, in the light of economic growth concerns and the eventual dampening of inflation, whilst also minimising exposure to investment risk. The authority has sought to minimise taking new long term borrowing at elevated levels (>5%) and has focused on a policy of internal and temporary borrowing, supplemented by short-dated borrowing (<5 years). The table at paragraph 5.5.1 shows the extent to which the council has utilised internal funds in lieu of borrowing. 5.1.4 Against this background and the risks within the economic forecast, caution was adopted within treasury operations. Interest rates in financial markets were closely monitored and a pragmatic strategy was adopted to manage interest rate risks. Based on long term borrowing interest rate forecasts and given the significant reserve balances held by the authority, it was felt that long term borrowing should be postponed, in favour of internal borrowing. However, the authority has a longer term underlying borrowing requirement and opportunities would be taken to secure new external borrowing, if rates were to take a dip due to ongoing volatility in financial markets, for example, following the introduction of President Trump’s trade tariffs policies. 5.1.5 Interest rate forecasts initially suggested gradual reductions in short, medium and longer term fixed borrowing rates during 2024/25. Bank Rate did peak at 5.25%, as anticipated, but the initial expectation of significant rate reductions did not transpire, primarily because inflation concerns remained elevated. Earlier forecasts were too optimistic (from a rate reduction perspective) and were more recently updated during November 2024. 5.1.6 PWLB rates are based on gilt (UK Government bonds) yields plus a specified margin determined by HM Treasury. Local authorities are able to access the PWLB Certainty rates, which equate to the appropriate gilt rate plus 80 basis points (0.80%). The 2024/25 strategy included market assumptions for these long term 5, 10, 25 and 50 year PWLB 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. These forecasts were later revised in November to 4.9%, 5.1%, 5.5% and 5.3% for 5, 10, 25 and 50 year PWLB rates and 4.5% for Bank Rate. However, gilt yields continued to be volatile throughout 2024/25 and PWLB rates have remained elevated. 5.1.7 Investments In accordance with the Code, the council’s approved Annual Investment Strategy set out the council’s investment priorities as being: • Security of capital Page 7
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• Liquidity • Yield 5.1.8 The authority aimed to achieve the optimum return (yield) on its investments, commensurate with proper levels of security and liquidity, and within the authority’s risk appetite. The risk appetite of the council would be low, prioritising security and liquidity. In the current economic climate, it was 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. 5.1.9 Investment returns remained robust throughout 2024/25 with Bank Rate reducing steadily through the course of the financial year. Bank Rate reductions of 0.25% occurred in August, November and February, bringing the headline rate down from 5.25% to 4.5% as at 31 March 2025. The authority was able to achieve returns in excess of 5% through to the summer of 2024 but by March 2025 deposit rates were up to 1% lower. 5.1.10 The Economy and Interest Rates Further commentary on the economy and interest rates, provided by the council’s treasury advisors, MUFG is provided for information as Appendix 1. 5.2 Borrowing and Investment Activity 5.2.1 Borrowing Activity No new long term borrowing was taken in the period 1 April to 30 September 2024. During the period 1 October 2024 to 31 March 2025, new PWLB long term borrowing totalling £22.000m was undertaken to provide an element of certainty in respect of funding the unfinanced net capital expenditure. Long term borrowing rates have been relatively high but forecast to steadily fall over the next few years. As such, new borrowing has been taken on a relatively short term basis. 5.2.2 The new loans taken out during the year were as follows: Lender Principal Type Interest Rate Maturity PWLB £12.000m Fixed 4.92% 10/08/26 PWLB £10.000m Fixed 4.86% 25/08/27 5.2.3 PWLB loan principal of £0.840m has been repaid in the 6 month period to 30 September 2024, with a further £0.840m repaid in the 6 month period to 31 March 2025. These repayments of principal, totalling £1.680m in the year, 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. 5.2.4 The authority has not borrowed more than, or in advance of its needs, purely in order to profit from the investment of the extra sums borrowed. Debt rescheduling opportunities were kept under review throughout the year. However, no Page 8
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rescheduling was undertaken during the year as the approximate 1% differential between PWLB new borrowing rates and premature repayment rates made rescheduling unviable. 5.2.5 Investment Activity The council’s Section 95 Officer confirms that the principles of the investment strategy have been adhered to during the year and that no liquidity difficulties were experienced. Throughout the year, investments have only been made in line with the approved limits for specific investment instruments, and in accordance with the creditworthiness approach. However, as a result of higher than anticipated receipts to the council’s bank account on Friday 3 January, a temporary technical breach of the £20m limit on deposits with any one bank occurred. Deposits of £21m were held with the Clydesdale bank over the weekend, prior to the position being rectified on Monday 6 January 2025. 5.2.6 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. The average rate of return on these investments was 5.07%, with an average investment duration of 10 days. This compares to the benchmark overnight SONIA rate average of 4.90% over the year. The Bank Rate started the year at 5.25% before being lowered by 0.25% in August, November and February, ending the year at 4.50%. 5.3 2024/25 Capital Expenditure and the Capital Financing Requirement (CFR) 5.3.1 IFRS16 Leases A new accounting standard, IFRS16 Leases has been adopted within the Local Authority Accounting Code of Practice and is applicable to accounts for the year ending 31 March 2025. This generally requires all leases to be recognised on the balance sheet, which impacts both assets and other long term liabilities (and the CFR). 5.3.2 Estimates of the impact of adopting IFRS16 were reflected within the Treasury and Prudential Indicators for 2024/25 and future years, contained within the approved Treasury Management Strategy. The impact on Other Long Term Liabilities and the CFR was estimated at £5m for 2024/25. 5.3.3 The authority engaged with MUFG, its current treasury advisors, to provide technical support services in respect of IFRS16 compliance. However, the required information has not been made available within the required timescale, to allow for completion of the pre-audit accounts, on this basis, by the statutory deadline of 30 June. As such, it has not been possible to reflect these new technical requirements within the actual debt or CFR figures. 5.3.4 Given that it has not been possible to comply with these requirements within the pre-audit version of the annual accounts, it should be noted that, as part of the audit process, there will be a requirement to restate assets and liabilities in respect of leasing arrangements, in order to comply with IFRS16. Page 9
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5.3.5 It is important to note that although these technical accounting changes will impact the CFR, they do not impact the borrowing required to finance capital plans. However, given that previous estimates included assumptions in respect of the impact of IFRS16 compliance, this gives rise to variations in the pre-audit actual outturn position from previous 2024/25 estimates. 5.3.6 Prudential Indicator for Capital Expenditure During the year, the gross capital expenditure and financing was monitored on an ongoing basis and regularly reported to the Policy and Resources Committee. The 2024/25 strategy estimated gross capital expenditure of £64.417m for the year. As part of the mid-year review, the 2024/25 estimated gross capital expenditure was revised to £81.532m, as outlined at paragraph 5.1.1. The increase mainly related 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. 5.3.7 Actual gross capital expenditure of £48.538m was incurred during 2024/25. The decrease in the actual outturn from the revised estimate mainly relates to slippage from 2024/25 into future years. It has also not been possible to account for leases under IFRS16 within the pre-audit annual accounts, as outlined at paragraph 5.3.3. 5.3.8 Financing of the Capital Plan The 2024/25 strategy mid-year review estimated gross capital expenditure of £82m for the year, with £46m to be financed from new borrowing. The following table shows the actual capital expenditure and how this was financed, in comparison to the revised estimate. 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). Capital Expenditure 2024/25 Revised Estimate £000 2024/25 Actual Outturn £000 Gross Capital Expenditure 81,532 48,538 Financed by: General Asset Sales 612 304 General Capital Grant 8,544 13,482 Project Specific Income 9,662 4,514 Revenue/Reserves 16,429 1,511 Total Financing 35,247 19,811 Borrowing Requirement 46,285 28,727 5.3.9 The reduction in the actual capital expenditure incurred during the year from the revised estimate impacts actual project specific income and required borrowing. Page 10
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It is also worth noting that additional Scottish Government funding of £3.8m was included within the 2024/25 General Capital Grant in respect of 2023/24 severe weather events (£2.3m) and to support the authority’s compliance with the landfill ban (£1.5m). This allowed for the use of reserves, previously earmarked to finance capital expenditure, to be used for revenue purposes, as anticipated in the approved revenue budget. Further, it has also been possible within the debt charges revenue budget capacity to borrow for expenditure, previously assumed to be met from reserves, providing flexibility in the financing of future capital investment plans. As a result of these changes, the actual net borrowing requirement has reduced by £17.558m from the revised estimate to £28.727m. 5.3.10 The Authority’s Borrowing Need (the Capital Financing Requirement) The level of capital activity also impacts the Capital Financing Requirement (CFR), the underlying need to borrow for capital purposes. The CFR is simply the total historic outstanding capital expenditure, which has not yet been paid for from either revenue or capital resources. It is essentially a measure of the authority’s underlying borrowing need or indebtedness. Any capital expenditure, which has not immediately been paid for through a revenue or capital resource, will increase the CFR. 5.3.11 Part of the authority’s treasury activities is to address the funding requirements for this borrowing need. The treasury service organises the authority’s cash position to ensure that sufficient cash is available to meet the capital plans and cash flow requirements. This may be sourced through borrowing from external bodies, (such as the Government, through the Public Works Loan Board [PWLB], or the money markets), or utilising temporary cash resources within the authority, as outlined at paragraph 5.1.3. 5.3.12 The CFR does not increase indefinitely, as prudent annual debt repayments require to be charged to revenue, reflective of the useful life of capital assets financed by borrowing (the statutory repayment of loans fund advances). The total CFR can also be reduced by charging more than the statutory revenue charge (special repayments of loans fund advances). 5.3.13 The Council’s 2024/25 prudent repayment policy (as required by Scottish Government) was approved as part of the Treasury Management Strategy Report for 2024/25. This authority has chosen to make statutory debt repayments through scheduled debt amortisation (principal repayment of loans fund advances). Consideration has also been given to the special repayment of debt, afforded by the use of earmarked reserves to manage the impact of additional debt charges on the revenue account. 5.3.14 The CFR represents a key prudential indicator. It includes PPP and lease arrangements reflected on the balance sheet. Whilst these increase the CFR, and therefore the authority’s borrowing requirement, these types of schemes include a borrowing facility by the PPP or lease provider and so the authority is not required to separately borrow for these schemes. The council held long term liabilities within its CFR in this respect totalling £100.946m as at 31 March 2025. Page 11
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5.3.15 The actual CFR for the year is shown in the table below. 2024/25 Revised Estimate £m 2024/25 Actual Outturn £m Opening CFR 332 332 Capital financing need for the year 46 29 Less Loans Fund statutory and special debt repayments and other financing movements (including PPP/finance lease arrangements and principal repayments) 12 17 Movement in CFR 34 12 Closing CFR 366 344 5.3.16 As part of the Treasury Management Mid-year Review report, Council noted an actual opening CFR of £332m as at 31 March 2024, as reported in the 2023/24 audited annual accounts, and a revised estimated closing CFR of £366m as at 31 March 2025 (£34m movement in CFR). The actual closing CFR as at 31 March 2025 is £344m, representing a movement of £12m in the CFR during the year. 5.3.17 The decreased movement of £22m in the CFR during the year reflects a decrease in borrowing to finance capital (£17m), as outlined in the table at paragraph 5.3.9, and special repayments of principal (£5m) in respect of prior year loans fund advances. It should be noted that the impact of additional special repayments of principal on the revenue account is entirely offset by the use of reserves, earmarked for capital purposes (£5m). 5.4 Treasury Position as at 31 March 2025 5.4.1 Debt The authority’s treasury management debt and investment portfolio is managed by the treasury management function, in order to ensure adequate liquidity for revenue and capital activities, security of investments and management of risk within all treasury management activities. Procedures and controls to achieve these objectives are well established. Page 12
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5.4.2 As at 31 March 2025, the council’s debt (excluding PPP and finance lease liabilities) totalled £129.774m, while net debt, after allowing for treasury investments of £14.548m, totalled £115.226m, as summarised in the table below. Debt Portfolio Amount £000 Average Interest Rate Average Life (Years) Public Works Loans Board 124,197 4.46% 24.6 Market Loans (LOBOs) 5,255 4.75% <1 Other* 322 4.19% <1 Total Debt 129,774 4.48% 24.5 Total Investments 14,548 4.56% <1 Net Debt 115,226 4.47% 22.1 *Note: This represents short term borrowing from various institutions (£314k) and local bonds (£3k). 5.4.3 The maturity structure of the total debt portfolio was as follows: Debt Portfolio Amount £000 Under 12 months 7,239 12 months and within 24 months 13,680 24 months and within 5 years 15,058 5 years and within 10 years 8,400 10 years and within 20 years 13,397 20 years and within 30 years 14,023 30 years and within 40 years 25,977 40 years and within 50 years 32,000 Total Debt 129,774 This debt maturity profile is within the specified limits for each band, as set out within the approved treasury indicators contained within the 2024/25 Treasury Management Strategy. 5.4.4 Investments All treasury investments are managed in-house and are invested for up to 1 year. An analysis of the investment portfolio held, totalling £14.548m as at 31 March 2025, is provided in the table below. Investment Portfolio Type Amount £000 Share of Portfolio Clydesdale Bank Instant Access 948 7% Money Market Funds (Various) Call Accounts 13,600 93% Total Investments 14,548 100% 5.4.5 In addition to the above, non-treasury investments totalled £3.371m as at 31 March 2025, comprising loans to various Housing Associations (£2.879m) and Page 13
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HubCo/DBFM (£0.492m). These loans were provided to meet service objectives rather than for treasury management purposes. However, it should be noted that these loans are not provided at preferential interest rates. 5.5 Compliance with Prudential Limits and Treasury Indicators 5.5.1 Prudential and Treasury Indicators are designed to ensure capital investment plans are affordable, prudent and sustainable. Borrowing activity is constrained by prudential indicators for borrowing and the CFR, and by the authorised limit. In order to ensure that borrowing levels are prudent over the medium term and only for a capital purpose, the authority requires to ensure that its external borrowing does not, except in the short term, exceed the total of the CFR in the preceding year plus the estimates of any additional capital financing requirement for the current and next two financial years. This essentially means that the authority is not borrowing to support revenue expenditure. The table below highlights the authority’s borrowing position against the CFR and demonstrates that it has complied with this prudential indicator. *Note: Includes on balance sheet PPP arrangements and finance leases. 2024/25 Revised Estimate £m 2024/25 Actual Outturn £m Borrowing 130 130 Other Long Term Liabilities* 106 101 Total Debt 236 231 CFR* (year end position) 366 344 Under / (Over) Borrowing 130 113 5.5.2 The level of ‘under borrowing’ outlined in the table above reflects the level of internal borrowing, as described in paragraph 5.1.3. Also, the estimated £5m impact of IFRS16 compliance on Other Long Term Liabilities, as outlined in paragraph 5.3.2 accounts for the variation in the actual total debt from the revised estimate. 5.5.3 The expected debt position over the year is termed the Operational Boundary, while the Authorised Limit is the expected maximum borrowing need with some headroom for unexpected cashflow movements. This is the statutory limit determined under section 3 (1) of the Local Government Act 2003, which needs to be set and revised by Members. Borrowing above this limit is prohibited. The following table demonstrates that during 2024/25, the authority has maintained gross borrowing within its authorised limit. Page 14
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*Note: On balance sheet PPP arrangements and finance leases. 2024/25 £m Borrowing 261 Other Long Term Liabilities* 106 Operational Boundary 367 Borrowing 266 Other Long Term Liabilities* 109 Authorised Limit 375 Maximum Gross Borrowing position during the year Borrowing 130 Other Long Term Liabilities* 106 Total Debt 236 5.5.4 In addition to the above, the ‘Actual financing costs as a proportion of net revenue stream’ indicator identifies the trend in the cost of capital, (borrowing and other long term obligation costs net of investment income), against the net revenue stream. This is calculated at 7.4% for the year, while the original estimate was 4.4%. The increase is largely due to special repayments of principal. However, as outlined at paragraph 5.3.17, the increase in financing costs in this respect is fully funded by a transfer from reserves, earmarked for capital purposes, with no overall impact on the General Fund balance. 5.5.5 During the year to 31 March 2025, the authority has operated within the treasury and prudential indicators set out in the approved Treasury Management Strategy for 2024/25, as revised by Council on 20 December 2024. The Section 95 Officer also confirms that no difficulties are envisaged in complying with these indicators across future years. All treasury management activities have also been conducted in full compliance with the authority's Treasury Management Practices. However, a temporary technical breach of the limit on bank deposits occurred during the year, as outlined at paragraph 5.2.5. 6.0 CONCLUSION 6.1 During 2024/25, the authority maintained an under-borrowed position. The significant level of internal reserve balances has provided an opportunity to defer new external borrowing, whilst also minimising exposure to investment risk. The level of internal borrowing as at 31 March 2025 stood at £113m. However, new PWLB borrowing totalling £22m was undertaken during the year, to provide an element of certainty in respect of funding the underlying borrowing requirement. 6.2 PWLB loan principal of £1.680m has been repaid during the year in respect of 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. Page 15
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6.3 The authority has not borrowed more than, or in advance of its needs, purely in order to profit from the investment of the extra sums borrowed. Also, no debt rescheduling was undertaken during the year as the differential between PWLB new borrowing and premature repayment rates made rescheduling unviable. 6.4 The principles of the investment strategy have been adhered to during the year and no liquidity difficulties were experienced. Throughout the year, investments have only been made in line with the approved limits for specific investment instruments, and in accordance with the creditworthiness approach. However, a temporary technical breach of the £20m limit on deposits with any one bank occurred during the year (£21m deposited with the Clydesdale bank from 3 to 6 January 2025). 6.5 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. The average rate of return on these investments was 5.07%, compared to the benchmark overnight SONIA rate average of 4.90% over the year. 6.6 The actual 2024/25 gross capital expenditure was £49m, with £29m to be financed from new borrowing, compared to an estimated borrowing requirement of £46m. Due to significant slippage in the capital programme, it has also been possible to borrow for expenditure, previously assumed to be met from reserves, providing flexibility in the financing of future capital investment plans. 6.7 The element of capital expenditure to be financed from borrowing impacts the Capital Financing Requirement (CFR), the underlying need to borrow for capital purposes. The actual closing CFR as at 31 March 2025 is £344m, representing a movement of £12m in the CFR during the year, compared to an estimated movement of £34m. This decrease of £22m in the movement reflects a decrease in borrowing to finance capital (£17m) and special repayments of principal (£5m) in respect of prior year loans fund advances. It should be noted that the impact of additional special repayments of principal on the revenue account is entirely offset by the use of reserves, earmarked for capital purposes (£5m). 6.8 As at 31 March 2025, the council’s debt (excluding PPP and finance lease liabilities) totalled £129.774m, while net debt, after allowing for treasury investments of £14.548m, totalled £115.226m. The average interest rate payable on this gross debt was 4.48%, repayable over an average life of 24.5 years. 6.9 All borrowing and investment activity during the year 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, as revised by Council on 20 December 2024. The authority's Treasury Management Practices have also been complied with, notwithstanding a temporary technical breach in respect of the limit on bank deposits. Page 16
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7.0 IMPLICATIONS 7.1 Policy Complied with treasury management policies and practices, with the exception of a temporary technical breach in respect of the bank deposit limit 7.2 Financial Provides an annual report on 2024/25 treasury management activity and compliance with approved treasury and prudential indicators 7.3 Legal None 7.4 HR None 7.5 Customer Service None 7.6 Risk Provides an overview of treasury risk 7.7 Climate Change None 7.8 Fairer Scotland Duty None 7.9 Equalities – protected characteristics None 7.10 Consumer Duty None 7.11 Island Communities None 7.12 Children’s Rights and Wellbeing None Kirsty Flanagan Executive Director/S95 Officer 4 June 2025 Councillor Ross Moreland, Policy Lead for Finance and Commercial Services APPENDICES Appendix 1 - The economy and interest rates For further information contact: Carolyn Earl, Interim Head of Financial Services Carolyn.Earl@argyll-bute.gov.uk Page 17
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Classification: OFFICIAL Appendix 1 The Economy and Interest Rates UK Economy UK inflation has proved somewhat stubborn throughout 2024/25. Having started the financial year at 2.3% y/y (April), the CPI measure of inflation briefly dipped to 1.7% y/y in September before picking up pace again in the latter months. The latest data shows CPI rising by 2.8% y/y (February), but there is a strong likelihood that figure will increase to at least 3.5% by the Autumn of 2025. Against that backdrop, and the continued lack of progress in ending the Russian invasion of Ukraine, as well as the potentially negative implications for global growth as a consequence of the implementation of US tariff policies by US President Trump in April 2025, Bank Rate reductions have been limited. Bank Rate currently stands at 4.5%, despite the Office for Budget Responsibility reducing its 2025 GDP forecast for the UK economy to only 1% (previously 2% in October). Moreover, borrowing has becoming increasingly expensive in 2024/25. Gilt yields rose significantly in the wake of the Chancellor’s Autumn Statement, and the loosening of fiscal policy, and have remained elevated ever since, as dampened growth expectations and the minimal budget contingency (<£10bn) have stoked market fears that increased levels of borrowing will need to be funded during 2025. The table below provides a snapshot of the conundrum facing central banks: inflation pressures remain, labour markets are still relatively tight by historical comparisons, and central banks are also having to react to a fundamental re-ordering of economic and defence policies by the US administration. UK Eurozone US Bank Rate 4.50% 2.5% 4.25%-4.5% GDP 0.1%q/q Q4 (1.1%y/y) +0.1%q/q Q4 (0.7%y/y) 2.4% Q4 Annualised Inflation 2.8%y/y (Feb) 2.3%y/y (Feb) 2.8%y/y (Feb) Unemployment Rate 4.4% (Jan) 6.2% (Jan) 4.1% (Feb) The Bank of England sprung no surprises in their March meeting, leaving Bank Rate unchanged at 4.5% by a vote of 8-1, but suggesting further reductions would be gradual. The Bank of England was always going to continue its cut-hold-cut-hold pattern by leaving interest rates at 4.50% but, in the opposite of what happened at the February meeting, the vote was more hawkish than expected. This suggested that as inflation rises later in the year, the Bank cuts rates even slower, but the initial impact of President Trump’s tariff policies in April 2025 on the financial markets underpin our view that the Bank will eventually reduce rates to 3.50%. Page 18
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Classification: OFFICIAL Having said that, the Bank still thinks inflation will rise from 2.8% in February to 3¾% in Q3. And while in February it said “inflation is expected to fall back thereafter to around the 2% target”, this time it just said it would “fall back thereafter”. That may be a sign that the Bank is getting a bit more worried about the “persistence in domestic wages and prices, including from second-round effects”. Accordingly, although we expect a series of rate cuts over the next year or so, that does not contradict the Bank taking “a gradual and careful” approach to cutting rates, but a tepid economy will probably reduce inflation further ahead and prompt the Bank to cut at regular intervals. From a fiscal perspective, the increase in businesses’ national insurance and national minimum wage costs from April 2025 is likely to prove a headwind, although in the near-term the Government’s efforts to provide 300,000 new homes in each year of the current Parliament is likely to ensure building industry employees are well remunerated, as will the clamp-down on immigration and the generally high levels of sickness amongst the British workforce. Currently wages continue to increase at a rate close to 6% y/y. The MPC would prefer a more sustainable level of c3.5%. As for equity markets, the FTSE 100 has recently fallen back to 7,700 having hit an all-time intra-day high 8,908 as recently as 3rd March. The £ has also endured a topsy-turvy time, hitting a peak of $1.34 before dropping to $1.22 in January and then reaching $1.27 in early April 2025. USA Economy Despite the markets willing the FOMC to repeat the rate cut medicine of 2024 (100 basis points in total), the Fed Chair, Jay Powell, has suggested that the Fed. Funds Rate will remain anchored at 4.25%-4.5% until inflation is under control, and/or the economy looks like it may head into recession as a consequence of President Trump’s tariff policies. Inflation is close to 3% and annualised growth for Q4 2024 was 2.4%. With unemployment just above 4%, and tax cuts in the pipeline, the FOMC is unlikely to be in a hurry to cut rates, at least for now. EZ Economy The Eurozone economy has struggled throughout 2024 and is flat lining at present, although there is the promise of substantial expenditure on German defence/infrastructure over the coming years, which would see a fiscal loosening. France has struggled against a difficult political backdrop, but with a large budget deficit it is difficult to see any turn-around in economic hopes in the near-term. With GDP currently below 1% in the Euro-zone, the ECB is likely to continue to cut rates, although the headline inflation rate is still above 2% (2.3% February 2025). Currently at 2.5%, a further reduction in the Deposit Rate to at least 2% is highly likely. Page 19
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