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ANNUAL REPORT ON TREASURY MANAGEMENT & ACTUAL PRUDENTIAL INDICATORS 2014/15 1 INTRODUCTION 1. The Local Government Act 2003 requires the Council to produce an annual treasury management review of activities and the actual prudential and treasury indicators for 2014/15.This report meets the requirements of both the CIPFA Code of Practice on Treasury Management and the CIPFA Prudential Code for Capital Finance in Local Authorities. The Council is required to comply with both Codes through Regulations issued under the Local Government Act 2003. 2. This report summarises: The economic and interest rate environment during 2014/15; The overall treasury position of the Council; The strategy agreed for 2014/15; The Council’s Borrowing Requirement and debt; Borrowing outturn for 2014/15; Investment outturn for 2014/15; Regulatory Framework and Risk; Appendix A Prudential and Treasury Indicators 2014/15 Appendix B Debt outstanding at 31st March 2015 Appendix C Investments held at 31st March 2015. THE ECONOMIC AND INTEREST RATE ENVIRONMENT 3. The original market expectation at the beginning of 2014/15 was for the first increase in Bank Rate to occur in quarter 1 2015 as the unemployment rate had fallen much faster than expected through the Bank of England’s initial forward guidance target of 7%. In May, however, the Bank revised its forward guidance. A combination of very weak pay rises and inflation above the rate of pay rises meant that consumer disposable income was still being eroded and in August the Bank halved its forecast for pay inflation in 2014 from 2.5% to 1.25%. Expectations for the first increase in Bank Rate therefore started to recede as growth was still heavily dependent on buoyant consumer demand. During the second half of 2014 financial markets were caught out by a halving of the oil price and the collapse of the peg between the Swiss franc and the euro. 4. Fears also increased considerably that the European Central Bank (ECB) was going to do too little too late to ward off the threat of deflation and recession in the Eurozone. In mid-October, financial markets had a major panic for about a week. By the end of 2014, it was clear that inflation in the UK was going to head towards zero in 2015 and possibly even turn negative. In turn, this made it clear that the MPC would have great difficulty in starting to raise Bank Rate in 2015 while inflation was around zero and so market expectations for the first increase receded back to around quarter 3 of 2016. 5. Gilt yields were on a falling trend for much of the last eight months of 2014/15 but were then pulled in different directions by increasing fears after the anti-austerity parties won power in Greece in January; developments since then have increased fears that Greece could be heading for an exit from the euro. While the direct effects of this would be manageable by the EU and ECB, it is very hard to quantify quite what the potential knock on effects would be on other countries in the Eurozone once the so called impossibility of a country leaving the Eurozone had been disproved. Another downward pressure on gilt yields was the announcement in January that the ECB would start a major programme of quantitative easing, purchasing Eurozone government and other debt in March. On the other hand, strong growth in the US 2 caused an increase in confidence that the US was well on the way to making a full recovery from the financial crash and would be the first country to start increasing its central rate, probably by the end of 2015. The UK would be closely following it due to strong growth over both 2013 and 2014 and good prospects for a continuation into 2015 and beyond. However, there was also an increase in concerns around political risk before the general election in May 2015. . OVERALL TREASURY POSITION at 31st MARCH 2015 6. At the beginning and the end of 2014/15 the Council’s treasury (excluding borrowing by PFI and finance leases) position was as follows:31st March 2014 Principal Average Rate £m % 56.237 5.99 114.064 (57.827) 97.500 39.673 Total Debt Capital Financing Requirement Over/(under) borrowing Total Investments Net Investment Position 31st March 2015 Principal Average Rate £m % 48,044 5.86 109.347 (61.303) 76,405 15.102 THE STRATEGY AGREED FOR 2014/15 7. The expectation for interest rates within the strategy for 2014/15 anticipated low but rising Bank Rate (starting in quarter 1 of 2015), and gradual rises in medium and longer term fixed borrowing rates during 2014/15. Variable, or short-term rates, were expected to be the cheaper form of borrowing over the period. Continued uncertainty in the aftermath of the 2008 financial crisis promoted a cautious approach, whereby investments would continue to be dominated by low counterparty risk considerations, resulting in relatively low returns compared to borrowing rates. 8. In this scenario, the treasury strategy was to postpone borrowing to avoid the cost of holding higher levels of investments and to reduce counterparty risk. 9. The actual movement in gilt yields meant that PWLB rates saw little overall change during the first four months of the year but there was then a downward trend for the rest of the year with a partial reversal during February. 3 THE COUNCIL’S BORROWING REQUIREMENT AND DEBT 10. The Council’s underlying need to borrow to finance capital expenditure is termed the Capital Financing Requirement (CFR). 31st March 2014 Actual Capital Financing Requirement £m 114.064 31st March 2015 Original Indicator £m 110.137 Actual £m 109.347 BORROWING OUTTURN FOR 2014/15 11. Due to investment concerns, both counterparty risk and low investment returns, no borrowing was undertaken during the year. 12. No rescheduling was done during the year as the average 1% differential between PWLB new borrowing rates and premature repayment rates made rescheduling unviable. 13. A money market loan of £8 million, inherited from Cleveland County Council, matured in December 2014. The loan was at an interest rate of 8.87% and incurred an annual interest charge of £709,600. The Council repaid the loan from existing resources without refinancing. 14. Consequently the closing debt at 31st March 2015 is significantly lower than the figure at the end of March 2014. The difference is accounted for by the £8 million repayment and some payments of principal on the Council’s annuity loans. Details of the Council’s loan portfolio at 31st March 2015 is shown in Appendix B. INVESTMENT RATES IN 2014/15 15. Bank Rate remained at its historic low of 0.5% throughout the year; it has now remained unchanged for six years. Market expectations as to the timing of the start of monetary tightening started the year at quarter 1 2015 but then moved back to around quarter 3 2016 by the end of the year. Deposit rates remained depressed during the whole of the year, primarily due to the effects of the Funding for Lending Scheme. INVESTMENT OUTTURN FOR 2014/15 16. The Council’s investment policy is governed by CLG guidance, which has been implemented in the annual investment strategy approved by the Council on 26/02/2014. This policy sets out the approach for choosing investment counterparties, and is based on credit ratings provided by the three main credit rating agencies supplemented by additional market data (such rating outlooks, credit default swaps, bank share prices etc.) 17. The Council maintained an average balance of £107.4 million of internally managed 4 funds. These funds earned an average rate of return of 0.72 %. The comparable performance indicator is the average 7-day LIBID rate, which was 0.352%. This compares with a budget assumption of £80 million investment balances earning an average rate of 0.75%. The movement in investment rates is demonstrated in the graph below. 18. Details of the Council’s investments at 31st March 2015 is attached at Appendix C. REGULATORY FRAMEWORK & RISK 19. The Council’s treasury management activities are regulated by a variety of professional codes and statutes and guidance: The Local Government Act 2003 (the Act) which provides the powers to borrow and invest as well as providing controls and limits on this activity; The Act permits the Secretary of State to set limits either on the Council or nationally on all local authorities restricting the amount of borrowing which may be undertaken (although no restrictions were made in 2014/15); Statutory Instrument (SI) 3146 2003, as amended, develops the controls and powers within the Act; The SI requires the Council to undertake any borrowing activity with regard to the CIPFA Prudential Code for Capital Finance in Local Authorities; The SI also requires the Council to operate the overall treasury function with regard to the CIPFA Code of Practice for Treasury Management in the Public Services; Under the Act CLG has issued Investment Guidance to structure and regulate the Council’s investment activities. Under section 238(2) of the Local Government and Public Involvement in Health Act 2007 the Secretary of State has taken powers to issue guidance on 5 accounting practices. Guidance on Minimum Revenue Provision was issued under this section on 8th November 2007. 20. The Council has complied with all the above relevant statutory and regulatory requirements which limit the levels of risk associated with its treasury management activities. In particular its adoption and implementation of both the Prudential Code and the Code of Practice for Treasury Management means both that its capital expenditure is prudent, affordable and sustainable, and its treasury management practices demonstrate a low risk approach. J Danks Corporate Director of Resources 6 APPENDIX A PRUDENTIAL AND TREASURY INDICATORS Actual prudential and treasury indicators 31st March 2014 Actual General Fund Capital Expenditure General Fund Capital Financing Requirement Maximum Gross borrowing position during the year External Debt Investments Longer than 1 year Under 1 year TOTAL Net Borrowing/ (investments) 31st March 2015 Actual £m Original Indicator £m 41.500 49.197 46.341 114.064 110.137 109.347 56.237 56.237 56.237 56.237 56.044 48.044 0.000 97.500 97.500 (41.263) 0.000 80.000 80.000 (23.956) 0.000 76.405 76.405 (28.361) £m Gross borrowing and the CFR 1 In order to ensure that borrowing levels are prudent over the medium term and only for a capital purpose, the council has to ensure that its gross external borrowing does not, except in the short term, exceed the total of the capital financing requirement in the preceding year (2014/15) plus the estimates of any additional capital financing requirement for the current (2014/15) and next two financial years. This essentially means that the Council is not borrowing to support revenue expenditure. This indicator allows the Council some flexibility to borrow in advance of its immediate capital needs in 2014/15. The authorised limit 2 The authorised limit is the “affordable borrowing limit” required by Section 3 of the Local Government Act 2003. Once this is set, the Council does not have the power to borrow above this level. The table below demonstrates that during 2014/15 the Council has maintained gross borrowing within its authorised limit. 7 The operational boundary 3 The operational boundary is the expected borrowing position of the Council during the year. Periods where the actual position is either below or over the boundary is acceptable subject to the authorised limit not being breached. Actual financing costs as a proportion of net revenue stream 4 This 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. Authorised Limit Maximum gross borrowing position Operational boundary Average gross borrowing position Minimum gross borrowing position Financing costs as a proportion of net revenue stream Ratio of financing costs to net revenue stream General Fund Incremental impact of capital investment decisions Increase in Council Tax (Band D) per annum 31st March 2014 Actual 2014/15 £147.800m £56.237m £127.000m £53.798m £48.044m 0.9% 31st March 2015 Actual % Original Indicator % 0.7 0.9 0.9 31st March 2014 Actual % 31st March 2015 Actual £ Original Indicator £ 0.00 0.00 0.00 8 £ 31st March 2014 31st March 2015 Principal Average Principal Average Rate Rate £m % £m % Fixed Rate Funding PWLB Market Variable Rate Funding PWLB Market Total debt 5.237 10.000 ( ( 8.12 5.044 2.000 7.98 0 41.000 0 5.20 0 41.000 0 5.20 56.237 5.99 48.044 5.86 Capital Financing Requirement 114.064 109.347 Over/(under) borrowing (57.827) (61.303) Total Investments 97.500 Net Investment Position 39.673 5 0.94 76.405 15.102 The maturity structure of the debt portfolio was as follows:- Debt Under 12 months 12 months and within 24 months 24 months and within 5 years 5 years and within 10 years 10 years and within 20 years 20 years and within 30 years 30 years and within 40 years 40 years and within 50 years 50 years and within 60 years 60 years and within 70 years TOTAL 31st March 2014 Actual 31st March 2015 Actual £m 8.174 £m 0.190 0.208 0.173 0.596 0.494 6.123 6.068 5.304 5.287 11.000 11.000 1.563 1.919 2.269 1.913 0.000 0.000 21.000 21.000 56.237 48.044 9 0.78 6 The maturity structure of the investment portfolio was as follows:- Investments 7 31st March 2014 Actual 31st March 2015 Actual Longer than 1 year £m 0.000 Original Indicator £m 0.000 Under 1 year TOTAL 97.500 97.500 80.000 80.000 76.405 76.405 £m 0.000 The exposure to fixed and variable rates was as follows:- Investments Fixed rate (principal) 31st March 2014 Actual £m 41.000 31st March 2015 Original Indicator £m Actual £m 54,000 80.000 Variable rate (principal) TOTAL 56.500 22,405 97.500 80.000 10 76.405 APPENDIX B Debt Outstanding at 31st March 2015 Loan Lender 12 months & under 467057 PWLB 476058 PWLB 466492 PWLB Start Maturity 10-Jul-1989 31-Jul-2015 01-Jan-2004 31-Dec-2015 01-Jan-2004 31-Mar-2016 Interest 9.625 8 9.25 Outstanding Debt 142,107.88 26,716.74 21,373.39 190,198.01 1 year to 2 years 467058 471705 471706 466493 PWLB PWLB PWLB PWLB 10-Jul-1989 01-Jan-2004 01-Jan-2004 01-Jan-2004 31-Jul-2016 30-Sep-2016 30-Sep-2016 31-Mar-2017 9.625 9.875 9.875 9.25 142,107.88 4,809.01 9,885.19 16,030.04 172,832.12 2 to 5 years 480866 463966 464618 467059 467066 467574 PWLB PWLB PWLB PWLB PWLB PWLB 01-Jan-2004 08-Feb-1988 01-Jan-2004 10-Jul-1989 01-Jan-2004 10-Oct-1989 30-Jun-2017 31-Jan-2018 31-Mar-2018 31-Jul-2018 31-Mar-2019 31-Jul-2019 5.75 9.5 9.25 9.625 9.625 9.75 26,716.74 213,161.82 26,716.74 142,107.88 14,138.05 71,053.94 493,895.17 5 years to 10 years Scottish Provident 04-Feb-1986 04-Feb-2021 467526 PWLB 01-Jan-2004 31-Mar-2021 484303 PWLB 01-Jan-2004 30-Jun-2021 479996 PWLB 01-Jan-2004 31-Dec-2021 479482 PWLB 01-Jan-2004 30-Jun-2022 Barclays 01-Jan-2004 03-Nov-2022 480389 PWLB 01-Jan-2004 31-Mar-2025 11.5 9.75 5.75 6.375 7.125 8.99 6.25 2,000,000.00 8,492.19 807.71 16,030.04 26,716.74 4,000,000.00 16,030.04 6,068,076.72 10 years to 20 years 478327 486677 465102 473557 481266 402348 402349 466016 Depfa PWLB PWLB PWLB PWLB PWLB PWLB PWLB PWLB 26-Jun-2001 26-Jun-2026 01-Jan-2004 31-Dec-2026 01-Jan-2004 31-Dec-2026 18-Aug-1988 31-Jul-2028 01-Jan-2004 30-Sep-2028 01-Jan-2004 31-Dec-2028 15-Sep-1969 31-Jul-2029 15-Sep-1969 31-Jul-2029 24-Jan-1989 31-Jul-2033 5.03 7.875 5.25 9.375 7.875 5.375 9.375 9.375 9.25 5,000,000.00 26,716.74 16,030.04 177,634.85 10,686.70 16,030.04 490.39 299.87 39,696.96 5,287,585.59 11 20 to 30 years Dexia Dexia 17-Jul-2002 17-Jul-2042 12-Dec-2005 10-Dec-2042 4.7 4.875 5,000,000.00 6,000,000.00 11,000,000.00 30 to 40 years 491100 491979 491981 491982 493326 493327 492196 492197 493328 493229 493230 PWLB PWLB PWLB PWLB PWLB PWLB PWLB PWLB PWLB PWLB PWLB 23-Jan-2006 31-Mar-2051 24-Aug-2006 31-Jan-2052 24-Aug-2006 31-Mar-2052 24-Aug-2006 30-Sep-2052 30-May-2007 31-Mar-2053 30-May-2007 30-Sep-2053 28-Sep-2006 30-Sep-2053 28-Sep-2006 31-Mar-2054 30-May-2007 31-Mar-2054 30-May-2007 30-Sep-2054 30-May-2007 31-Mar-2055 3.7 4.25 4.25 4.25 4.6 4.6 4.05 4.05 4.6 4.6 4.6 284,215.76 177,634.85 177,634.85 177,634.85 177,634.85 177,634.85 106,580.91 106,580.91 177,634.85 177,634.85 177,634.85 1,918,456.38 40 to 50 years 493331 492919 492920 492921 492922 493332 492923 492924 492925 492926 494748 PWLB PWLB PWLB PWLB PWLB PWLB PWLB PWLB PWLB PWLB PWLB 30-May-2007 30-Sep-2055 15-Feb-2007 30-Sep-2055 15-Feb-2007 30-Sep-2055 15-Feb-2007 31-Mar-2056 15-Feb-2007 31-Mar-2056 30-May-2007 31-Mar-2056 15-Feb-2007 30-Sep-2056 15-Feb-2007 30-Sep-2056 15-Feb-2007 31-Jan-2057 15-Feb-2007 31-Jan-2057 15-Aug-2008 31-Mar-2058 4.6 4.4 4.4 4.4 4.4 4.6 4.4 4.4 4.4 4.4 4.39 177,634.85 177,634.85 177,634.85 177,634.85 177,634.85 172,424.39 177,634.85 177,634.85 177,634.85 177,634.85 142,107.88 1,913,245.92 60 to 70 years Depfa Depfa 06-Mar-2007 07-Mar-2077 06-Mar-2007 07-Mar-2077 4.81 4.71 6,000,000.00 15,000,000.00 21,000,000.00 GRAND TOTAL 48,044,289.91 12 APPENDIX C INVESTMENTS AS AT 31 MARCH 2015 NAME MATURITY TOTAL Call Accounts Nat West SIBA Santander Handelsbanken 405,000 10,000.000 12,000,000 22,405,000 Less than one month Goldman Sachs Goldman Sachs 02-Apr-15 14-Apr-15 12,000,000 3,000,000 15,000,000 One to Three Months Three to Six Months Barclays Nationwide Coventry 31-Jul-15 05-Aug-15 23-Sep-15 5,000,000 9,000,000 5,000,000 19,000,000 Six months to one Year Nationwide Lloyds/Bank of Scotland Barclays Lloyds/Bank of Scotland 21-Dec-15 01-Mar-16 01-Mar-16 18-Mar-16 5,000,000 5,000,000 5,000,000 5,000,000 20,000,000 GRAND TOTAL 76,405,000 13