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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.
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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
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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
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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