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Item: 6(a)
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REPORT TO POLICY AND RESOURCES COMMITTEE – 5 MARCH 2009
TREASURY MANAGEMENT STRATEGY 2008-09 - UPDATE
1.
Reason for Report
1.1
This report updates the Committee on the impact of the current economic
turmoil has had in relation to the Council’s treasury management activities it
also seeks to report the savings arising as a result of actions undertaken.
2.
Background
2.1
The CIPFA Code of Practice on Treasury Management in the Public Services
requires the Council to set out its treasury management strategy for borrowing
and investment. The Treasury Management Strategy including the
Investment Policy and Long Term Borrowing Strategy and three year
Prudential Indicators is prepared annually. The strategy in relation to
2008/09 was approved by Policy and Resources Committee on 17 April 2008
with updates to the Investment Policy homologated at this Committee on 13
November 2008. The strategy in relation to 2009/10 appears elsewhere on
today’s agenda.
2.2
During 2008 economic data had been indicating a slowing economy for some
while but it was not sufficiently weak to force the Bank of England to cut
interest rates until 8 October 2008. It was the strength of the banking crisis,
pre-empted by the collapse of Lehmans Bank in New York that eventually
drove the interest cut of 0.5% on October 8 in conjunction with the Federal
Reserve, the ECB (European Central Bank) and other central banks. And
thereafter further reduced by 1.5% on 6 November, 1% on 4 December, 0.5%
on 8 January 2009 and 0.5% on 5 February to 1.0%.
2.3
As a result of the banking crisis the UK Government took action in September
2009 to either supply finance itself to recapitalise some of the major clearing
banks or to require the others to strengthen their capital position by their own
capital raising efforts. The banking crisis has given rise to significant changes
to financial institution credit ratings with reductions and amendments to the
potential financial institutions (counterparties) the Council can use for its
investment. Aberdeenshire Council’s counterparties are selected from a
credit rating managed by Sector the Council’s Treasury Advisors.
Investments can range from being “at call” i.e. payable on demand, to ”fixed
term deposits” of up to 364 days. The average daily investment for 2008 was
£93.4m.
2.4
At its meeting of the 12 February 2009 the Council instructed officers to
“submit to the Policy and Resources Committee a report on the options for
using treasury management to release additional £200,000 in 2009/10 for
essential repairs and maintenance in schools.”
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3.
Proposals
3.1
It is proposed that the Committee note and support the treasury management
actions undertaken by Aberdeenshire Finance during 2008/09.
4.
Discussion
4.1
In early October 2008 Aberdeenshire Finance as a result of the ongoing crisis
tightened its Investment Policy and adopted a number of working practices
which restricted Investment Practices further than those indicated in the
Investment Policy. These were:
4.2

Working towards reducing the maximum exposure to any one counterparty
to £5m, with the exception of those institutions where wholesale money
market deposits are covered by government guarantee i.e. Northern Rock
and six Irish financial institutions.

The length of new fixed term deposits was minimised, with three months
being the maximum exposure.

The debt management office (DMO) is an Executive Agency of the
Treasury and offers a fixed term deposit facility. The rate of return
provided by this facility is below market rate however it is government
secured and therefore minimises risk. An uncapped counterparty limit was
adopted for the DMO.
In late December 2008 following a series of media reports concerning the Irish
economy this practice was reviewed by Aberdeenshire Finance:

counterparty limits for Irish financial institutions were reduced to £5 million.

”at call” bank accounts are used to place deposits that can be withdrawn
without notice at any time. It was agreed that the counterparty limit for the
three institutions we have these accounts with who are eligible institutions
in relation to the UK government credit guarantee scheme and the bank
recapitalisation fund, could be increased to £10 million. These are: Abbey,
HBOS and Clydesdale Bank.
4.3
In early January 2009 the Councils Treasury Advisors issued advice indicating
that the Council should not place any new deposits with the Irish financial
institutions. At this point Aberdeenshire Finance stopped the practice of
placing new deposits with these institutions. The Council’s current exposure to
Irish Banks is £21 million. These cannot be withdrawn prematurely without
the Council incurring large penalties.
4.4
Additionally, despite historically low long term borrowing rates, Aberdeenshire
Finance’s strategy has been to utilise internal balances to fund capital activity
thereby minimising interest rate and credit risk.
4.5
Further steps were taken to minimise credit risk when in October 2008
repayments of £15 million of long term borrowing were made with further
repayments of £69 million made in January 2009. This action took
advantage of an opportunity that gave rise to savings over the life of the loans
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and discounts. When a loan with the PWLB is repaid early, a premium or
discount is paid or received from the PWLB. These payments or receipts
represent the difference between the interest rate of the loan repaid and the
current PWLB interest rate for a loan lent for the same period. Discounts
totalling £886,000 (General Fund £630,000, HRA £256,000), have been
reported already in the revenue budget monitoring during the year following
the October repayment. And a further saving of £1,573,000 (General Fund
£1,118,000, HRA £455,000) arising from the early repayments made in
January is detailed in the revenue budget monitoring report elsewhere on
today’s agenda. These figures indicate that £200,000 could be released into
2009/10 in line with the Council decision referred to at 2.4 above.
4.6
It is anticipated that long term borrowing to replace the repaid debt will be
undertaken during 2009/10 as appropriate and as demands on cash balances
arise. This strategy minimises the current risk of holding cash balances.
There is a potential risk that long term PWLB borrowing rates rise above the
anticipated level of 4% that supported these decisions.
4.7
As a result of the actions detailed in 4.4 and 4.5 cash balances will have
reduced significantly by 31 March 2009. However a number of fixed term
deposits will still require to mature, therefore an element of short term
borrowing is anticipated at that date.
4.8
The continuing economic issues and their impact on Aberdeenshire Council’s
Treasury Management Strategy is subject to ongoing regular monitoring and
proactive amendment to Treasury Management practices.
5.
Area Implications
5.1
The report has no specific area implications.
6.
Policy Implications
6.1
There are no policy implications arising from the report.
7.
Staffing Implications
7.1
There are no staffing implications from the report.
8.
Financial Implications
8.1
The revised annual budget of the Loans Fund in 2008/09 was £30.2 million
and is recharged to the General Fund and Housing Revenue Account as
Capital Financing Charges and Interest on Revenue Balances. The forecast
for the year at 31 December 2008 was £25,208,000 an underspend of
£5,002,000. In addition to this a further £1,250,000 of savings have been vired
to the Capital Fund as approved by this Committee on 13 November 2008.
8.2
The total underspend of £6,252,000 is detailed below.
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8.2.1 During a large period of the year, cash balances were significantly higher than
estimated when the budget was prepared and this combined with high interest
rates of up to 6.75%, generated greater than budgeted investment returns of
£3,455,000.
8.2.2 Early repayment of debt as detailed in 4.5 lead to the securing of discounts
totalling £2,459,000. In addition, the early repayment of debt partially
mitigates the anticipated budget pressure against Investment Income in
2009/10 by avoiding having to pay fixed long term borrowing costs of 4% and
above.
8.2.3 Further savings of £338,000 have been identified most relate to savings from
the deferral of long term borrowing during 2008/09.
9.
Sustainability Implications
9.1
There are no sustainability implications arising from the report.
10.
Consultations
10.1
No consultations have been required in the preparation of this report.
11.
Recommendations
The Committee is asked to
1.
2.
Note the actions taken in relation to Treasury Management during
2008/09.
Note that a saving of £200,000 can be found from Treasury
Management savings in 2008/09 and carried forward to 2009/10..
Charles Armstrong
Director of Finance
Report prepared by: Julie Anderson, Principal Accountant (GAE & Resources)
18 February 2009