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Finance Item: 6(a) Page: 1 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.” Item: 6(a) Page: 2 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 Item: 6(a) Page: 3 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. Item: 6(a) Page: 4 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