Council · Web viewAfter a disappointing quarter 1 of only +0.2% GDP growth, the three subsequent quarters of 2016 came in at +0.6%, +0.5% and +0.7% to produce an annual growth for

Appendix 5 – Treasury Management Strategy

Annual Treasury Management Strategy2016/2017 Outturn Report

INDEX

1. Economic background for 2016/172. Annual Investment Strategy3. New borrowing4. Debt Rescheduling5. Compliance with Treasury and Prudential Limits

Table 1: Prudential Indicators as at 31 March 2017Table 2: Treasury Indicators as at 31 March 2017Table 3: Summary of Cornwall Council net debt at 31 March 2017

ATTACHMENTS

1. Glossary of Terms

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The CIPFA (Chartered Institute of Public Finance and Accountancy) Code of Practice for Treasury Management recommends that members be updated on treasury management activities regularly. This report therefore ensures Cornwall Council is implementing best practice in accordance with the code. 1 – Economic Background

The two major landmark events that had a significant influence on financial markets in the 2016-17 financial year were the UK EU referendum on 23 June and the election of President Trump in the USA on 9 November.

The first event had an immediate impact in terms of market expectations of when the first increase in Bank Rate would happen, pushing it back from quarter 3 2018 to quarter 4 2019. At its 4 August meeting, the Monetary Policy Committee (MPC) cut Bank Rate from 0.50% to 0.25% and the Bank of England’s Inflation Report produced forecasts warning of a major shock to economic activity in the UK, which would cause economic growth to fall almost to zero in the second half of 2016. The MPC also warned that it would be considering cutting Bank Rate again towards the end of 2016 in order to support growth. In addition, it restarted quantitative easing with purchases of £60bn of gilts and £10bn of corporate bonds, and also introduced the Term Funding Scheme whereby potentially £100bn of cheap financing was made available to banks.

In the second half of 2016, the UK economy confounded the Bank’s pessimistic forecasts of August. After a disappointing quarter 1 of only +0.2% GDP growth, the three subsequent quarters of 2016 came in at +0.6%, +0.5% and +0.7% to produce an annual growth for 2016 overall, compared to 2015, of no less than 1.8%, which was very nearly the fastest rate of growth of any of the G7 countries.

Needless to say, this meant that the MPC did not cut Bank Rate again after August but, since then, inflation has risen rapidly due to the effects of the sharp devaluation of sterling after the referendum.

Interest Rates 2016/17 and Forecast

After the EU referendum, the Bank Rate was cut from 0.5% to 0.25% on 4 August and remained at that level for the rest of the year. Deposit rates continued into the start of 2016/17 at previous depressed levels but then fell during the first two quarters and fell even further after the 4 August MPC meeting resulted in a large tranche of cheap financing being made available to the banking sector by the Bank of England. Rates made a weak recovery towards the end of 2016 but then fell to fresh lows in March 2017.

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0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00Apr 2016 - Mar 2017 Bank Rate vs LIBID rates %

Bank Rate 7 day 1 mth 3 mth 6 mth 12 mth

The Council’s treasury advisor, Capita Asset Services, has provided the following forecast based on the Certainty Rate (minus 20 bps) which has been accessible to most authorities since 1st November 2012:

J un-17 Sep-17 Dec-17 Mar-18 J un-18 Sep-18 Dec-18 Mar-19 J un-19 Sep-19 Dec-19 Mar-20

Bank Rate 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.50% 0.50% 0.75% 0.75%

5yr PWLB rate 1.40% 1.60% 1.60% 1.70% 1.70% 1.70% 1.80% 1.80% 1.90% 1.90% 2.00% 2.00%

10yr PWLB rate 2.10% 2.30% 2.30% 2.30% 2.40% 2.40% 2.40% 2.50% 2.50% 2.60% 2.60% 2.70%

25yr PWLB rate 2.70% 2.90% 3.00% 3.00% 3.00% 3.10% 3.10% 3.20% 3.20% 3.30% 3.30% 3.40%

50yr PWLB rate 2.50% 2.70% 2.80% 2.80% 2.80% 2.90% 2.90% 3.00% 3.00% 3.10% 3.10% 3.20%

Borrowing Rates in 2016/17

During 2016/17 PWLB certainty rates have fallen to historically very low levels. The following graph for PWLB rates shows for a selection of maturity periods, the average borrowing rates, the high and low points in rates, spreads and individual rates at the start and the end of the financial year:

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0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%Apr 2016 - Mar 2017 PWLB Maturity Certainty Rates

1 Year 5 Year 10 Year 25 Year 50 Year 50 year target %

2 – Annual Investment Strategy

The Annual Treasury Management Strategy (ATMS) for 2016/17, which includes the Annual Investment Strategy, was approved by the Council on 16 February 2016 and further updated at the meeting 22 November. It set out the Council’s investment priorities as being:

Security of capital; Liquidity; and Yield

Officers can confirm that the approved limits within the Annual Investment Strategy were not breached during the year.

Investment rates available in the market have continued at historically low levels. The average level of investments during the year was £480m. The level of cash available was mainly dependent on the timing of precept payments, receipt of grants and progress on the Capital Programme.

At 31 March 2017 the Council’s investment portfolio stood at £450m. Average investment returns to 31 March were 1.24%, which is 1.01% above the benchmark, the Average 7 day LIBID, which stood at 0.23%. The average 12 month LIBID was 0.70%.

3 – New borrowing

No new long term borrowing was undertaken in 2016/17. Short Term borrowing (less than 12 months) was undertaken as part of normal day to day treasury activities to facilitate cash flow movements.

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The Council has not borrowed in advance of need during the year to 2016/17.

4 – Debt Rescheduling

No debt rescheduling was undertaken during the year 2016/17.

It should be noted that the Council currently holds just over half (£342m) of its long term debt in LOBOs. That has reduced significantly from the position at the start of the year to reflect, by agreement with Barclays, the transfer/switch of five LOBOs totalling £55m into straight fixed term borrowings. This was achieved at no cost to Cornwall Council.

5 – Compliance with Treasury and Prudential Limits

It is a statutory duty for the Council to determine and keep under review the affordable borrowing limits. The Council’s approved Treasury and Prudential Indicators (affordability limits) are included in the approved ATMS.

During the financial year 2016/17 the Council has operated within the treasury and prudential indicators set out in the Council’s Treasury Management Strategy Statement and in compliance with the Council's Treasury Management Practices. The Prudential and Treasury Indicators are shown in tables 1 and 2.

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TABLE 1: Prudential Indicators as at 31 March 2017

Prudential Indicators2016/17 Strategy

£m

Mid-Year Forecast

£mOutturn

£mCapital expenditure:General Fund 222.4 222.6 220.9HRA 27.4 17.4 14.7Total 249.8 240.0 235.6

Capital Financing Requirement (CFR):General Fund 681.5 867.3 838.9HRA 120.8 112.3 111.2Total 802.3 979.6 950.1Annual change in CFR:General Fund 31.5 182.1 153.7HRA 7.7 0 (1.1)Total - I n year borrowing requirement 39.2 182.1 152.5

Ratio of financing costs to net revenue stream:General Fund 11.85% 11.71% 10.80%HRA 11.70% 11.08% 9.46%

a) Increase / (decrease) in council tax (band D change) per annum

£0.84 £0.65 (24.00)

a) Increase / (decrease) in average housing rent per week

£0.82 £0.70 (0.50)

This indicator is a summary of the Council’s Capital Expenditure for the financial year. The outturn, which is largely in line with previous forecasts, is lower than the original strategy mainly as a result of reductions in the HRA capital programme and in particular the development programme and the rolling planned maintenance programme. This on the back of the Government's announcement that Local Authorities would be expected to reduce rents by 1% each year from April 2016.

The CFR is the total historic outstanding Capital Expenditure which has not yet been paid for from either revenue or capital resources. Though significantly above the original forecast, this is mostly a result of technical changes to the calculation of circa £136m including significantly the inclusion of the CERC (waste pfi) which does not impact the Council's underlying borrowing need.[Note: the CFR includes certain technical adjustments e.g. pfi, for which the Council will not undertake any additional external borrowing. By excluding these adjustments, the actual underlying borrowing need as at 31 March 2017 is circa £775m]

This indicator identifies the trend in the cost of capital (borrowing costs net of investment income) against the Council’s net budget. The capital financing costs (general fund), as a proportion of the overall budget, is lower than originally expected and reflects the in year change to the Council's Minimum Revenue Provision policy achieving a saving of c £4.5m.

This indicator identifies the increase/(decrease) in Band D and weekly housing rent that would occur as a result of the Council’s Capital Expenditure plans financed by borrowing. The reduction in Band D Council Tax charge of £24 p.a. again reflects the saving by changes to the Council's Minimum Revenue Provision policy.

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TABLE 2: Treasury Indicators as at 31 March 2017

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Treasury Indicators2016/ 17 Strategy

£m

Mid-Year Forecast

£mOutturn

£mAuthorised limit for external debt 900 900 900Operational boundary for external debt 850 850 850

Gross external debt 754 643 707Investments 504 418 450Net Debt 250 225 257

0% - 10% 10%(20% - 30%) (30.9%)

0% - 10% 0%(30% - 40%) (27.5%)90% - 100% 90%

(40% - 50%) (41.6%)

Upper limit of fixed interest rates based on net debt 500 500 500Upper limit of variable interest rates based on net debt 200 200 200

The authorised limit represents a statutory limit, set or revised by Full Council, beyond which external debt is prohibited. The operational boundary is the limit which external debt is not normally expected to exceed. These indicators remain unchanged from the original strategy.

Gross external debt is the total level of Council debt outstanding at the end of the financial year. As anticipated, the level of investments has reduced from the mid year position (of £464m) due to timing of Government grants, Council Tax and Business Rate receipts.Maturity structure of fixed rate borrowing - upper and lower limits(first option dates in brackets)

The forecast position of the Council’s fixed rate maturity structure is in line with the strategy with 90% of the Council’s debt being in the 10 years and above category.

Under 12 months 0% - 40%

12 months to 10 years 0% - 40%

10 years and above 0% - 100%

TABLE 3: Summary of Cornwall Council Net Debt at 31 March 2017

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£mTotal Borrowing 707

Long TermPublic Works Loan Board (PWLB) 239 34%UK: 336 48%Barclays (fixed term) 55Barclays* 25RBS* 85Dexia* 158KBC* 13Germany: Bayerische Landesbank GIR* 15 2%Ireland: DEPFA* 46 6%

Sub-Total 636

Short TermTemporary Borrowing: Local Authorities 71 10%* indicates LOBO (totalling £342m)

£mTotal Investments 450

UK: 320 71%Local Authorities 114Lloyds 50RBS 41Goldman Sachs 36Prime Rate 50Nationwide 10Coventry BS 10Santander Plc 10Australia: Commonwealth Bank of Australia 40 9%Canada: Toronto-Dominion Bank 40 9%Netherlands: Rabobank 20 4%Switzerland: UBS 10 2%France: Credit Agricole Corp 10 2%Germany: Landesbank Hessen Thringen 10 2%

£mNet Debt 257

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ATTACHMENT 1

Glossary of Terms

Annuity – method of repaying a loan where the payment amount remains uniform throughout the life of loan, therefore the split varies such that the proportion of the payment relating to the principal increases as the amount of interest decreases.

CIPFA – the Chartered Institute of Public Finance and Accountancy, is the professional body for accountants working in Local Government and other public sector organisations, also the standard setting organisation for Local Government Finance.

Counterparty – an institution (e.g. a bank) with whom a borrowing or investment transaction is made.

Credit Rating – is an opinion on the credit-worthiness of an institution, based on judgements about the future status of that institution. It is based on any information available regarding the institution: published results, Shareholders’ reports, reports from trading partners, and also an analysis of the environment in which the institution operates (e.g. its home economy, and its market sector). The main rating agencies are Fitch, Standard and Poor’s and Moody’s. They analyse credit worthiness under four headings:

Short Term Rating – the perceived ability of the organisation to meet its obligations in the short term, this will be based on measures of liquidity.

Long Term Rating – the ability of the organisation to repay its debts in the long term, based on opinions regarding future stability, e.g. its exposure to ‘risky’ markets.

Individual/Financial Strength Rating – a view of the likelihood, in the case of a financial institution failing, that its obligations would be met, in whole or part, by its shareholders, central bank or national government.

Legal Support Rating - a view of the likelihood, in the case of a financial institution failing, that its obligations would be met, in whole or part, by its shareholders, central bank, or national government.

The rating agencies constantly monitor information received regarding financial institutions, and will amend the credit ratings assigned as necessary.

DMADF and the DMO – The DMADF is the ‘Debt Management Account Deposit Facility’; this is highly secure fixed term deposit account with the Debt Management Office (DMO), part of Her Majesty’s Treasury.

EIP – Equal Instalments of Principal, a type of loan where each payment includes an equal amount in respect of loan principal is eroded, and so the total amount reduces with each instalment.

Gilts – the name given to bonds issued by the UK Government. Gilts are issued bearing interest at a specified rate, however they are then traded on the markets like shares and their value rises or falls accordingly. The

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Yield on a gilt is the interest paid divided by the Market Value of that gilt, e.g. a 30 year gilt is issued in 1994 at £1, bearing interest of 8%. In 1999 the market value of the gilt is £1.45. The yield on that gilt is calculated as 8%/1.45 = 5.5%.

Lender Option Borrower Option (LOBO) - LOBOs are a long term borrowing instrument commonly used by banks. It is an alternative lender option to the Governments Public Works Loan Board.

In simple terms the instrument gets its name because the lender has an option to set revised interest rates at predetermined dates, and at which point the borrower has the option to accept the revised rates or pay the debt in full without penalty.

LIBID – The London Interbank Bid Rate, the rate which banks would have to bid to borrow funds from other banks for a given period. The official rate is published by the Bank of England at 11am each day based on trades up to that time. The average 7 day rate is the benchmark the Council uses for its own investment performance.

Liquidity – Relates to the amount of readily available, or short term, investment money which can be used for either day to day or unforeseen expenses. For example Call Accounts allow instant daily access to invested funds.

Maturity - Type of loan where only payments of interest are made during the life of the loan, with the total amount of principal falling due at the end of the loan period.

Minimum Revenue Provision (MRP) – A statutory amount charged to the Councils revenue account for the provision to repay the loan principal on debt undertaken to finance the Capital Programme. For the Council this is done on a straight line basis in-line with the asset life and commences the financial year after the asset is operational.

Policy and Strategy Documents – Documents required by the CIPFA Code of Practice on Treasury Management in Local Authorities. These set out the framework for treasury management operations during the year.

Public Works Loans Board (PWLB) – a central government agency providing long and short term loans to Local Authorities. Rates are set daily at a margin over the Gilt yield (see Gilts above). Loans may be taken at fixed or variable rates and as an Annuity, Maturity, or EIP loans (see separate definitions) over periods of up to fifty years. Financing is also available from the money markets, however because of its nature the PWLB is generally able to offer better terms.

Yield – The amount in cash (in percentage terms) that returns to the owners of an investment e.g. interest earned from a deposit.

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