Agenda item

TREASURY MANAGEMENT STRATEGY - PRUDENTIAL INDICATORS, CAPITAL EXPENDITURE & SENSITIVITY OF INTEREST RATES - 10 Minutes

To receive a report from the Director of Finance, presenting the Council’s proposed 2019/20 Treasury Management Strategy & Prudential Indicators.

(TO FOLLOW)

 

Minutes:

RECEIVED a report from the Director of Finance setting out the Council’s 2020/21 Treasury Management Strategy Statement (TMSS) & Prudential Indicators.

 

NOTED

 

1.    The report was presented by Matt Bowmer (Director of Finance).

2.    The draft treasury strategy is presented on an annual basis and will go to Cabinet, along with the Capital Programme and MTFP (Medium Term Financial Plan), on the 12 February 2020 and then onto Council for approval. The Capital financing shown in this report will change when it is presented at Cabinet in February 2020.

3.    One of the key changes that Finance are making is that the TMSS is now a 10-year strategy and this will be presented to Council for approval on the 26 February 2020.

4.    The impact of this 10-year strategy can be seen on point 3 (page 104) of the strategy, the borrowing strategy. Two new tables have been added, as detailed at 3.2 and 3.3 of the strategy, which sets out the overall underlying need to borrow by the council. For greater transparency to the TMSS, the tables show a breakdown of different parts into companies i.e. Meridian Water, other general fund commitments and the HRA (Housing Revenue Account) as detailed at point 3.8 (page 107) of the strategy.

Chart 1 (page 107) of the strategy takes that profile timescale further and pitches out over 50 years. This shows the rise in capital finance requirements the council has.

5.    Increasing need to borrow in the strategy and the council need to look more broadly than PWLB (Public Works Loan Board) to satisfy its borrowing requirements over time. Table 3 (page 110) details borrowing options that are present for the Council, which are now affordable to the council with better rates than PWLB offer.

Some of these options to borrow will require the council to be credit rated through one of the credit rating agencies.

6.    The borrowing numbers in the strategy are based on the draft capital programme and there are several ambitions that the council has invested in that programme. Finance will be looking at alternative options and borrowing methods to be able to deliver those programmes of work.

7.    As detailed at Appendix D (pages 124-126) of the strategy regarding prudential indicators. For the HRA 30 year business plan, there are some additional prudential indicators around interest rates, which will be formally adopted in this strategy. Finance are also looking at prudential indicators around the capital finance costs of the general fund in proportion to the overall council budget.

8.    The next key change to the TMSS is detailed at Appendix E (page 127) of the strategy – the Minimum Revenue Provision Policy.

9.    As detailed at point 4 (g) (page 128) of the strategy, asset lives had given greater provenance to the asset lives finance will be accounting against when revenue provision is set aside i.e. ICT – 5 years, Vehicles – 10 years, etc.

10. The following questions, statements and queries raised in response to the report:

a.    In response to members concern about the increase in borrowing and the cost to the council regarding capacity for officers to investigate alternative borrowing (other than the PWLB) and to obtain a credit rating, Matt Bowmer clarified that the general forecast for low interest rates is that they will remain low for a few years and this will be continually monitored. There would be a cost to the council for borrowing elsewhere other than the PWLB.

b.    As detailed at 3.24 (page 95) of the report. This was further clarified to the committee as a time aspect and not a quantity of monies.

c.    Councillor Gunawardena asked what the measurable benefits were as regards risk analysis. Targets and key indicators are needed when analysing risk to see if they are heading to achievement. Fay Hammond clarified that because the committee hear the TMSS at this meeting, separate from the Capital spend, it is a bit dis-connected. When the report goes to Cabinet, it will be clear what the council are buying for the debt it is potentially incurring.

The Capital Programme comes through in a Cabinet report and looks at each one of the capital projects and the return for each. What the council are delivering will come through more in that Cabinet report. Presently, the financing of a project is independent of what is being delivered because this is a way this report has to go through Audit & Risk management Committee. But those two reports are heard at the same time at Cabinet as regards what is being delivered and what the benefits are. The TMSS is just a position statement of what the capital programme says the council is thinking about are looked at and assess what the priorities are and if things need to change. So it is part of the capital budget process which then results in the financing requirement.

d.    In response to councillor Gunawardena’s question about how risks are measured and the need to see both sides clearly, Fay Hammond clarified that each cabinet report going through the capital investment has financial implications, risk assessments, mitigation of risks added to them. BDO will look at the council’s decision-making processes to get assurance that decisions are made having looked at those areas. BDO will be assured that the council are not making decisions independent of seeing the bigger financial picture, which is what the TMSS provides and have not seen before.

e.    In response to Councillor Gunawardena’s request that he would like to see BDO’s analysis of making risk assessments so he can make the connection between the risks and benefits specified. BDO clarified that they would cover things they consider are the biggest risks to the MTFP (Medium Term Financial Plan). They would consider the borrowing strategy in terms of the Capital Programme. They would not be providing a detailed assessment of everything going on at the Council. They are looking at risks to the opinion they are giving in terms of adequacy arrangements, decision making processes and what the high-level assumptions are.

David eagles (BDO) felt that the Member wants an operational understanding about detail going into risk assessments and how documents are pulled together.  This should be a direct conversation with the member and officers to get that understanding about specific processes.

f.     Councillor Hockney’s asked what was the most significant exposure risk that finance are concerned about in terms of increased borrowing and in terms of servicing and the extra debt, what pressures would that put on services. Fay Hammond clarified that exposure to risk is always looked at annually as part of the treasury strategy. So, in 5 years’ time the council’s exposure to risk, at that point, will be different to whatever it is.

The Council will need to look at this level of debt and look at different ways of financing that over this time period. The Council has alternative financing options available which have been set out in the report and will be looked at by officers over the next 6 months working alongside technical advisers and other professionals.

Debt servicing is already in the MTFP for the next 5 years.

g.    In reply to Councillor Hockney’s question about the council’s spend on servicing the debt now and what that will increase to in 5 years’ time, Fay Hammond clarified that she would be sending documents to Councillor Hockney under separate cover to answer the above.

ACTION: Fay Hammond (Acting Executive Director Resources).

h.    Councillor Barry asked about how members can reach a judgement about the value for money aspect of a project. Fay Hammond referred to what the Capital report mentions about statutory reasons for making buildings safe and what the investment there would be and how that may save the council money. Net present value (NPV) calculations are made covering savings or generating income and this is the work done to develop this programme. There are also those things that are not income generating that the council are doing i.e. place making reasons. The advantage of having a 10-year capital programme in one Cabinet report provides a spectrum of capital investment areas’.

i.      Councillor Leaver also clarified that members’ roles here is that, when presented with a financial proposal in managing cash, we can meet the political decisions of this council. Councillors have a view on if its appropriate and support is given to the suggestions’ officers have made as a way forward to go to Cabinet. This is about how officers pull together the needs of this council, both capital and revenue and fund it. It is not a forum to have political debate about whether it is appropriate or not. It is whether members believe  the officers are putting together sensible proposals so that the governance of the council  can be undertaken. This is good cash flow management looking at the reality of what the council has over the next 5-10 years.

 

AGREED the Treasury Management Strategy Statement for 2020/21, to note the economic context & Interest rate forecast, the prudential indicators, the minimum Revenue Provision Statement, the Counterparty List and limits and to note the plans to develop options for financing the capital programme over the next six to nine months.

 

 

Supporting documents: