Mid - Year Treasury Management and Investment Update 2021/22
By: Director, Finance and Corporate Services
To: Audit and Governance Committee - 25 November 2021
Subject: MID - YEAR TREASURY MANAGEMENT AND INVESTMENT UPDATE 2021/22
Classification: Unrestricted
FOR DECISION
Summary
The CIPFA Code of Practice on Treasury Management and the CIPFA Prudential Code require the Authority to determine and set the Treasury Management Strategy for the financial year ahead. This was agreed at the Authority meeting on 23 February 2021 and a requirement of the Strategy is to provide a Mid-year update on treasury activity undertaken and the extent of compliance with the agreed prudential indicators.
The Authority continues to prioritise security and liquidity over potential yield, in line with CIPFA guidance. Interest rates have remained low during the year with the Authority receiving total investment income to date of £20k, based on an average cash balance of £50m.
Recommendation
Members are requested to:
1. Agree to note the report and the treasury activity undertaken.
LEAD/CONTACT OFFICER: Finance Manager – Nicola Walker
TELEPHONE NUMBER: 01622 692121 ext. 6122
EMAIL: Nicola.walker@kent.fire-uk.org
BACKGROUND PAPERS:
Comments
Introduction
1. The Authority operates a balanced budget, which broadly means cash raised during the year will meet its cash expenditure. Part of the treasury management operations ensure this cash flow is adequately planned, with surplus monies being invested in low risk counterparties, so as to ensure sufficient funds are available to meet anticipated
expenditure before any other consideration is given to optimising investment returns.
2. The second main function of the treasury management service is to ensure that the necessary funding is available, when needed, to meet the agreed commitments set out in the Authority’s Capital Plan, whether that’s by using the Authority’s own cash balances or undertaking any new borrowing. Hence, good treasury management and
cash-flow planning is key to enable the Authority to meet its capital spending programme.
3. This report has been written in accordance with the requirements of the Chartered Institute of Public Finance and Accountancy’s (CIPFA) Code of Practice on Treasury Management (revised 2017).
Economic Outlook
4. The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy that aims to meet the 2% inflation target in a way that helps to sustain growth and employment. In that context, its challenge at present is to respond to the economic and financial impact of the Covid-19 pandemic. On the 4 November 2021, the MPC voted 7-2 to maintain the Bank Rate at 0.1%.
5. The outlook for the UK and global economies remains uncertain. Further progress on vaccine rollouts, continued policy support, and the re-opening of most major economies should mean that global GDP growth in 2021 will grow at its fastest rate since 1973. However, the spread of mutations of the virus poses a great risk, particularly in large parts of the emerging world where vaccination coverage is typically lower than in advanced economies.
6. Inflation – The Consumer Price Inflation (CPI) saw a sharp increase in the year to August, up from the Bank of England’s target of 2% in July to 3.2% in August, with it falling to 3.1% in September. It is currently expected to peak at over 4% in the coming months. There have been significant increases in gas and electricity prices recently
with further increases expected next April, which is expected to lead to faster and higher inflation expectations and underlying wage growth, which in turn increase the risk that price pressures would prove more persistent next year than previously expected. To emphasise its concern the Monetary Policy Committee (MPC) chose to reaffirm its commitment to the 2% inflation target in its statement, which suggests we could see base rates rising sooner than previously forecast by the market.
7. Interest Rate Forecast – Rates available on deposits from counterparties are significantly lower than those of a year ago. The Authority is currently forecasting investment income of £45k for the year.
The Authority’s treasury advisor, Link Asset Services, has provided the following interest rate forecast:
(LIBID – The London Interbank Bid Rate is the average interest rate at which major London banks bid for eurocurrency deposits from other banks in the interbank market)
(PWLB – Public Works Loan Board is a statutory body of the UK Government that provides loans to public bodies)
Treasury Management Strategy Statement and Annual Investment Update
8. The Treasury Management Strategy Statement, (TMSS) for 2021/22 was approved by the Authority on 23 February 2021 and subsequently updated to increase investments in Money Market funds from £15m to £25m at the April 2021 Authority meeting. As a consequence this report reflects the current position of the Authority’s deposits, which are in line with the Treasury Management Strategy. The appropriate Prudential Indicators can be found at paragraph 14 within this report.
9. Where projects are re-profiled from time to time or completed under budget, this impacts on reserve balances and hence often results in a higher level of funding being available for depositing with the agreed counter parties. The table below shows the revised forecast of funds available for such purposes:
Table 1
| Reserves and Balances | 2020/21 Forecast (£'000) | 2020/21 Outturn (£'000) | 2020/21 Revised (£'000) |
|---|---|---|---|
| General reserve | 3,710 | 3,710 | 3,760 |
| Earmarked reserves | 33,334 | 38,221 | 28,617 |
| Insurance Provision | 237 | 395 | 182 |
| Capital Receipts | 7,863 | 7,875 | 9,449 |
| Total Core Funds | 45,144 | 50,201 | 42,008 |
| Working Capital surplus | 991 | 1,404 | 1,404 |
| Under-borrowing | -1,373 | -1,373 | -828 |
| Expected Deposits | 44,762 | 50,232 | 42,584 |
The working capital of the Authority increased at financial year end 2020/21, as the difference between what we received compared to what we paid out was more than previously forecast, which on the whole was was generally due to increased grant funding received by the Authority.
Investment Portfolio
10. The Authority’s key priority is to ensure security of capital and liquidity and to obtain an appropriate level of return consistent with the Authority’s risk appretite. Certainly over the last few years, returns on deposits have been very low and at times it has been a challenge to ensure returns have not gone negative. The base rate still continues at
an all time low, however there is now a suggestion that returns may see a slow rise at the longer term end of the market, especially given the rising inflation position.
11. The Authority held £54.2m of deposits as at October 2021 (£48m at 31 March 2021). A breakdown of the Authority’s deposits and the average interest rates that were included in the 2021/22 Annual Treasury Strategy are compared to actual deposits and actual interest rates as at 29 October 2021 in the table below:-
Table 2 Investments and Average Interest Rates
31.03.21
| Value | Total Deposits (£000's) | Average Interest Rate |
|---|---|---|
| Debt Management Office (Including Treasury Bills) | 2,950 | 0.01% |
| RBS Group: Royal Bank of Scotland & Natwest | 1,121 | 0.01% |
| Lloyds Bank: Lloyds TSB & HBOS | 7,000 | 0.02% |
| Barclays Bank plc | 5,000 | 0.30% |
| Nationwide Building Society | 5,000 | 0.05% |
| Santander UK plc | 7,000 | 0.39% |
| HSBC | 7,000 | 0.10% |
| Coventry Building Society | 3,000 | 0.03% |
| Leeds Building Society | / | / |
| Aberdeen Sterling Liq. Fund | 5,000 | 0.01% |
| BlackRock Inst. Sterling Liq. Fund | / | / |
| Aviva Investors Sterling Liq. Fund | 5,000 | 0.01% |
| Totals | 48,071 | 0.09% |
29.10.21
| Value | Total Deposits (£000's) | Average Interest Rate |
|---|---|---|
| Debt Management Office (Including Treasury Bills) | 2,000 | 0.02% |
| RBS Group: Royal Bank of Scotland & Natwest | 2,292 | 0.01% |
| Lloyds Bank: Lloyds TSB & HBOS | 7,000 | 0.02% |
| Barclays Bank plc | 5,000 | 0.15% |
| Nationwide Building Society | 5,000 | 0.10% |
| Santander UK plc | 7,000 | 0.37% |
| HSBC | 7,000 | 0.10% |
| Coventry Building Society | 5,000 | 0.07% |
| Leeds Building Society | 2,000 | 0.07% |
| Aberdeen Sterling Liq. Fund | 5,000 | 0.01% |
| BlackRock Inst. Sterling Liq. Fund | 1,975 | 0.01% |
| Aviva Investors Sterling Liq. Fund | 5,000 | 0.01% |
| Totals | 54,267 | 0.10% |
12. The Director of Finance and Corporate Services confirms that the approved limits were within the Annual Investment Strategy and to date have not been breached.
Borrowing
13. The Authority’s capital financing requirement (CFR) for 2021/22 is £1,829k. The CFR denotes the Authority’s underlying need to borrow for capital purposes. Of the Authority’s underlying borrowing need, £1,001k has been borrowed from the Public Works Loans Board (PWLB) and £828k has been utilised from the internal cash flow of
the authority in lieu of borrowing. This is a prudent and cost effective approach in the current economic climate. The Authority continues to pay off outstanding external loans as they become due for repayment and has identified no need to borrow externally to fund the existing Capital Strategy, at this stage.
Prudential Indicators
14. A Summary of the Prudential Indicators agreed at the Authority meeting in February are detailed below and shown against the 2020/21 outturn figures and revised projections for 2021/22.
Table 3 Prudential Indicators for affordability, prudence and capital expenditure
| Value | 2020/21 Outturn (£'000) | 2021/22 Budget (£'000) | 2021/22 Revised (£'000) |
|---|---|---|---|
| Revenue Expenditure | 71,421 | 71,573 | 70,372 |
| Revenue Provision for debt repayment | 969 | 969 | 969 |
| Capital expenditure | 3,517 | 10,406 | 4,969 |
| CFR as at 31 March | 2,798 | 1,829 | 1,829 |
| Total loans outstanding as at 31 March | 1,425 | 1,001 | 1,001 |
| Ratio of Financing Costs to Net Revenue Stream | 1.32% | 1.50% | 1.52% |
Treasury Indicators
| Value | 2020/21 Outturn (£'000) | 2021/22 Budget (£'000) | 2021/22 Revised (£'000) |
|---|---|---|---|
| Assumed Operational Boundary for external debt | 18,000 | 18,000 | 18,000 |
| Assumed Authorised Limit for external debt | 22,000 | 22,000 | 22,000 |
| Interest rate exposure for borrowing at fixed rates | 100% | 100% | 100% |
| Interest rate exposure for borrowing at variable rates | 20% | 20% | 20% |
| Interest rate exposure for investing at fixed rates | 100% | 100% | 100% |
| Interest rate exposure for investing at variable rates | 100% | 100% | 100% |
Impact Assessment
15. All financial implications associated with servicing the Authority’s loans are able to be contained within the overall budget.
Conclusion
16. Members are requested to:
16.1 Agree to note the report and the treasury activity undertaken.