Agenda Item No by AqO4J4C

VIEWS: 5 PAGES: 10

									                                                                   Agenda Item No.6
                                                                   1st September, 2010




To the Mayor and Members of the CABINET

TREASURY MANAGEMENT ANNUAL REPORT YEAR ENDED 31ST MARCH, 2010

Relevant Cabinet       Relevant Overview       Wards Affected          Key Decision
Member(s)              and Scrutiny Panel
Mark Thompson          Overview & Scrutiny     All                     Yes – K949
                       Management
                       Committee

EXECUTIVE SUMMARY

1.    Due to the forecast interest rate environment where borrowing interest rates were
      expected to be higher than investment interest rates, the 2009/10 strategy was to
      defer borrowing and utilise internal funds to support the capital programme.

2.    Lower than planned external borrowing was undertaken during the year which did not
      impact on the delivery of the capital programme which was funded by the use of
      internal balances.

3.    By minimising external borrowing during the year savings were made by avoiding
      higher borrowing costs, whilst at the same time minimising the risk of failure by a
      third party to meet its contractual obligations under an investment, loan or other
      commitment.

4.    Successful implementation and management of the strategy lead to an underspend of
      £16K being recorded for the year.

5.    The Council’s Treasury Management function was not immune to problems as it had
      a deposit with an Icelandic bank at the time of their failure. This is now classed as
      being at risk, with uncertainty surrounding when and how much will be repaid. The
      recovery is subject to court action within the Icelandic legal system.


EXEMPT REPORT

6.    N/A.

RECOMMENDATIONS

7.    The Cabinet is asked to note this Treasury Management Annual Report, noting the
      successful delivery within the strategy set for 2009/10, and note the Prudential
      Indicators contained in Appendix A.
BACKGROUND

8.    The revised Chartered Institute of Public Finance and Accountancy’s (CIPFA) Code
      of Practice on Treasury Management 2009 was adopted by this council on 02
      February 2010 and this Council fully complies with its requirements.

9.    Treasury Management in this context is defined as:-

      "The management of the organisation's investments and cash flows, its banking,
      money market and capital market transactions; the effective control of the associated
      risks with those activities; and the pursuit of optimum performance consistent with
      those risks."

10.   This annual report comments on the delivery of:-

            the Council’s Treasury position as at 31 March 2010;
            the strategy for 2009-10;
            the forecast and actual economic activity and interest rates;
            the borrowing activity for 2009/10;
            the investment activity for 2009/10;
            Icelandic Bank defaults;
            compliance with treasury limits.


Treasury Portfolio Position

11.   The debt and investment position at the beginning and end of the financial year were
      as follows:-

                             As At         Average          As At         Average
                            01.04.09       Interest        31.03.10       Interest
                                             Rate                           Rate
                              £’m             %                £’m           %

      Fixed Rate              325.0                           354.2
      Variable Rate             9.7                             9.1
      Total Debt              334.7            5.46           363.3          5.12

      Investment               11.5            6.46            12.7          0.68

Economic Activity (2009/10)

Strategy

12.   The Treasury Management Strategy approved by Council on 23rd February 2009,
      expected the following prospects for interest rates during 2009/10.

13.   The forecast was for the global recession to intensify, prompting a further fall in bank
      base rate to 0.5% until the second quarter of 2010.

14.   The scenario above assumed inflation would not be a problem, however, inflation
      may not fall as far as predicted, which would put pressure on the Monetary Policy
      Committee (MPC) to raise interest rates earlier than anticipated.
Outturn

15.   During 2009/10 the MPC was focused on helping the economy to turn around from
      plunging into the deepest and longest recession the UK economy had experienced in
      many years.

16.   Bank base rate was at an unprecedented historical low of 0.5% all year.

17.   Inflation has not been a major concern of the MPC as it fell back to below the 2%
      target level from June to November. However, it did spike upwards to reach 3.5% on
      the back of the unwinding of the temporary cut in VAT to 15% on 1 January 2010.
      This was not seen as a cause for alarm as this spike was expected to fall out of the
      inflation rate which was forecast by the Bank of England to fall back under target by
      the end of 2010.

Borrowing Activity

Strategy

18.   The amount of new borrowing for 2009/10 was estimated to be £41m. The primary
      strategy due to the scope within the existing debt maturity profile, was to take
      cheaper short term borrowing for up to 10 years to minimise the debt interest costs.


Outturn

19.   During the 2009/10 financial year £29.2M in new external borrowing was undertaken,
      this was lower than the original estimate of £41M for the following reasons:-

     The global economic downturn created uncertainty about the viability of the financial
      institutions the Council invested with. Lower borrowing was taken to minimise this
      risk.

     The historically low bank interest rate also meant that the return earned from the
      investment balance reduced and impacted on the position assumed in the budget.
      Minimising external borrowing during the year meant savings were made by avoiding
      higher borrowing costs.

     Short term interest rates at historically low levels offered opportunities for shorter
      term borrowing of up to 10 years, which would enable the Council to smooth the
      current maturity profile, illustrated in Appendix B.

     Receipt during March of the sale proceeds of plot 8 Lakeside enabled less borrowing
      to be taken.


20.   Although lower external borrowing was undertaken during the year this did not impact
      on the delivery of the capital programme which was funded by the use of internal
      balances.
Debt Rescheduling

21.   Debt rescheduling relates to the early repayment of loans in order to generate a
      revenue saving or change the structure of the debt maturity profile.

22.   On 1st November, 2007, the Public Works Loans Board (P.W.L.B.) introduced a two
      tier rate system, which effectively made it more expensive for Councils to repay debt.
      This precluded any rescheduling opportunities being undertaken during the 2009/10
      financial year, which was outlined and planned as part of the strategy.


Investment Activity

Strategy

23.   Investments were to be primarily placed with reference to cashflow requirements,
      which reduces the need to take on more expensive borrowings. However, where
      balances are identified as being available for a longer duration, investments would be
      placed with maturity dates of up to a year to achieve a higher return.

Outturn

24.   The result of the investment activity was as follows:-

             Average investment balance throughout the year £16.8m
             Rate of return                                  1.06%
             Benchmark Rate                                  0.42%


25.   Whilst the actual income earned was lower than plan, the enhanced rate of return on
      the portfolio was due to a combination of obtaining higher interest rates by placing
      deposits, prior to the global economic downturn, for longer maturities, and the
      strategic decision to reduce the balance of the investment portfolio. This meant that
      as bank interest rates declined the impact on the Council was reduced as a
      proportion of the investment balance was locked in to the higher rates for a period of
      3 months.

26.   The default of the Icelandic Banks prompted the Acting Assistant Director of
      Resources (Finance) to review the credit policy in order to reduce the exposure to
      risk. This involved limiting deposits to qualifying U.K. institutions only, and reducing
      the deposit period of an investment to a maximum of 3 months.


Icelandic Bank Deposit

27.   The Council have a deposit of £3m with Landsbanki an Icelandic bank which is under
      receivership. At this time there is uncertainty as to when the principal or accrued
      interest will be repaid to the Council. This position was outlined within the strategy
      and there was no significant change to this position during 2009/10.

28.   The Icelandic Government has stated its intention to honour all its commitments as a
      result of their banks being placed in receivership, and the U.K. Government is
      working with them to achieve this.
29.   The Local Government Association is co-ordinating the efforts of all 123 U.K. local
      authorities with a total of £919.6m in Icelandic deposits. From the latest published
      information available the indications are a recovery rate for priority claim holders of
      83p in the pound, (with the potential to rise to 94p over the next 8 years, which is
      performance related). However, the priority claim status is subject to legal challenge
      through the Icelandic courts. It is unlikely that an agreement will be reached before
      November 2010. Even if our priority status was upheld, the resultant recovery of the
      funds is unlikely to happen in the short term.

30.   The figures in this report exclude the £3m deposit with the Icelandic Bank.

31.   The investment portfolio as at 31 March 2010 is summarised in Appendix C.

Compliance with Treasury Limits

32.   During the year the Council operated within the limits set out in the Treasury
      Strategy, Policy and Practice statements and the Treasury Management Prudential
      Indicators included in Appendix A.

OPTIONS CONSIDERED

33.   Treasury Management operates within a dynamic environment and the Acting
      Assistant Director of Resources (Finance) in consultation with the treasury advisors
      constantly evaluate the changing factors. Decisions are made after considering all
      options and associated risks, taking forward the most beneficial option for the
      Council.


REASONS FOR RECOMMENDED OPTION

34.   The report fulfils the Council's Financial Governance responsibilities and complies
      with the recommended C.I.P.F.A. Codes of Practice.

IMPACT ON COUNCIL'S KEY OBJECTIVES

Medium Term Resource Planning

35.   The costs of the treasury management activities form part of the Council’s revenue
      budget, and decisions made now relating to long term borrowing (up to periods of 50
      years) to fund the capital programme, will have implications for future years. It is
      therefore important to have in place a strategy to minimise debt interest payments,
      and, the associated risk.

RISKS & ASSUMPTIONS

36.   By its very nature the Treasury Management function can expose the Council to
      certain risks, whether these are with respect to the interest rate achievable on new
      borrowings, or, the risk associated with placing an investment with a counterparty.
      The Council have in place policies and strategies in order to manage and mitigate
      these risks.

37.   The primary overriding aims are the protection of capital investment sums, and the
      maintenance of a long term, low fixed rate debt portfolio. In achieving this the
      Council abides by the Code of Practice, and, reviews procedures to ensure best
      practice is implemented at all time to control the risk and achieve the aims.
LEGAL IMPLICATIONS

38.   The Council's Treasury management activities are regulated by a variety of
      professional codes, statutes and guidance:-

      a.     parts 1 and 2 of the Local Government Act 2003 (the Act) provides the
             powers to borrow as well as providing controls and limits on this activity;

      b.     the Local Authorities (Capital Finance and Accounting) Regulations 2003, as
             amended, develops the controls and powers within the Act;

      c.     the Local Authorities (Capital Finance and Accounting) (Amendment)
             (England) Regulations 2007;

      d.     the Local Authorities (Capital Finance and Accounting) (England)
             (Amendment) Regulations 2008, as amended, develops the control and
             powers within the Act;

      e.     the above Regulations require local authorities to undertake any borrowing
             activity with regard to the C.I.P.F.A. Prudential Code for Capital Finance in
             Local Authorities;

      f.     the Regulations also require local authorities to operate its overall treasury
             function with regard to the C.I.P.F.A. Code of Practice for Treasury
             Management in the Public Services;

      g.     under the Act, the Secretary of State has issued investment guidance to
             structure and regulate local authority investment activities;

      h.     under the Act, the Secretary of State has issued a Minimum Revenue
             Provision guidance to regulate the way in which Local Authorities calculate
             their M.R.P.

39.   The Treasury Management function is included in the Acting Assistant Director of
      Resources (Finance)'s duties under Section 151 of the Local Government Act 1972
      to administer the Council's financial affairs.

FINANCIAL IMPLICATIONS

40.   The Council's budget for 2009/10 included the revenue costs of the Treasury
      Management activities. The outturn compared with the budget is shown over:-
                                                     Budget                   Actual
                                                   2009/10 OE                 2009/10
                                                      £m                        £m

      Budget                                           12.755                  12.783
      Costs
      External Borrowing                               19.158                  18.671
      Internal Fund Interest                            0.417                   0.233
      Premium Charges                                   0.090                   0.054
      M.R.P.                                            6.676                   6.533
      Total Cost                                       26.341                  25.491
      Income
      Recharge B.I.F./H.R.A.                          -13.060                 -12.536
      Investment Interest                              -0.526                  -0.188
      Total Income                                    -13.586                 -12.724

       Net Costs                                       12.755                  12.767

41.    It can be seen from the above that the strategy pursued in relation to the Treasury
       Management activities achieved a saving of £0.016m over the year.

CONSULTATION

42.    The Council regularly obtain advice from external specialist organisations in respect
       of its Treasury Management activities.

43.    This report has significant implications in terms of the following:-

       Procurement                                  Crime & Disorder
       Human Resources                              Human Rights & Equalities
       Buildings, Land and Occupiers                Environment & Sustainability
       ICT                                          Capital Programme

BACKGROUND PAPERS

44.    Sector Annual Treasury Management Report 2009/10.

       C.I.P.F.A. Treasury Management in the Public Services 2001. (Revised 2009)

       The Council's Treasury Management Strategy Statement, Annual Investment
       Strategy 2009/10, & The Minimum Revenue Provision Policy.

REPORT AUTHORS & CONTRIBUTORS

Christopher Yates, Principal Finance Officer, Tel. 737908,
E-mail christopher.yates@doncaster.gov.uk.




Steve Mawson
Acting Assistant Director of Resources (Finance)
APPENDIX A

PRUDENTIAL INDICATORS 2009/10

                                                        Estimate             Actual
                                                         £'000               £'000

Capital Expenditure
Non-H.R.A.                                               84,565               33,333
H.R.A.                                                   59,373               66,174
                                                        143,938               99,507


Capital Financing Requirement as at 31st March, 2010
Non-H.R.A. (inc. ADJ 'A')                         222,862                    191,422
H.R.A.                                            254,295                    256,538
                                                  477,157                    447,960


Incremental Impact of Capital Investment Decisions
For the Band D Council Tax                         £0.00                      £0.00
For Average Weekly Housing Rents                   £0.00                      £0.00


Ratio of Financing Costs to net revenue stream
Non-H.R.A.                                                   7.65%            6.87%
H.R.A.                                                      20.36%           17.92%


Authorised Limit for External Debt                      792,000              519,512
(this limit allows authorities to take borrowing
In advance of need as required)

Operational Boundary for External Debt                  511,000              427,739
(this is a key management tool for in-year
monitoring)

Upper Limit for Fixed Interest Rate Exposure                 100%              97%
Upper Limit for Variable Rate Exposure                        30%               3%


                                              Upper Limit      Lower Limit       Actual
                                                 %                 %               %
Under 12 months                                    30                 0            4
12 months and within 24 months                     30                 0            5
24 months and within 5 years                       50                 0            9
5 years and within 10 years                        75                 0            0
10 years and above                                 95                10           82
APPENDIX B

                                  DEBT PORTFOLIO MATURITY SPREAD AS AT 31 MARCH 2010


                  2057/58

                  2055/56

                  2053/54

                  2051/52

                  2046/47
 FINANCIAL YEAR




                  2043/44

                  2037/38

                  2035/36

                  2031/32

                  2026/27

                  2023/24

                  2015/16

                  2012/13

                  2010/11

                        0.00   5.00          10.00            15.00            20.00   25.00   30.00
                                                     VALUE OUTSTANDING £'M'S

                                             PUBLIC WORKS LOANS BOARD   MARKET LOANS
APPENDIX C

                                         Investment Portfolio as at 31 March 2010




                ABBEY NATIONAL
 COUNTERPARTY




                YORKSHIRE BANK




                         COOP




                                 0   1               2                3             4   5   6
                                                                AMOUNT £'M's

								
To top