Agenda item

(Report of the Head of Finance & Procurement – Anthony Thomas)

The Committee received a report on the Treasury Management Strategy Statement (TMSS) 2019/20 from Mr Anthony Thomas (Head of Finance & Procurement) and he delivered a Presentation to explain in more detail the Capital Strategy and the Capital Programme, the minimum revenue provision statement 2019/20, the balance sheet projections, interest rate projections, cash flow forecast for 2019/20, treasury management strategy and the annual investment strategy, the prudential and local indicators and the CIPFA resilience index.  Mr Thomas explained that the authority were expected to approve a treasury management strategy before the start of the financial year and this report fulfilled the authority’s legal obligation.  Mr Thomas explained that the capital strategy was a new requirement which brings together existing areas of capital and treasury activities in one document.  The Capital Programme approved by Council on 20 February 2018 was compared to the draft Capital Programme that will be recommended to Council on 19 February 2019.  It was noted that the most significant change was due to capital expenditure related to the Property Investment Strategy.  This was to ensure there was sufficient capacity, appropriate expertise and firm governance arrangements in place to ensure sufficient due diligence is undertaken prior to any acquisition.  The extra investment was highlighted i.e. disabled grants, ICT projects and the short term site works at Birmingham Road site had been included in the draft MTFS – Capital Programme – see Appendix B.

The projected capital receipts included in the Medium Term Financial Strategy were shown illustrating share of housing sales from Bromford and asset sales which were also highlighted.  The borrowing need was summarised as it starts relatively small and increases from 2020 because of the £45m investment in commercial property already agreed.  The projected change in the balance sheet 2018/19 to 2022/23 was summarised as they are significant in assessing the Council’s Treasury Management position in terms of borrowing requirement, investment levels and our Investment Strategy.   (As assets are acquired under the Property Investment Strategy the borrowing liabilities also increase to fund these acquisitions.  The element of property assets funded by external borrowing (the Loan to Value) and was compared to an indicative private sector level of 45%.  In the private sector a Loan to Value limit would be set to manage the risk that the loans outstanding are unable to adapt to changing asset strategy or property value.  This will be evident in a recession where typically property values reduce and loans therefore can exceed property value (known as negative equity).  A negative equity scenario can make it difficult to rebalance the portfolio through disposals due to the existing loan repayments that will still need to be paid whilst income is no longer received.

Mr Thomas said there could be an opportunity to borrow some of the required funds internally and this was something to be considered and, in his opinion, it would be a lower cost option, reduce investment risk because there would be lower investment levels and would allow in the event of “windfall” income early repayments without penalties.  However, a second opinion would be sought from the Treasury Management Advisors - Arlingclose.

Mr Thomas explained the cash flow forecast which takes account of the income the Council receives including housing benefits grants, council tax and business rate income and expenditure such as payments to precepting bodies, employee costs and housing benefit payments as well as the expected movement in interest rates which the council’s assumption had been interest rates remain at the current level (because of the BREXIT uncertainty).  Mr Thomas explained he had taken this view as it exposes us to least risks but no one knows what impact the form of exit from the EU will have on monetary policy.

Mr Thomas explained that Appendix E was the new Investment Strategy Report for 2019/20 which was to meet the requirements of the statutory guidance issued by the government in January 2018.  It focused on how the Authority invests its money to support local public services and earns investment income from commercial investments. 

Our investments and their limits were shown and the proposed changes for 2019/20 to provide additional options in the event there are issues with existing Money Market Funds domiciled in Luxembourg and Ireland were highlighted as:-

A new category of UK Domiciled Pooled Funds has been created with a limit of £5m per fund (there are currently two and the council has accounts with both);

A new category of Corporates (excluding the Council Company) has been created with a limit of £250,000 per company.  Loans to unrated companies will only be considered following an external credit assessment;

A new investment limit for Real Estate Investment Trusts of £5m.

The lessons learnt in relation to Northamptonshire County Council had resulted in CIPFA recently consulting on the provision of a Financial Resilience Index to which we responded on 15 August 2018 with the outcome published on 4 December 2018.   CIPFA are looking to produce a range of measures to enable each Council to understand its position relative to other similar Councils in terms of the level and use of reserves, exposure to specific funding streams and the External Auditor's value for money assessment.  A beta version has been received and CIPFA plan to openly publish an updated version later this year.

Members voiced their concern about the undeveloped site at Birmingham Road although very much in its infancy and it was queried if we have included any budget for long term development of the site - Mr Thomas confirmed that the short term use budget included in the draft Capital Programme was for a period of 3 to 5 years including essential works to the bus station.  However, the budget also included a budget for “master” planning and the council was currently looking at options for the whole of the city centre development as well as the site at Birmingham Road and until we know the options available and the delivery options a budget for long-term development could not be accurately assessed and therefore no budgetary provision was currently included in the draft MTFS.

The cash flow forecast was questioned as to why it is lower and then going higher and Mr Thomas agreed to check this and report back to the committee via email.

Members welcomed Mr Thomas’s stoicism because of all the uncertainty at the moment and supported the internally borrowing rather than external borrowing because of this uncertainty.

RESOLVED:- That Members consider the Treasury Management Strategy Statement and highlight any changes or recommendations to Cabinet in relation to:-

(1)  The Capital Strategy and Capital Programme, in Appendices A & B;

(2)  The Minimum Revenue Provision Statement 2019/20 at Appendix C which sets out the Council’s policy of using the asset life method as the basis for making prudent provision for debt redemption;

(3)  Treasury Management Strategy Statement for 2019/20 including proposed limits (Appendix D);

(4)  The Investment Strategy Report (Appendix E) including the proposed limits for 2019/20;

(5)  The Capital and Treasury Prudential Indicators for 2018-23 in the financial implications section;

(6)  The Authorised Limit Prudential Indicator shown within the financial implications section.