Agenda item

(Report of the Head of Finance & Procurement)

Mr Anthony Thomas (Head of Finance and Procurement) delivered a Presentation on the Annual Treasury Management Report and explained to the committee the reasons why the report is prepared:-

·         The Constitution assigns responsibility for scrutiny of treasury management to this committee;

·         Treasury management includes capital expenditure, funding, borrowing, investments and prudential indicators;

·         There are three cyclical treasury management reports:-

(1)  Treasury Management Strategy – what we plan to do.

(2)  Mid-Year Treasury Management Report – how we are doing.

(3)  Annual Treasury Management Report – what we did.

Mr Thomas talked through the key points of the report focussing on:-

·         Capital Expenditure – an underspend of £13.4m (85% of the approved budget) with the most significant item of £10.5m being due to no investment in property due to a PWLB consultation on debt for yield schemes and subsequent CIPFA advice to Chief Financial Officers.

·         Balance Sheet – the impact on the balance sheet of the year end pension valuation of the long-term liability provided by the Pension Fund Actuary, £12.2m lower than budget and £10m lower than last year’s valuation.  This was due to changes in financial and demographics used by the Actuary in the valuation.

·         Strategic Investments – as at 31 March 2020 the Council had invested £6m in property and diversified income funds with their valuation being £5.5m as at 31 March 2020 and £5.6m as at 10 July 2020.  In June 2020 in line with the strategy and to take account of lower asset prices, the Council had invested a further £2m in a diversified income fund.

·         Prudential Indicators – the Council was compliant with all indicators for 2019/20.

In terms of Covid-19 and treasury management, further information was provided:

·         A report to Cabinet on 7 July 2020 had projected the financial impact for the Council (after grant) could range from £1.3m to £4.5m.

·         In terms of managing the risk, the Council had £7m in confirmed general reserves, financial stress testing had been undertaken, enhanced financial monitoring of income streams was taking place, a further £0.14m of government grant had been received, a sales, fee and charges income loss sharing agreement had been announced and there was also going to be the ability to spread council tax and business rates collection fund losses over three years rather than one.

·         The Council had not undertaken investment in property funded by borrowing and therefore was not exposed to additional financial risk.

·         In terms of the risk of investments not being repaid, the Council’s approach had always been to diversify investments to manage risk, no new investments were undertaken without firstly obtaining Arlingclose advice and there were no known problems with the Local Authorities where the Council had investments.

A query relating to the decision taken 3 years ago to borrow up to £45m was raised and it was asked if the Council had any plans to cancel this agreement.  Mr Thomas said at this point a decision had not been made on the plans for the approved budget of £45m.  He said the PWLB consultation was focussed on debt for yield schemes and from the Council’s perspective this was high risk because the property investment strategy was overly commercial, however, it does not preclude borrowing from the PWLB to fund place-shaping or housing investment.

It was asked if an assurance could be given that this decision would be coming to the Strategic O&S committee as well as this committee before any changes are made.  Mr Thomas said the £45m budget was part of the MTFS approved by Council on 18 February 2020 and in line with the budget framework, only Council can therefore approve changes to this budget.  Therefore, the options for this budget would form part of the development of the MTFS that will be scrutinised by both the Strategic O&S committee and this committee prior to ultimate approval by Council.  Councillor Strachan, Cabinet Member for Finance, Procurement, Customer Services and Revenues & Benefits, advised on the specific point that the Treasury’s move, and, the subsequent advice from CIPFA was to address concerns around an emergent bubble in asset prices using easily accessible government funds to buy property but if the bubble was to burst this then becomes a large risk factor.  Councillor Strachan said if we were to borrow to invest in building/housing we were still able to invest in these types of projects but he absolutely undertook that this would be part of the over-arching MTFS and assured all the committee members that any decision would go through the correct governance channels and this would be a Cabinet discussion in the future.

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The Balance Sheet investments having increased £11.1m higher than the working capital and reserves was questioned and Mr Thomas explained that the level of working capital had increased with lower debtors in part due to the corporate debt team and higher creditor amounts including the surplus made on the collection fund that will be paid over in 2020/21.  Usable reserves had also increased due to a variety of reasons such as lower capital and revenue spend in the year.  He said these were likely to increase significantly this year to manage timing differences between the receipt and spend of grants to offset the impact of the pandemic.

In relation to the service investments particularly, the ICT Cloud one, it was queried that there was a variance of £39,000 costs more than was budgeted.  It had been noted that it said it was a project change and Mr Thomas was asked to explain more.

Mr Thomas said that when this project was approved an approach based on a particular partner was envisaged, however, an alternative approach with an alternative partner had now been approved and, therefore, we are not going to generate the savings we had predicted and he confirmed it would be a budget pressure moving forward, Mr Thomas said it would be a key issue.

The Property Fund book value was discussed and it was asked how much of that was exposed to retail - were the reserves not covering the book loss? Mr Thomas was asked which direction this would take and he said the Council was not exposed to the level of some property funds as we were a low risk organisation who are in it for the longer term therefore less volatility.  He said the CCLA do not invest in high street retail – they mainly invest in industrial/distribution as they believe it is not exposed to the level of some property funds.  Moving forward Mr Thomas said it was a good question.  One of the reasons for setting up the reserves in the first place was to manage the volatility.  In addition, there is also a statutory override in place until 31 March 2023 that means any reductions in value do not have to be charged to revenue and Mr Thomas said he had already raised this point in Government Returns that this will need to be extended given the impact of the pandemic on investment values.

It was noted that looking at the numbers and figures in Appendix A, a great deal of capital projects had slipped back, investment in the property company especially, it was asked if there was a real chance that this may slip in to 2021/22 and how long we could allow the investment in the property company to slip back before it had an impact on the MTFS.

Mr Thomas said the investments in the property company consist of 2 elements: an equity investment of £225,000 that we undertook in May; and a £675,000 loan for up to 5 years.  He said we have only built income from the loan into the approved MTFS i.e. £4,000 in 2020/21 and increasing to £22,000 in 2023/24.  At this stage, no income from dividends from the company had been included in the MTFS.  In terms of the investment in property budget, the MTFS assumes a contribution of £87,000 in 2020/21 increasing to £658,000 in 2023/24 and therefore if investment does not take place or result in income, then the funding gap will increase.

RESOLVED:- (1) The Report was reviewed and noted;

(2) The actual 2019/20 prudential indicators contained within the report were reviewed and noted.