MINUTES of the meeting of the TREASURY MANAGEMENT TOPIC GROUP held on Friday 23 March 2012 at 10.00am

ATTENDANCE

Members of the Topic Group

N K Brook, D S Drury (Vice-Chairman), S Quilty, E T Roach, A M R Searing (Chairman)

Also in attendance

T Hawkyard, Head of Scrutiny

N Keeling, Sterling Consultancy Services

E Lund, Democratic Services Officer

S MacKenzie-Carmichael, Sterling Consultancy Services

P Towey, Head of Specialist Accounting

1. / APPOINTMENT OF CHAIRMAN AND VICE-CHAIRMAN
1.1 / It was noted that A M R Searing and D S Drury had been appointed Chairman and Vice-Chairman of the Topic Group for the duration of its work.
2. / GENERIC TOPIC GROUP INFORMATION
2.1 / The information was noted.
3. / REMIT OF THE TOPIC GROUP
3.1 / The Group noted its remit and focus, and the Head of Scrutiny reminded Members of the background and reasons for the scrutiny. It was noted that it had originally been envisaged that the scrutiny would centre around the County Council’s investment policy in relation to ethical investments: however, given the County Council’s overriding obligation to seek to obtain best returns, the remit of the scrutiny had been widened to cover the regulatory background and the risks which the Treasury Management service manages on a daily basis.
4. / SCRUTINY OF THE TREASURY MANAGEMENT FUNCTION
4.1 / Patrick Towey, Head of Specialist Accounting, provided Members with an overview of the Treasury Management service and how it operates within the County Council. It was noted that the key functions of treasury management within a local authority are:
  • liquidity management (ensuring that the right amount of funds are available in the right place at the right time to settle bills as they become due);
  • capital funding (arranging debt finance to fund the County Council’s capital programme);
  • investment management (investing surplus funds to gain a return, with regard to security, liquidity and yield).

4.2 / In relation to liquidity management, the Topic Group heard that this is primarily managed by means of a cash flow tool. An annual cashflow forecast is prepared by officers using various sources of information to determine peaks and troughs in available funds. This is then used to inform decision-making, i.e. whether to borrow short- or long-term, or for how long to invest surplus cash.
4.3 / In relation to capital funding, the Group heard that arrangement of debt finance can come from a variety of sources, but primarily: loans from the Public Works Loan Board (part of HM Treasury’s debt management office); loans from banks (via Lender Option Borrower Option (LOBO) loans); or bond issues (although the latter involves legal and banking costs). The main risks associated with debt finance are re-financing risks (i.e. terms and rates being less favourable when the need for re-financing falls due; a large number of loans maturing at the same time and requiring re-financing at the same time; or a large number of loans having ‘call-options’ at the same time (i.e. the lender having the option to require repayment). There can also be supply risk if there is a restricted number of lenders willing to lend. The Group heard that given the volatility in current markets, and low investment yields with low interest rates, the authority’s current approach is low-risk, with cash reserves used as far as possible to fund the capital programme, thus limiting borrowing requirements.
4.4 / In relation to investment management, it was noted that where cash reserves exist, these are predominantly invested within Money Market Funds (MMFs), which provide a high level of liquidity and low security risk, as the funds can be withdrawn without notice. In response to questions about security in light of current market volatility, it was noted that if necessary during periods of extreme risk, funds could be quickly moved from MMFs, and placed securely with the government’s Debt Management Account Deposit Facility.
4.5 / In response to questions about the impact of previous investments which the County Council had placed with various Icelandic Banks, and which had resulted in losses totalling c £28m, Members heard that c£16.1m of the £28m loss has now been returned, and in total around 92% of the original investment is expected to be able to be recouped. The Head of Specialist Accounting outlined the measures which have since been taken to improve controls around investment management: these include clearer segregation of duties and weekly meetings involving senior finance staff to monitor the investment portfolio and the credit ratings of counterparties. The market is also closely monitored through meetings with pension fund managers, and information which is provided by treasury management advisers, brokers and credit agencies. In debate it was noted that similar bank failures had happened in the past and would undoubtedly happen again: Members stressed the need for officers not to become complacent around investments which appear to offer a significantly better return than competitors, or to relax controls once the economic situation improves. It was noted that in order to minimise counterparty risk (i.e. the risk that the counterparty with which investments are placed is unable to repay at maturity) the authority’s investments are now exclusively held in UK-based institutions, and that the MMFs are ‘AAA’ rated. It was also noted that whilst no investment is risk free there are ways to limit and manage risk, but that the lower the risk and stricter the investment criteria, the lower the potential yield. The Head of Specialist Accounting advised that Members are now more involved with investment management than previously, with regular reporting (including information on any breaches of policy) being provided to County Council, Cabinet, the Policy, Resources & Performance Cabinet Panel, the Audit and Pensions Committees and the Investment Sub-Committee. It was noted that breaches have significantly reduced, and are now occasional. In relation to Pension Fund investments, it was noted that the Fund comprises c£2.3bn of assets spread across equity, bond and property managers, with c£20m of pension fund cash managed in-house. The investment approach to these funds mirrors that of the rest of the authority: i.e. a majority holding in MMFs. The Group heard that the Investment Sub-Committee regularly reviews the strategy for pension fund investment and monitors fund managers, with quarterly meetings with fund managers providing valuable information and viewpoints of the market.
4.6 / In response to questions from Members about new provisions contained in the Localism Act which enable authorities to invest in derivatives, the Head of Specialist Accounting expressed the view that investing in derivatives would represent a high-risk approach which would be counter to the Council’s current agreed low-risk approach; that such a risky approach is not currently needed; and that the potential gain would be unlikely to justify the level of risk involved. It was considered that any decision to invest in derivatives would need to be taken with great caution, with Cabinet approval, and with regard to appropriate external advice and legal opinion.
4.7 / The Group also heard from Samantha MacKenzie-Carmichael and Nick Keeling from Sterling Consultancy Services, treasury management advisers to the County Council. The Group received a presentation providing an overview of the company; the profile of the consultancy services team; the services provided (which include strategic treasury management advice, investment advice, debt management advice and technical advice); the ways in which updates are provided and information is shared (this includes regular and timely reports and technical updates; benchmarking; seminars and meetings; training; and regular reviews of strategy, practices and procedures). The Group heard that Sterling tailors its advice to match the client authority’s preferred approach, with an overall view to balancing the investment portfolio to limit risk on any one side. The Group also heard about Sterling’s risk monitoring, credit risk management, and performance and risk review services; debt management services and economics and interest rate forecasting. It was also noted that Sterling provides technical advice to the authority in relation to accountancy and regulatory changes, as well as in-house and on-site training. In relation to the latter it was noted that many Members would be likely to be interested in attending treasury management training, and it was recommended that a lunchtime Member training session(s), suggested to follow an Audit or Pensions Committee meeting, should be arranged.
4.8 / Members also heard about the new banking contract with Barclays Bank, which is to be implemented with effect from 1 June 2012. It was noted that this is expected to result in savings to the County Council of c£0.5m over the next five years: this being achieved through effective collaborative working with Cambridgeshire and Nothamptonshire in the procurement of the new contract. The collaborative approach will continue for the duration of the 5 year contract, and Members welcomed this innovative partnership approach.
4.9 / Copies of all papers considered at the meeting can be found at:
5. / CONCLUSIONS AND RECOMMENDATIONS
5.1 / The Group agreed a series of conclusions and recommendations, to be set out in the separate report of the Topic Group. It was noted that a draft of the final report would be circulated to officers initially (in order to check for accuracy) before being circulated to Members for comment. It was agreed that, treasury management being of relevance to all Members, the final report should be circulated to all Members of the County Council.
5.2 / The Chairman thanked officers and witnesses for their time in providing evidence to the Group.

Emma Lund

Topic Group Administrator

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