REPORT TO:
REPORT NO:
DATE:
REPORTING OFFICER:
CONTACT OFFICER:
SUBJECT:
WARD: / Executive Board
CFSO/12/04
7 September 2004
Chief Financial Services Officer
M S Owen (Ext. 2704)
2003/2004 Treasury Management Report
N/A
1.PURPOSE OF THE REPORT
To present the Treasury Management Report of Wrexham County Borough Council for the financial year ended 31 March 2004.
2. INFORMATION
2.1Policy Framework
This matter is not covered by the policy framework but the receiving of reports on Treasury Management is explicitly delegated to the Executive Board under the constitution.
2.2Budget
The Council’s net Capital Financing budget for 2003/2004 was £9,927k.
2.3Consultation
Not relevant.
2.4Overview and Scrutiny committee(s) comments
The Financial Scrutiny Committee has had the opportunity to comment in detail on the report on 29 July 2004.
2.5Further information
The Council has adopted the CIPFA Code of Practice on Treasury Management in the Public Services. The Code provides that the responsible Financial Officer presents an annual report on the performance of the treasury management function. Financial Regulation 8.3 requires that this report be presented by 30 September of the succeeding financial year. Accordingly, the annual Treasury Management Report for 2003/04 is attached in the Appendix.
- RECOMMENDATION
That the report be received.
4.REASONS FOR RECOMMENDATION
To comply with the CIPFA Code of Practice on Treasury Management and Financial Regulation 8.3
BACKGROUND PAPERS
CIPFA Code of Practice: Treasury Management in the Public Services
The Non-Investment Products Code
Wrexham County Borough Council Financial Regulations
CIPFA Treasury Management Benchmarking Club 2004 draft report
6.WEBSITE INFORMATION
2003/2004
ANNUAL
TREASURY
MANAGEMENT
REPORT
Annual Treasury Management Report
Introduction and Background
The Council has adopted the Treasury Management in Public Services: Code of Practice (the Code) and fully complies with its requirements. The primary requirement of the Code is the formulation and agreement by the Council of a Treasury Management Policy Statement and a number of Treasury Management Practices that set out member and officer responsibilities, delegation and reporting arrangements.
A requirement of the Council’s Treasury Management Practices is the reporting to the Executive Board of both the expected treasury management activity for the forthcoming financial year (the annual treasury management strategy statement) and subsequently, the results of the Council’s treasury management activities in that year (this Annual Treasury Management Report). Treasury management in this context is defined as:
“The management of the organisation’s cash flows, its banking, money market and capital market transactions; the effective management of the risks associated with those activities; and the pursuit of optimum performance consistent with those risks”.
This annual report covers:
- borrowing strategy
- debt rescheduling
- borrowing outturn
- investment strategy
- investment outturn
- general performance and other issues
1.Borrowing Strategy
The Adopted Borrowing Strategy
The approved strategy for 2003/2004 was to maintain long term borrowing at, or approaching, the overall credit ceiling and no new borrowing was anticipated during the year.
The Expectation for Interest Rates
The interest rate expectations incorporated within the Council’s treasury management strategy statement were based upon officers’ views with help from Butlers, our independent treasury management advisers, supported by a selection of City forecasts. The outlook for interest rates in 2003/04 was for a continued period of stability, with rates increasing in the second half of the year as economic activity strengthened.
Actual Interest Rate Activity
Economic and geo-political instability prevailing at the beginning of the period combined to keep interest rates at historically low levels. The poor performance of the US economy and the continuing uncertainty of the situation in Iraq together with fears of a slowdown in UK economic activity were the reasons for a reduction in base rates to 3.5% in July.
In the second half of the year, growing evidence that the US economy was staging a sustainable recovery, together with buoyant retail spending and continuing house price inflation in the UK resulted in increases in base rates while longer term rates increased in response to the Government’s demand for funds to finance its growing deficit.
Table 1 below, shows a summary of Short-Term interest rate levels throughout 2003-2004, which were broadly in line with expectations.
TABLE 1
End-Quarter / Base Rate /LIBOR*
3 month / 6 month / 12 month2003 / Mar / 3.75 / 3.7 / 3.6 / 3.5
Jun / 3.75 / 3.6 / 3.6 / 3.6
Sep / 3.50 / 3.7 / 3.8 / 4.0
Dec / 3.75 / 4.0 / 4.2 / 4.4
2004 / Mar / 4.00 / 4.4 / 4.5 / 4.8
*London Inter-Bank Offered Rate
2.Debt Rescheduling
The Public Works Loan Board (PWLB) allows authorities to pursue a policy of debt restructuring with the aim being to secure revenue savings by the proactive management of interest rate risk. This can entail converting loans from fixed rate to variable and vice versa, or prematurely repaying loans in order to attract revenue savings. During 2003/2004 the Council was able to prematurely repay 3 PWLB loans with a total value of £13,250,000. These loans were repaid at a discount that resulted in Council Fund savings of £89,380 and Housing Revenue Account savings of £41,971.
3.Borrowing Outturn
Table 2 below gives details of borrowing activity during 2003/2004
Table 2
Type of Loan / Loans as at 31/3/03£’000 / Average Rate of
Interest
% / Loans Repaid 2003/04
£’000 / Loans as at 31/3/04
£’000 / Average Rate of
Interest
%
Short Term (<365 days) / 0 / 0 / 0
Long Term (>365 days)
Fixed – PWLB (Maturity) / 148,427 / 6.29 / 13,250 / 135,177 / 6.44
Fixed – PWLB (Annuity) / 3 / 3.60 / 0 / 3 / 3.60
Fixed – PWLB (EIP) / 0 / 0 / 0
Fixed – Other / 14,300 / 4.81 / 0 / 14,300 / 4.81
Variable - PWLB / 0 / 0 / 0
TOTALS / 162,730 / 6.16 / 13,250 / 149,480 / 6.28
Short Term Debt
Due to differing trends in income and expenditure cash flows, there are occasions when the Council may need to borrow funds on a short-term basis, or by way of overdraft. An overdraft facility of £5,000,000 is available at the Authority’s Bank (National Westminster) but the cost of this, at 1% above Base Rate, is generally a more expensive option than taking short-term funds from the money market. During 2003/2004 no short-term money market loans were required.
Long Term Debt
As noted above under Debt Rescheduling, loans to the value of £13,250,000 were repaid prematurely in accordance with the strategy to maintain long term borrowing at, or approaching the overall credit ceiling.
Maturity Profile
The strategy is to spread the maturity dates of the Authority’s debt over several years, and therefore flatten the maturity profile to avoid a high commitment to repayments in any one financial year. This is taken into consideration when applying for all new loans. The portfolio is reviewed on an ongoing basis.
The portfolio includes fixed term PWLB (Public Works Loans Board) debt with fixed maturity dates and market LOBO (Lenders Option Borrowers Option) debt that allows the Authority the option to repay the loan prematurely if the lender chooses to increase the rate of interest on specified dates. Appendix A gives details of the maturity dates for both types of debt at 31 March 2004. For fixed term debt, almost 79% of total debt is due to mature in more than 15 years time. Maturity periods for the outstanding market loans range from a minimum of 2 years to a maximum of 39 years.
Compliance with Treasury Limits
As required by Section 45 of the Local Government and Housing Act, 1989, the following approved treasury limits were set by Council on 5 March 2003:-
- the overall borrowing limit£180,000,000
- the amount of the overall borrowing limit which may be
outstanding by way of short term borrowing£ 35,000,000
- the maximum proportion of interest on borrowing which is
subject to variable rate interest50%
During the year, none of these limits were exceeded.
Performance Measurement
Participation in the CIPFA Treasury Management Benchmarking Club has enabled the comparison of Wrexham’s performance with 91 other bodies. For fixed term debt, Wrexham’s average interest rate of 6.4% was lower than the average of the benchmarking group of 6.7%. The highest average rate for any authority was approximately 9.5%, whilst the lowest was approximately 4.2%. As a result of this, our position within the league table is just above half-way.
4.Investment Strategy
Temporary investments were made to coincide with the Council’s cash flow requirements, and the major objectives followed were:-
- to achieve a level of return greater than would be secured by internal investment
- to maintain capital security
- to maintain policy flexibility
As included in the Treasury Management Policy Statement, all investments have been made with counterparties from a list of institutions which meet credit criteria suggested by the Council’s Treasury Consultants. Only those counterparties that meet these criteria form part of the Council’s approved lending list. Ratings are considered valid for up to 12 months and accordingly, 12 months was used as the maximum maturity period for all investments. The Authority manages its investments in-house and, during the year, invested for varying periods ranging from overnight to 364 days dependent on the Authority’s cash flows and the interest rates on offer.
5. Investment Outturn
Listed below are details of the investments undertaken by the Council.
TABLE 3
Counterparty Type / Number ofInvestments
/Value of
Investments£ / Average Number
of Days / Interest
Received
£ / Average Rate of
Return %
UK Banks / 47 / 55,830,000 / 64 / 410,797 / 3.65
Foreign Banks / 114 / 94,590,000 / 24 / 235,670 / 3.63
Building Societies / 85 / 122,120,000 / 35 / 468,982 / 3.71
Total / 246 / 272,540,000 / 1,115,449 / 3.67
Most of the investments are driven by the Authority’s cash flow and therefore the quantity is high, but the sums tend to be relatively small and for short periods. The majority of such investments are placed with only a relatively small number of counterparties, who are willing to take deposits of this nature.
No institutions with which deposits were placed showed any difficulty in repaying investments and interest in full during the year.
Temporary investments outstanding at 31March 2004 totalled £19,500,000.
Performance Measurement
Wrexham’s performance for the rate of return on all investments of 3.67 % marginally exceeded the average of the Benchmarking club of 3.60% and the average market 7-day rate of 3.57%. This places us above half-way in the league table.
6.General Performance
The Treasury Management service is based in the Accountancy Division of the Financial Services Department. It recognises the importance of CIPFA’s Treasury Management in Public Services: Code of Practice, the Non-Investment Products Code and the CIPFA Statement of Professional Conduct and is committed to achieving the standards laid down within these documents. A continual evaluation process is undertaken to ensure that any changes in policy or market developments can be acted upon promptly, efficiently and effectively. This is essential in providing a quality service to the Council.
7.Other Issues
Deferred Purchase Agreement
Principal payments of £90,000 were made to Morgan Grenfell in respect of the Deferred Purchase Agreement entered into by the former Wrexham Maelor Borough Council in 1990, (as amended 12 May 1998) for the purpose of refurbishing Redwither Tower. This leaves an outstanding balance of £630,000 at 31 March 2004, to be repaid over the remaining 7 years at £90,000 per annum.
8. Conclusion
During the year Treasury Management activity followed the approved strategy and complied with the broad objectives contained within the Treasury Policy Statement and the CIPFA Code of Practice. Comparison with other members of CIPFA’s Treasury Management Benchmarking Club shows that we have been successful in achieving greater than average returns on investments, whilst maintaining a comparatively low rate of interest on outstanding loans.
APPENDIX A
PWLB Maturity Analysis at 31 March 2004
Maturing within: / % / Amount£ / Average Rate %
up to 5 years / 0.43 / 592,622.02 / 10.989
5 to 10 years / 7.05 / 9,524,156.97 / 9.448
10 to 15 years / 13.67 / 18,482,083.08 / 7.838
More than 15 years / 78.85 / 106,581,533.02 / 5.898
Total (56 loans) / 100.00 / 135,180,395.09 / 6.436
NB – The amounts shown maturing include one annuity loan that remains outstanding. This is due to be paid off in full in 2018.
Market Loan Maturity Analysis at 31 March 2004
Counterparty / Amount£ / Average Rate % / Initial Rate % / Early Repayment Date / Subsequent Rate % / Maturity Date
Bayerische Landesbank / 4,100,000 / 4.88 / 4.60 / 28 March 2006 / 4.90 / 28 March 2042
Barclays Bank Plc / 4,000,000 / 4.92 / 3.85 / 05 August 2006 / 4.99 / 05 August 2042
Dresdner Bank AG / 6,200,000 / 4.67 / 3.45 / 28 March 2007 / 4.80 / 31 March 2043
Total (3 loans) / 14,300,000 / 4.81
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