Agenda item

To consider a report by the Lead Member for Finance and Assets (copy enclosed) to note the Annual Treasury Management Report 2011/12 regarding the Council’s investment and borrowing activity during 2011/12 together with the details of the economic climate and compliance with Prudential Indicators.  Also to note the Treasury Management Update Report of the activities during 2012/13.

10.30am – 12.00pm

Councillor Julian Thompson-Hill, Lead Member for Finance and Assets introduced the report (previously circulated) and provided some background information on the Council’s treasury management functions and the role and responsibility of the Corporate Governance Committee in that regard.  In view of the scale and complexity of treasury management, regular updates and training would be provided for the committee to aid members’ understanding and enable effective scrutiny of those functions.

 

The Head of Finance and Assets (H:F&A) drew members’ attention to a timetable of reports and training for the committee (paragraph 2.2.1 of the report) together with reporting arrangements to Council and Cabinet.  In guiding members’ through the report, the H:F&A explained each of the issues in detail to aid the committee’s understanding of the complexities involved within treasury management activities and provide a working knowledge of those particular functions.  The main report included individual reports on the following areas –

 

Paper on Borrowing (Appendix 1) –

 

The H:F&A referred to the timeliness of this paper given that members would be discussing financing of the Corporate Plan after Full Council the following week.  In considering the Council’s aspirations for capital investment for future years it was important that members had an understanding of borrowing.  The H:F&A explained why and how the Council borrowed and provided details of the strategy adopted.

 

The presentation on borrowing covered –

 

• background to the legal situation in terms of borrowing
• borrowing only permitted for capital purposes to build new assets or to improve/repair existing assets
• capital expenditure could be financed by grants, contributions and capital receipts but any shortfall had to be met by borrowing
• the different types of borrowing (Internal/External) and the elements and proportions of each type together with the level of borrowing over the last five years
• the current level of debt and details of the various individual loans varying in length from 1 to 50 years together with the basis of those loans (Maturity/Equal Instalment of Principal/Annuity) and the maturity profile of that debt together with details of interest rates payable
• details of the elements of the Capital Financing Budget (approximately £12m) set aside to cover the cost of borrowing
• the principles on which the treasury management strategy was based to ensure that the Council did not borrow more than was needed and could afford to pay back the debt which included setting prudential indicators to determine borrowing limits and to measure affordability, and
• the source of the Council’s current debt with loans linked to future revenue streams and reference to interest rates for loans and their calculations.

 

Members took the opportunity to ask questions and discuss a number of issues with the H:F&A arising from his presentation to which he responded as follows –

 

-          in comparison with other local authorities the Council’s borrowing proportion was somewhere in the middle, but had been distorted somewhat by the money spent on housing stock as detailed in the Housing Revenue Account

-          the Council’s credit limit was set by Full Council

-          confirmed the intention to include revenue implications in costing the Corporate Plan

-          elaborated upon the Private Finance Initiative which had been used previously by local authorities as a means of funding schemes which was no longer in favour

-          reported upon the Council’s reserves and balances advising that approximately £7.2m was available in general balances with over £20m in reserves which had been set aside for specific purposes.

 

Members also noted that the vast majority of the Council’s debt had been taken out by predecessor authorities in the 1980s and 1990s (approximately £100m against total borrowing of £134.39m).  The H:F&A elaborated upon the impact of the different types of loans on the Council’s finances and members discussed the merits of each loan type.  There had been a shift in recent years from Maturity Loans to Equal Instalment of Principal Loans to ensure debt was being paid off on a regular basis. Members considered the various risks associated with borrowing together with the benefits which could be achieved as a result.  Examples of capital investments in line with the Council’s priorities were discussed including schools, highways and extra care housing and the potential savings generated from investments as a result in particular areas.  It was accepted that those issues would be discussed further by councillors at the session on financing the Corporate Plan the following week.

 

Annual Treasury Management Report 2011/12 (Appendix 2) –

 

The H:F&A presented the Annual Treasury Management Report which provided details of the Council’s treasury management activities and an overview of the economic background for the year.  It also reported upon the risk implications of treasury decisions and transactions and confirmed compliance with treasury limits and Prudential Indicators.  The H:F&A elaborated upon the following elements contained within the report –

 

• borrowing activity and strategy to use mainly internal resources instead of external borrowing as the most cost effective means of funding capital expenditure
• investment activity and level of the Council’s investments at the start and the end of the year with low interest rates continuing to have a significant impact on the investment return earned by the Council; investment objectives focused on security, liquidity and yield with security being the main objective for investment, and
• compliance with prudential indicators.

 

In response to a question regarding the depreciation of assets, members were advised that the Council did not charge depreciation by law because of the potential for figures to be manipulated.  Instead a charge was made against assets based on a particular formula.  In addition, asset sales were not included in the revenue budget but had to be kept separate by law.

 

Treasury Management Update Report 2012/13 (Appendix 3) –

 

The H:F&A presented the Treasury Management Update Report which provided details of the treasury management activities during 2012/13 including the Economic Outlook; Risks, Activity, Controls and Future activity.  Members’ attention was drawn to the following points –

 

• the volatile financial markets and position in Europe
• risk management strategies to safeguard the Council’s investments
• the maturity profile of the Council’s investments which was currently limited to seven days and consequently returns remained low
• robust auditing of treasury management by both Internal Audit and the Wales Audit Office on a regular basis.  The Internal Audit review undertaken in February 2012 had concluded that processes and procedures were robust, well established and followed meticulously with key risks effectively managed
• the Council intended to reduce its investment balances and use temporary borrowing as a means of funding short term cash flow requirements.

 

The H:F&A responded to members’ questions as follows –

 

-          reported upon the officers responsible and safeguards in place when making investments which focused more on cash flow management in the current financial environment rather than strategic investment

-          the need for a debate on the nature and purpose of reserves and balances to ensure its most effective use which was linked to the forthcoming discussion on the Corporate Plan timetabled after Full Council the following week

-          there was no guidance on minimum balances and it was a matter for individual Councils to set their own level of financing

-          agreed that borrowing for individuals and corporate bodies was completely different and members needed to consider what they wanted to achieve and how they were prepared to realise those achievements.

 

The Head of Legal and Democratic Services (H:L&DS) reported that he had received an e-mail from Lay Member Paul Whitham advising that he had been pleased to note the training and updates planned for members of the committee.  He had also queried whether treasury management was subject to annual and formal risk assessments.  In his address the H:F&A had elaborated upon the robust and regular audit reviews undertaken on the function which the H:L&DS agreed to report back directly to Mr. Whitham.  The H:F&A added that in addition to the regular auditing of the function the department had their own risk register and reported to the Corporate Governance Committee on a quarterly basis.

 

The presentation had been well received by members and at its conclusion the committee was keen to learn more about the treasury management function and processes and highlighted the need for members to gain a greater understanding of those activities.  During consideration of their training requirements the H:F&A confirmed that sessions could be held before meetings to build an understanding of the subject and regular updates would be provided to the committee.  Councillor Julian Thompson-Hill added that it had been agreed previously that such training be mandatory for committee members.

 

Finally the Chair thanked the H:F&A for his interesting and informative presentation and the knowledge imparted which gave members a greater understanding and insight into treasury management activities.

 

RESOLVED that –

 

(a)       the Paper on Borrowing (Appendix 1 to the report) be noted;

 

(b)       the performance of the Council’s Treasury Management function during 2011/12 and its compliance with the required Prudential Indicators as reported in the Annual Treasury Management Report 2011/12 (Appendix 2 to the report) be noted, and

 

(c)        the Treasury Management Update Report 2012/13 (Appendix 3 to the report) be noted.

 

The meeting concluded at 12.35 p.m.