2018/2019 Mid-Year Treasury Report
The report updates Members on recent treasury activity.
3. 2018/2019 Mid-Year Treasury Report
Sawan Shah (Finance Analyst at Brent Council) introduced the report which provided an update on Treasury Management Activity in the first half of the 2018/19 financial year. Mr Shah spoke of the economic background in the United Kingdom (UK) and said that the economy had been recovering in the second quarter of the financial year following very low growth in the first quarter and had been growing at roughly the same pace as the economy of the European Union (EU), with growth in the United States of America (USA) had been stronger. Although the latest figures showed that inflation had dropped to 2.4% and wages had grown by around 3%, the impact of the UK leaving the EU continued to cause uncertainty.
The Committee heard that there was no new borrowing required over the course of the current financial year and the Council’s long-term debt had been reduced slightly. Furthermore, Brent continued to qualify for borrowing at ‘certainty rate’ until 31 October 2018 and an application for the period November 2018 to October 2019 had been made (paragraph 3.9 on page 29 of the Agenda pack).
Mr Shah advised Members that the Council’s Capital Programme continued to be funded by internal borrowing and that a report on cash flow borrowing had been considered by Cabinet. A significant amount of capital expenditure had been allocated to one of the Council’s wholly owned investment companies – i4B Holdings Limited – and the New Accommodation for Independent Living (NAIL) scheme.
An Elected Member who was in attendance at the meeting enquired whether it could be possible to repay the Council’s debt earlier than scheduled. Mr Shah explained that repaying the current long-term borrowing portfolio and then borrowing money at the current interest rates (which were lower) was possible. However, Daniel Omisore (Head of Finance at Brent Council) highlighted that the main disincentive to repay the Council’s debt at the moment was the fact that the Local Authority would have to pay significant premiums which would not be financially viable. He referred Members to paragraph 3.13 of the report (page 30 of the Agenda pack) which contained an example of the cost the Council would have to cover had it decided to repay just one of its loans early. Brent would owe a 26% premium on the value of the loan before the cost of re-financing. The aims of this were to compensate the lender and to act as a penalty.
This led to a wider discussion on Brent’s Borrowing Strategy which had been approved by Cabinet in September 2018. Conrad Hall (the Council’s Chief Finance Officer) pointed out that interest rates since 2010 had been under 1%. Historically this was abnormal. Although some commentators are of the view that it is the new normal. The view that the Council had taken was that interest rates in short and medium term were more likely to rise than not. Therefore, the report presented at the previous meeting of the Committee and considered by Cabinet recommended a forward borrowing option to be included as part of a wider borrowing strategy. The benefit of such an arrangement was that it allowed the Council to agree a fixed rate in advance that was broadly comparable with Public Works Loan Board (PWLB) rates. As interest payments did not commence until the loan started, the Council would be able to hedge against interest rate exposure. In response to a question that related to the policies of other local authorities, Mr Hall said that councils’ approach to borrowing would depend on their individual circumstances related to their capital programmes and debt strategies. Moreover, even if it might be possible to obtain benchmarking information from Arlingclose (the Council’s Treasury Management advisers), it would not be feasible to compare the figures without taking into account the financial position of each local authority.
Paul Dossett (Partner, Grant Thornton – External Audit) informed Members that a statement had been issued by the Ministry of Housing, Communities and Local Government setting out that capital expenditure on property by local government had increased significantly in the last couple of years. There had been diversification in the number of different types of funding available to support capital programmes which, on their turn, generated returns and contributed to councils meeting their social objectives. Mr Dossett added that the type of borrowing used by local authorities was linked to their strategies and their future goals.
A Member of the Committee referred to Appendix 1 to the report (page 33 of the Agenda pack) and asked officers to provide more information on the capital financing requirement (CFR) and the reason why the Council’s level of Usable Reserves were forecasted to decline from £204 million to £60 million by 31 March 2021. Mr Omisore explained that the CFR measured the Council’s underlying need to borrow and that the decline had been forecasted because reserves had been used to fund the capital programme explained. Members heard that the Local Authority had an ambitious programme which included funding i4B Holdings Ltd and investment in housing stock which would require it to borrow money in the next couple of years.
Mr Hall highlighted that Council had been accumulating funds as result of collecting Community Infrastructure Levy (CIL) which had not been spent. In his view, the CFR showed Brent’s intention to grow its capital programme in attempt to deal with the substantial financial pressures it faced.
The Chair referred to paragraph 3.24 of the report (page 32 of the Agenda pack) and said that it was important to note that officers had complied with the Prudential Indicators for 2018/2019 which had been set in February 2018 as part of the Council’s Treasury Measurement Statement. He also commented on the Internal Investments: Average Rate vs Credit Risk diagram included in Appendix 3 to the report (page 40 of the Agenda pack), pointing out that Brent’s position was balanced in relation to return on internal investments and credit risk score.
RESOLVED that the contents of the 2018/2019 Mid-Year Treasury Report, be noted.
- 07. 2018-19 Mid-Year Treasury Report, item 7. PDF 124 KB
- 07a. Prudential Indicators, item 7. PDF 75 KB
- 07b. Maturity of Fixed Rate Borrowing, item 7. PDF 38 KB
- 07c. Investment Strategy Options, item 7. PDF 89 KB