TREASURY MANAGEMENT ANNUAL REPORT YEAR ENDED 31ST MARCH 2004 CONSULTED

Transcription

1 AGENDA ITEM EXECUTIVE DATE: 31ST AUGUST 2004 SUBJECT REPORT BY: TREASURY MANAGEMENT ANNUAL REPORT YEAR ENDED 31ST MARCH 2004 HEAD OF CORPORATE FINANCE CONTACT OFFICER: B CRICK IMPLICATIONS: LEGAL EQUALITIES STAFFING COMMUNITY SAFETY FINANCIAL RISKS OTHER CONSULTATIONS: COUNCILLORS CONSULTED STAKEHOLDERS CONSULTED SCRUTINY COMMITTEE CONSULTED OTHER WARDS AFFECTED: NONE LEAD EXECUTIVE MEMBER(S): COUNCILLOR PANTLING RECOMMENDATION(S) 1. Executive is asked to approve the Annual report on Treasury Management for the year ended 31 March 2004 which summarises and reviews the Council s Treasury Management activities. REPORT 2. This report is submitted in accordance with the Annual Strategy for 2003/04 approved at decision EX/57/03.It reviews the activities in 2003/04 and indicates the degree of compliance with the strategy set out in the document. 3. The Chartered Institute of Public Finance & Accountancy s Code of Practice on Treasury Management 2001 was adopted by this Council on 9 July 2002 and this Council fully complies with the vast majority of its requirements.

2 4. It is acknowledged in the Council s Treasury Management practices that the level of Treasury Management activity has not in the past been deemed sufficient enough to segregate all duties that would be desirable if financial/human resources were not a consideration. This situation is kept under continuous review. Initial Borrowing Strategy for 2003/04 Short term interest rates 5. Inflationary pressures were expected to remain weak and the RPIX (headline inflation less mortgage interest rates) was expected to average near or around the target rate of 2.5% thus giving little cause from this source for the Monetary Policy Committee (MPC) to raise the base rate.despite concerns over the continued increase in house prices and increased consumer borrowing the MPC was forecast to maintain the base rate at 4% in order to encourage growth but with the possibility that if prospects for growth weakened then a cut may be necessary. Long term interest rates 6. Public Works Loan Board (PWLB) were at historically low levels running at 4.50% for 25 years and over and the forecast was for a further reduction to around 4.40% and to remain there for the rest of the year. Treasury Borrowing 7. Based on the prospects for interest rates outlined above the following options were available to the Council:- that with short term rates looking to be good value when compared to longer term rates, borrow short term at variable rates or short fixed periods in order to minimise borrowing costs in the short term and make savings required to meet current budgetary constraints; or borrow long term fixed at continued historically low rates on order to maintain a stable longer term portfolio and to guard against potentially high rates further to a short period of short term borrowing. 8. It was recognised that both the above scenarios were sensitive to world economic growth, where an increase could cause an unexpected rise in both long and short term rates thus leading to the likely action of taking fixed long term funds at still relatively low rates or vice versa if a slowdown in growth occurred.

3 Borrowing Outturn for 2003/04 Short term interest rates 9. Base rate was cut from 4% to 3.75% in February 2003 with fears of the Iraq war dampening growth prospects. Anxiety over the international economy and in particular the Euro zone, post Iraq conflict, led to a further cut in July down to 3.5% this move proving to be the bottom of the interest rate cycle. By October growth prospects in both the US and the UK had improved prompting the first increase in base rate by the MPC in four years to 3.75%. This move was also partly designed to slow down the increasingly robust housing market.a second increase was announced in February 2004 to 4% due to a sharp increase in the outlook for UK growth, fresh impetus in the housing market and strong consumer spending. Long term interest rates 10. Immediately prior to the Iraq war year PWLB lower quota rate had been down at 4.50%, however, by April 2003 with the war in its early stages, it had risen to around 4.80% as confidence in long term gilts disappeared due to a sharp rise in yields. By June, amongst worldwide fears of deflation, the rate fell back again to a low of 4.40%.These fears quickly evaporated, however, and by September, with long term US bond yields rising and hence UK Gilts, the rate increased and fluctuated between 4.70% and 4.95% before rising to 5.05% in December on the strength of increased US growth prospects. Prospects weakened over the next three months and by March 2004 the rate had eased back to around 4.75%. 11. Appendix A shows the interest rates prevailing throughout the year. Treasury Borrowing 12. There was no fresh borrowing undertaken during the year, however, two loans were arranged to replace fixed rate PWLB borrowing as a result of a debt rescheduling exercise carried out in conjunction with advice received from the Council s Treasury Management consultants Sector. 13. Four PWLB fixed rate loans were repaid totalling 20m and replaced with a variable rate PWLB loan for 15m along with a Money Market Loan (LOBO) of 5m at rates of 3.80% and 2.05% and periods of one and two years respectively. At the time fixed rates available from the PWLB were considerably higher. 14. Appendix C shows a comparison of the treasury borrowing maturity profile between 2002/03 and 2003/04.

4 Debt Rescheduling 15. Continued low interest rates for borrowing during the first half of the year coupled with diminishing returns on investments and concern over the inflexibility of having100% fixed rate debt, triggered a review of the Council s debt portfolio.a number of fixed rate PWLB loans were running at between 6 5/8% & 7 5/8% and together with the Council s Treasury Management consultants Sector a rescheduling exercise was carried out resulting in the repayments and subsequent borrowing detailed above. 16. This action entailed a premium of around 4.5m, however, a window of opportunity arose in that if the exercise was carried out before 31 March 2004 then the general fund element of the premium 3.5m could be charged direct to the Provision for Credit Liabilities Account and no charge made to the general fund for the amortised premium. Investment interest was lost on the premium payment however the overall benefit to the general fund in the year, taking account of the premium, was in excess of 200k with further savings accruing in the next 5 years of over 1m. Compliance with Treasury Limits 17. The maximum amount outstanding by borrowing during the year was 87m and the overall external borrowing limit determined by the Executive for the year was 110m. 18. Prior to this financial year the Council s borrowing was all from the PWLB at fixed interest rates, however the debt rescheduling exercise carried out during the year led to 17% of the debt being replaced by a PWLB variable rate loan and 6% replaced by a money market fixed rate loan. The limit on the proportion of borrowing at variable rates determined by the Executive for the year was 40%. Investment Strategy for 2003/ At the beginning of 2003/04 the Council s strategy was to have a large proportion of its investments managed externally by Morley Fund Management.The Fund Management agreement defined the exposure limits, counterparty criteria, the limits for maximum weightings in Gilts/bonds and the maximum duration of the fund. 20. Cash balances available for investment on a daily basis to be managed in house, in accordance with the principles set out in the treasury management practices.

5 Investment Outturn for 2003/04 Internally Managed Investments Money Market Investments 21. Surplus funds were invested throughout the year with institutions included on the Council s lending list. Periods ranged between 1 and 364 days and careful consideration was given to interest rate predictions in the market and the Council s cash flow position. 22. Funds were also invested on behalf of London Luton Airport (Ltd) at times when concession income created investment opportunities and these investments are shown in the accounts of London Luton Airport.Similarly surplus funds on the Schools National Westminster Bank account, mainly arising from half yearly payments by the Council, were invested on both a daily basis in a Royal Bank of Scotland Money Market Fund for cash flow liquidity and a longer term basis for excess funds not required immediately for cash flow purposes.in both cases investments were only made with institutions included on the Council s approved lending list. 23. Appendix B shows performance for the year against benchmark which was set at the average 7 day LIBID rate (uncompounded) for the year (3.52%). EuroSterling Bonds 24. Following disappointing returns from the Council s fund manager Morley Fund Management (3.13% to the 30 September) 5million was taken back at the end of September and invested in a Eurosterling bond yielding 4.61% for a three year period. 25. Appendix B shows the performance of the bond as a long term investment but it should be noted that the performance figure shown against internally managed funds (3.90%) also includes the effect of this investment. Externally Managed Investments 26. As previously mentioned returns during the year from the Council s fund manager Morley Fund Management were disappointing and by January 2004 had only reached 3.33% against a benchmark of 4.09%. 27. Further to consultation with the Council s Treasury Management consultants Sector it was decided to terminate the contract with Morley and bring the funds back to be managed internally.one month s notice was given and the m was repaid on 5 March Continued poor returns and Sector s view that, in the rising interest rate environment, little opportunity would be available for fund managers to out perform the Council s in house operation,

6 led to the decision taken. This action gives rise to a saving of fees of around 27k in 2004/ Appendix B shows performance for the year against benchmark which was set at the average 3 month LIBID rate (compounded +10%) for the year (4.09%). LEGAL IMPLICATIONS 29. There are no legal implications in respect of this report and this has been agreed with the relevant solicitor in legal services on 10 August FINANCIAL IMPLICATIONS 30. The Annual Strategy Financial Implications are dealt with in the body of the report as agreed with the Chief Accountant RISKS 31. Treasury Management is an area of significant risk. In relation to security and probity of investments all activity has been undertaken in accordance with the provisions of the Council s Treasury Management Practices (TMPs) which include a substantial section on risk, in order to manage and minimise, so far as possible, the risks involved. OPTIONS 32. Executive can choose whether or not to approve this report. APPENDICES Appendix (A) Summary of Interest Rates 2003/04 Appendix (B) Treasury Position Comparison 2002/03 to 2003/04 Appendix (C) Long Term Borrowing Maturity Profile Comparison 2002/03 to 2003/04 BACKGROUND PAPERS Broker/Advisers Commentaries Final Account Working Papers Treasury Management Statistical Analysis