Alan George, Regional Director

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• Treasury Management
• Borrowing

• Alan George, Regional Director
• 26th March 2015

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Audit Scotland Overview Report 19th March 2015

• 32 Councils in Scotland
• Debt 14.8bn
• Asset base 39bn

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Audit Scotland Overview Report Summary

• 14.8bn total debt (not debt liability!!)
• 12.1bn borrowing - 2.7bn PPP/finance
  leases
• Borrowing remained c 12bn over last 3 years with
  total assets of 39bn
• Councils only demonstrating short term
  affordability
• Not always highlighting strategic importance of
  borrowing/treasury
• Not highlighting affordability and sustainability
• Not support for borrowing decisions to ensure
  best value
• Treasury management is professional and mostly
  integrated with capital functions
• Need to improve scrutiny and governance
  arrangements of TM
• Complex area (Black Art!!)
• Provide wider training for Members
• Clearer more accessible and regular reports to
  Members
• Link to corporate objectives and investment plans
• Scenario planning
• Capital financing options
• Prudential indicators over longer period

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Local Government Acts and Regulations
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How do we assess the risks?

• Balance Sheet Analysis
• Helps to identify potential treasury risks and
  where you sit (not a performance indicator
  between organisations)
• All organisations at a different point in
  delivering their objectives
• Also assists in-
• Reviewing/understanding overall financial
  position
• Identifying options for future treasury strategy
  and mitigating treasury risks

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Key Themes Long-term Assets/Liabilities
2012/13 bn 2013/14 bn change y/y
Long-term Assets to be financed 38.3 38.9 1.6
Capital Adjustment A/c / Revaluation Res 22.8 23.0 0.9
To be financed Capital Financing Requirement 15.5 15.9 2.6
PFI and finance leases 2.9 2.8 -3.4
Underlying need to borrow 12.6 13.1 4.0

External borrowing 11.5 11.9 3.5
Internal borrowing 1.1 1.2

Internal borrowing 8.97 9.03
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Key Themes Cash and Investments
2012/13 bn 2013/14 bn change
General Fund balances 0.364 0.422 15.9
HRA balances 0.114 0.111 -2.6
Earmarked reserves 1.727 1.663 -3.7
Capital receipts/grants/provisions 0.240 0.301 25.4
Total reserves and balances 2.445 2.497 2.1

Total cash investments 1.645 1.496 -9.1

• Key point to note
• 52m increase in level of reserves
• But cash and investments decreased by 149m

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Treasury Considerations and Risks?

• 15.9bn debt liability to be repaid through
  Annual Revenue Budgets
• Scheduled Debt Amortisation and interest payments
  for external borrowing
• Debt underpinned by strong asset base (39bn)
  with regular investment
• Austerity Impact?
• Reserves still rising?
• Revenue Grant Settlements? Huge uncertainty!!
• Regulatory Changes? Asset Lives? Loans Fund
  Review?

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Treasury Considerations and Risks?

• Can level of internal borrowing be sustained?
  Helps to reduce credit risk?
• What if borrowing rates rise further?
• When will cash run out?
• Where will interest rates be when you need to
  borrow in later years?
• Economic Outlook?
• Geo-political risksUK electionsEU
  Referendum???
• Also need to consider internal issues
• impact of CFR falling, capital plans being
  scaled back?
• medium-term affordability of borrowing plans?
• Profile of Scheduled Debt Amortisations (Loans
  Fund repayments)?
• Other options to finance capital expenditure
  (e.g. City deals, TIF)

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Treasury Considerations and Risks?

• Affordability and Sustainability!

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CIPFA Prudential Code - Objectives

• Achieved by
• Strategic planning service priorities and
  objectives
• Asset management planning whole of life costs
• Option appraisal individual projects
• Practicality is plan achievable and realistic?

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Prudential Code Principles

• Under Code, individual authorities responsible
  for deciding level of affordable borrowing
• Requirement to consider impact on Council Tax /
  Housing Rent levels when considering
  affordability of capital plans
• Indicators set for forthcoming financial year and
  next two financial years
• Allows self-regulation (previously S94 consent)
• Use of indicators enables Authority to explain to
  stakeholders how its finances are managed in the
  medium-term
• Builds process into financial planning framework
  and identifies potential risks
• Role of Chief Finance Officer clearly defined

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Corporate Governance

• Integrates financial planning process by
  linking-
• Corporate Plan and Objectives
• Medium-term Financial Plan/Strategy
• Capital Expenditure Plans
• Asset/Estates Strategy
• Reserves Strategy
• Revenue Budget
• Loans Fund
• And therefore consideration of longer-term
  position beyond three-years

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Affordable/Sustainable/Prudent?

• Affordable
• Ratio of financing costs to Net Revenue Stream
• Calculated for both Council Tax and Housing Rents
• Sustainable
• Incremental impact of capital investment
  decisions on Council Tax/Housing Rents
• Budgetary costs arising from the proposed changes
  to the capital programme
• Prudent
• Gross debt and the Capital Financing Requirement
• Borrowing only for capital purposes
• External borrowing
• Total sums borrowing including deferred
  liabilities (PFI etc)

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Ratio of financing costs General Fund scenario
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Affordability

• New powers provide freedom and flexibilities to
  Councils
• Brings with it risks and opportunities!
• Capital plans prepared for up to 10 years in
  advance
• Revenue Budgets cover a shorter-period Why?
• Lack of clarity over funding settlements
• Political Uncertainty locally and nationally

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Boundaries and limits

• Operational boundary
• Day-to-day operational limit for borrowing
• Expected level of borrowing
• Includes other-long-term liabilities in addition
  to borrowing
• Boundary can be exceeded on temporary basis
• But, provides an early warning!
• Authorised limit for borrowing
• Maximum amount that can be borrowed
• Operational boundary headroom!
• Remember any breach must be reported to Council

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Authorised Limits and Operational Boundary
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• Interest Rate Forecasts

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What is driving the fall in interest rates ?
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What is driving the fall in interest rates ?
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What about the Eurozone ?
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What about the US ?
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What about the UK?
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What about the UK?
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What about the UK ?
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What about the UK ?
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Were doomed, were all doomed !
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What about the UK?
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What about the UK?
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(No Transcript)
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Governance and Scrutiny

• Many treasury and financial risks to consider in
  current economic climate
• Role of the Prudential Code?
• Reporting to Members frequency??
• Engaging with Members?
• Compulsory financial management and treasury
  management training?

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Treasury Management Strategic Considerations

• Deliverability of capital schemes -
  realistic/slippage?
• Timing of capital receipts / asset acquisitions?
• Cash-flow management budget profiling
• Budget Pressures
• Short-term savings?
• Longer-term certainty?
• Balance Sheet position treasury management
  requirements
• Regular communication required!

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How does CFR influence External Borrowing?

• Key issue arising, assess what position is best
  for your Authority, then
• Consider 3 year ahead time frame under the
  Prudential Code, then
• Which type of external borrowing?
  (PWLB/Market/Short Term)
• How long to borrow for?
• What is your view of Short/Medium/Long Term
  interest rates
• Benchmark rate for borrowing?
• Fixed or variable rate borrowing?

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Housekeeping - What TM issues to consider?

• Ensure you are within borrowing / treasury limits
  (Authorised Limit and Operational Boundary)
• Are your fixed/variable rate maturity profile
  limits appropriate?
• Ensure there is appropriate authority to borrow
  and reschedule and that decision-making for
  activity is recorded (e.g. treasury policy and
  strategy statements and reports)
• Consider all reasonable sources of funding (e.g.
  PWLB, market, revenue, capital receipt, etc)

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Issues to include in your Risk Matrix ?

• Revenue to fund services, debt repayment asset
  renewal
• What level Reserves/Balances, Capital Receipts
  Provisions over MTFP
• Is expenditure on replacement of existing non
  current assets sufficient
• Revenue grant funding to support Cap Ex in near
  term
• Level of Internal Borrowing Forecast if no
  new loans taken
• Year-end liquidity position if current level of
  reserves is reduced
• Capital Financing Costs as a of net revenue
  stream

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and if we did nothing
. in future years !
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Conclusions

• Cost of carry is key in current interest rate
  environment
• Use the Balance Sheet Analysis and medium term
  projections to ascertain when cash is required.
  Not an exact science!
• Outcomes are sensitive to relatively small
  changes in rates
• Trigger points should be set and acted upon
• Is house view for bank rate to peak at lower than
  normal level
• How much long term certainty do you require?
• An individual approach is required taking into
  account
• CFR forecasts and capital programme delivery
• Maturing debt
• Use of core funds
• Loans Fund Model under review possible move to
  Minimum Revenue Provision approach what does
  that mean?

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Summary

• Challenging agenda but great opportunities?
• Risk management/monitoring/mitigation policies
  and practices in place
• Officers time horizons different to members
• Governance and Scrutiny arrangements need to be
  more transparent
• Members scrutiny critical (generally not as
  effective as could be!!)
• Capital investment or revenue spend????
• Grant cuts, service cuts, protecting services
• Assets fit for purpose
• Remember - All organisations are in a different
  starting position
• Key issue from Audit Scotland Report - Scrutiny
  and Governance
• CIPFA and Capita Asset Services joint initiative
  for Member Training

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Wood and trees?
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• Any Questions?