Agenda item

(Section 151 Officer) To consider the attached report concerning the Council’s Treasury Management activities in 2019/20 and proposed amendments to two Treasury Management Investment limits (AGC-014-2020/21).

The Council’s interim Chief Financial Officer, C Hartgrove, presented the Treasury Management Outturn Report for 2019/20.

C Hartgrove reminded the Committee that the Treasury Management Outturn Report detailed the Council’s actual Treasury Management activity for the year, and included the year-end position which would be included in the Council’s Statement of Accounts. During the year, external borrowing by the Council had risen by £39million to £224.5million and the value of the Council’s investments had risen by £5.5million to £22.1million. The Council’s Commercial Property Portfolio was also included and this had delivered a net income of £6.2million during the year, although there were also valuation losses due to unfavourable market conditions.

C Hartgrove reported that full compliance had been achieved with the majority of the Council’s adopted Treasury Management and Prudential Indicators; however, there had been some technical breaches with Investment Limits. The £3million limit on investing in any single organisation (except for the UK Government) was breached during the year, with the Council holding larger amounts of cash with NatWest, the Council’s main bankers. The peak cash holding was £26million in mid-December 2019 for a period of 6 days. The increasing scale of commercial activity generally, including the Qualis initiative, meant that the current Investment Limits were proving operationally very difficult. A review of the Limits had therefore been undertaken and a solution (that balanced risk with operational need) had been developed. Based on discussions with Arlingclose, the Council’s Treasury Management consultants, a revised Investment Limit for a single institution had therefore been suggested at £4million.

In addition, C Hartgrove stated that it was the view of Arlingclose that the Council’s current Investment Limit of £10million in total for Money Market Funds (MMFs) was now excessively prudent, with a £10million limit more usually associated with a single MMF. These were not considered risky investments (and usually carried very high credit ratings), provided investments were spread across a range of MMFs. It was therefore proposed that the MMF Investment Limit be amended to £10 million for a single MMF. Consequently, the Committee was requested to recommend these revised Investment Limits to the Council for approval.

In relation to the increased borrowing undertaken by the Council of £39million during the year, the Section 151 Officer A Small reminded the Committee that £30million of this borrowing had been undertaken on behalf of Qualis. It was likely that the Council would undertake further borrowing on behalf of Qualis and this would be reflected in the Treasury Management Strategy in the future. The Portfolio Holder for Finance & Economic Development, Cllr J Philip, added that Qualis could test the market for future lending, and the Council would not necessarily be the only lender to Qualis in the future. C Hartgrove stated that the loan with the Public Works Loan Board of £185.5million was still to be repaid in 2022; the Council was due soon to make a repayment of £31.8million, for which it currently had approximately £12million currently set aside.

Cllr R Jennings was concerned that the Council now had a substantial debt and was there a mechanism to stop the Council borrowing further monies? A Small stated that the risks the Council could take when borrowing monies was part of the Treasury Management Strategy; there was a requirement to demonstrate that the Council’s liabilities could be managed and the debts repaid, so potentially there was no upper limit for the Council’s borrowings.

The External Auditor stated that their focus was on the robustness of the governance arrangements, and that decisions to borrow further monies by the Council were based on sound financial processes, including assessing whether the Council was benefitting from its borrowing decisions. The Council would always be encouraged to follow its governance processes to ensure that any borrowing decisions were sound, and that such decisions were monitored to ensure that the original business case was still relevant.

In relation to the proposed increase in Investment Limits, A Small explained that each MMF was a blend of different funds with different institutions, which presented a more diversified risk. Thus, such Funds were more likely to achieve an ‘AAA’ credit rating than a single institution due to this spreading of the risk. If the Council was to have more than £10million in cash for any length of time, then it would probably be more prudent to reduce debts than hold these monies in such funds. However, they would normally only be used for short-term holdings and it was unlikely that the Council would invest in more than 3 such funds at any one time. In addition, the Council would only ever use such funds that were credit rated as ‘AAA’ and recommended by Arlingclose.

Cllr S Heap was concerned that MMFs were not as safe as being stated by Officers. The Councillor felt that there needed to be some control over the number of such funds that were invested in, and would prefer a limit of £5million per fund. Cllr I Hadley commented that this rise in the investment limit for MMFs appeared to be much larger than the proposed rise in the counterparty limit from £3million to £4million, especially as it was a rise from £10million in total invested in MMFs to £10million per MMF. Cllr R Jennings shared these concerns and would also prefer a limit of £5million per MMF. Cllr J Philip proposed that the Section 151 Officer would report to the next meeting of the Committee instances of when the Council used more than three MMFs at any one point in time. However, Cllr R Jennings highlighted that the Committee only met every two or three months and suggested that an emergency meeting of the Committee could be called, or perhaps the Chairman plus one or two other Members of the Committee, whenever Officers wished to invest in more than three MMFs.

C Hartgrove reiterated that monies did not generally remain in MMFs for very long, and were often only invested in for very short periods of time, whilst Cllr J Philip reminded the Committee that the Council would be acting on the advice of their Treasury Management Consultants. A Small stated that the alternative would be to invest these funds with individual institutions in accordance with the Treasury Management Strategy, but this would limit the Council’s flexibility to make short-term investment decisions and represent a higher investment risk. In addition, the more individuals that had to be called together before the Council could make an investment decision would also restrict the Council’s flexibility.

However, the Committee was still concerned about the risk this could pose to the Council if there was not a maximum on the number of MMFs that could be invested in at any one time. Therefore, the Committee agreed to recommend to limit the number of such Funds that could be invested in to three at any one time, and if Officers wished to invest Council monies in more than three such Funds at the same time then they would have to call an emergency virtual meeting with at least three members of the Audit & Governance Committee – preferably including the Chairman – to discuss the situation.

            Resolved:

            (1)        That the Treasury Management Outturn Report for 2019/20 be noted;

            (2)        That the following amended Treasury Management Investment Limits             be recommended to the Council for approval:

                        (a)        Single Institution (excluding the UK Government) to be                                increased to £4million (previous limit was £3million); and

                        (b)        Money Market Funds to be increased to £10million per fund,                         with a maximum of 3 Funds to be invested in at any one time unless                         Officers have called an emergency virtual meeting with three members                         of the Audit & Governance Committee – preferably including the                            Chairman - to discuss the situation (previous limit was £10million in                         total for all such Funds invested in).