Transcript Slide 1

Treasury Management
& Borrowing
Alan George, Regional Director
26th March 2015
Audit Scotland – Overview Report 19th March 2015
32 Councils in Scotland
Debt £14.8bn
Asset base £39bn
2
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
3
Local Government Acts and Regulations
Local Government (Scotland) Act 1975
Local Government in Scotland Act 2003
• Power to borrow - Schedule 3
• S.35 Capital expenditure limits
• Allowable sources
• S.36 Imposition of capital expenditure
limits (have regard to Prudential Code
under S.S.I. 2004 No.29)
• May lend to another authority
• Loans Fund
• Power to establish funds
• S.40 Power to invest money in
accordance with regulations by ministers
Local Government Investments (Scotland) Regulations 2010
• Authorities may only invest with the consent of Scottish ministers
• Must have regard to TM Code & Prudential Code
4
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
5
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%
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
8.97%
9.03%
PFI and finance leases
% Internal borrowing
6
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
7
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?
8
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 risks………UK elections………EU 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)
9
Treasury Considerations and Risks?
Affordability and Sustainability!
10
CIPFA Prudential Code - Objectives
Achieved by:
Affordable capital expenditure plans
• Strategic planning –
service priorities and
objectives
External borrowing and liabilities within
prudent and sustainable levels
• Asset management
planning – whole of
life costs
• Option appraisal –
TM decisions in accordance with
good practice
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
12
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
13
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)
14
Ratio of financing costs – General Fund scenario
120
Net Revenue Stream
100
100
Financing costs
90
80
80
70
60
60
7.50%
40
12.50%
20
7.5
7.5
7.5
7.5
7.5
0
2013/14
2014/15
2015/16
2016/17
2017/18
15
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
16
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
200,000
External Debt
193,000
Authorised Limit
190,000
Operational Boundary
184,000
183,000
181,000
180,000
172,000
170,000
167,000
166,000
165,000
160,000
167,207
161,994
150,000
150,679
143,382
140,000
2012/13
2013/14
2014/15
2015/16
18
Interest Rate Forecasts
19
What is driving the fall in interest rates ?
Oil and Commodity Prices Falling
$700
$140
$130
$650
$120
$600
$110
$550
$100
$500
$90
$450
$80
$70
$400
$60
$350
$50
$300
$40
$250
$30
$200
$20
Goldman Sachs Commodity Index
Oil Prices (Brent Crude) $ (RHS)
20
What is driving the fall in interest rates ?
G7 CPI (Annualised) - Prices Falling
3
2.5
2
1.5
%
1
0.5
0
-0.5
UK
Canada
US
Italy
Germany
France
Japan
21
What about the Eurozone ?
Eurozone Unemployment - January 2015
Germany
4.70%
Austria
4.80%
UK
Unemployment Rate (%)
5.70%
Luxembourg
5.90%
Malta
6.00%
Estonia
Netherlands
Belgium
Finland
Slovenia
Ireland
France
Latvia
EA19
6.60%
7.20%
8.50%
8.80%
9.70%
10.00%
10.20%
10.70%
11.20%
Slovakia
12.50%
Italy
12.60%
Portugal
Cyprus
Spain
Greece
13.30%
16.10%
23.40%
25.80%
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-200
Feb-15
Dec-14
Oct-14
Aug-14
Jun-14
Apr-14
Feb-14
Dec-13
Oct-13
Aug-13
Jun-13
Non-farm Payrolls Cumulative
300
200
3000
100
1000
0
Cumulative (000s)
Non-farm Payrolls m/m
Apr-13
Feb-13
Dec-12
Oct-12
Aug-12
Jun-12
Apr-12
Feb-12
Dec-11
Oct-11
Aug-11
Jun-11
Apr-11
Feb-11
Monthly (000s)
What about the US ?
Non-Farm Payrolls
400
9000
7000
5000
-1000
-3000
-100
-5000
-7000
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What about the UK?
UK CPI Breakdown - January (%) y/y
12%
Education, 2.2%
10%
8%
6%
4%
2%
Alcoholic beverages and
tobacco, 4.5%
Housing, water,
electricity, gas and other
fuels, 12.9%
-4%
Health, 2.4%
Miscellaneous goods and
services , 8.8%
0%
-2%
Restaurants and hotels,
12%
Clothing and footwear,
7.2%
Recreation and culture, Food and non-alcoholic
beverages, 11.2%
14.4%
Furniture, household
equipment and
maintenance, 6%
Communication, 3.2%
Transport, 15.2%
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What about the UK?
6.0%
CPI y/y
Average Weekly Earnings (3m Average Growth)
Change (CPI /Average Weekly Earnings) y/y
5.0%
4.0%
3.0%
2.0%
1.8%
1.0%
0.0%
0.3%
-1.0%
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What about the UK ?
Monthly House Price Changes
5
Halifax
Nationwide
4
3
%
2
1
0
-0.1
-0.3
-1
-2
-3
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What about the UK ?
Public Sector Net Debt - Excluding Public Sector Banks
1800
90
1600
80
1400
70
1200
60
1000
50
800
40
600
30
400
20
200
10
2020
2019
2018
2018
2017
2017
2016
2016
2015
2014
2014
2013
2013
2012
2011
2011
2010
2010
2009
2009
2008
2007
2007
2006
2006
2005
2004
2004
2003
0
2003
0
Net Debt (£billion)
Net Debt (£billion) Projections from December 2014 (ESA10)
Net Debt (£billion) Projections from March 2015 (ESA10)
Net Debt as a % GDP
Net Debt (% of GDP) Projections from December 2014 (ESA10)
Net Debt (% of GDP) Projections from March 2015 (ESA10)
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‘’We’re doomed,
we’re all doomed !’’
What about the UK?
Bank Rate Forecast
2.5
2
1.5
1
0.5
0
Bank Rate
Capita Asset Services Forecast
CE Forecast
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What about the UK?
25yr PWLB
5.1
4.9
4.7
4.5
4.3
4.1
3.9
3.7
3.5
3.3
3.1
2.9
2.7
2.5
PWLB
Capita Asset Services' Target
Capita Asset Services' Forecast
CE Forecast
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COMPARISON OF BORROWING COSTS
25yr PWLB now
25yr PWLB in 3 years time
Principal
Discount rate for NPV
3.10%
4.70% Per forecast
£ 10,000,000
3.50%
Borrow 25yr PWLB now, cash spent in 3 years
NPV based
NPV based
Borrow 25yr PWLB in 3 years
on 3.5%
on 3.5%
- Cost / Benefit
per annum
Cumulative
position
( - Cost /
Benefit)
Year
PWLB 25yr
Investment Investment
Rate
Income
(est.)
Net Cost
PWLB 25yr
Net Cost
0.50
-£155,000
0.50%
£25,000
-£130,000
-£127,783
£0
£0
£0
-£127,783
-£127,783
1.00
1.50
2.00
2.50
3.00
-£155,000
-£155,000
-£155,000
-£155,000
-£155,000
0.75%
1.00%
1.25%
1.50%
2.00%
£37,500
£50,000
£62,500
£75,000
£100,000
-£117,500
-£105,000
-£92,500
-£80,000
-£55,000
-£113,527
-£99,719
-£86,350
-£73,407
-£49,607
£0
£0
£0
£0
£0
£0
£0
£0
£0
£0
£0
£0
£0
£0
£0
-£113,527
-£99,719
-£86,350
-£73,407
-£49,607
-£241,310
-£341,029
-£427,379
-£500,786
-£550,393
7.00
-£155,000
-£155,000
-£121,829
-£235,000
-£235,000
-£184,708
£62,879
-£15,729
7.50
-£155,000
-£155,000
-£119,751
-£235,000
-£235,000
-£181,558
£61,807
£46,078
8.00
-£155,000
-£155,000
-£117,709
-£235,000
-£235,000
-£178,462
£60,753
£106,831
25.00
-£155,000
-£155,000
-£65,588
-£235,000
-£235,000
-£99,440
£33,852
£1,657,375
25.50
-£235,000
-£235,000
-£97,744
£97,744
£1,755,119
27.50
-£235,000
-£235,000
-£91,245
£91,245
£2,129,707
28.00
-£235,000
-£235,000
-£89,689
£89,689
£2,219,395
-£11,750,000
-£7,047,338
£2,219,395
TOTALS
NPV SAVINGS
-£7,400,000
-£4,827,942
£2,219,395
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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?
32
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!
33
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?
34
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)
35
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
36
…and if we did nothing …
…. in future years !
37
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?
38
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
39
Wood and trees?
40
Any Questions?
41