Bath & North East Somerset Council
DECISION MAKER:	Cllr Malcolm Hanney, Cabinet Member for Resources & Deputy Leader
DECISION DATE:	On or after 16th August 2008	PAPER NUMBER		1
TITLE:	Treasury Management Monitoring Report to 30th June 2008	EXECUTIVE FORWARD PLAN REFERENCE:
		E	1857
WARD:	All
AN OPEN PUBLIC ITEM
List of attachments to this report: Appendix 1 - The Council's Investment Position at 30th June 2008 Appendix 2 - Average monthly rate of return for 1st 3 months of 2008/2009 Appendix 3 - The Council's External Borrowing Position at 30th June 2008 Appendix 4 - Performance against Prudential Indicators

1 THE ISSUE

1.1 This report gives details of performance against the Council's Treasury Management Strategy and Annual Investment Plan 2008/09 for the first three months of 2008/09.

2 RECOMMENDATION

2.1 That the Cabinet Member accepts the treasury management report to 30^th June 2008 prepared in accordance with the CIPFA Treasury Code of Practice and notes the performance.

3 FINANCIAL IMPLICATIONS

3.1 Included in the report.

4 CORPORATE PRIORITIES

4.1 This report is for information only and is therefore there are no proposals relating to the Councils Corporate Priorities.

5 THE REPORT

Treasury Performance

5.1 An amount of £7.024m was included in the Councils 2008/09 revenue budget for interest and capital financing costs. The budget was reduced by £117k resulting from a virement to Development & Major Projects in relation to debt savings following the capital revenue funding review. The revised net budget for interest and capital financing costs is £6.907m. A breakdown of this budget and the forecast year end position based on the period April to June is included in Appendix 1. This shows a current forecast underspend of £250k in 2008/09 due to additional interest earned from the higher ongoing cash balances from 2007/08.

5.2 Further analysis is being undertaken of the impacts of the 2007/08 capital outturn on the capital financing budget in 2008/09 and other favourable cashflow benefits. An increase in the forecast income is likely due to the following factors:

• Additional Investment income achieved over budget due to having higher cash balances available (including the £4.75m VAT refund)
  
• If higher cash balances remain this will reduce the borrowing requirement for the current financial year with corresponding savings in budgeted interest costs of assumed new borrowing.

In addition there is likely to be a lower Minimum Revenue Provision (MRP) required, in respect of debt repayments, due to the final capital spend in 2007/08 being below the estimate used in setting the 2008/09 budget for MRP.

5.3 The Council's investment position as at 30^th June 2008 is given in Appendix 1.

5.4 Gross interest earned on investments for the first 3 months totalled £1.1m. Net interest, after deduction of amounts due to the pension fund and schools, is £0.8m. The balance of internal funds has risen in 2008/09 due to receipt of Growth Points funding, held on behalf of the West of England Partnership, and an increase in pooled funding from the PCT (Primary Care Trust). The net interest figure will be further reduced by year end when interest due on the internal funds is transferred. Appendix 2 details the investment performance, the average rate of interest earned over this period was 5.16%, which is 0.09% above the benchmark rate of average 7 day LIBID +0.05% (5.07%).

5.5 The Bank of England base rate was reduced by 0.25% on 10^th April 2008 to 5.00%. The current interest rate forecasts of our treasury management advisor and those of UBS and Capital Economics are shown in the table below. All forecasts are predicting a reduction in rates to differing extents in the period to the end of 2009.

Table 1: UK Base rate forecasts

	Q3 08	Q4 08	Q1 09	Q2 09	Q3 09	Q4 09
Sector	5.00%	4.75%	4.50%	4.25%	4.25%	4.50%
UBS	5.00%	5.00%	5.00%	4.75%	4.50%	4.25%
Capital Economics	5.00%	4.75%	4.50%	3.75%	3.50%	3.50%

5.6 The volatile market conditions affecting the banking sector reported in the 2007/08 Treasury Management Outturn report (Cabinet 25^th June 2008) have been kept under review and based on some stabilisation within the sector and using the guidance of our treasury management advisors, the Section 151 Officer in consultation with the Cabinet Member for Resources, decided to widen the scope of fixed term deposits to the higher credit rated banks with a fixed term of 3 months with effect from 28^th May 2008. The Council also recommenced using its liquidity accounts from which investments can be recalled at no notice.

5.7 No borrowing activity has taken place in the first quarter of 2008/09; the current borrowing portfolio is shown in Appendix 3.

5.8 The Councils Prudential Indicators for 2008/09 were agreed by Council in February 2008 and performance against the key indicators is shown in Appendix 4. All indicators are within target levels.

6 RISK MANAGEMENT

6.1 The report author and Cabinet member have fully reviewed the risk assessment related to the issue and recommendations, in compliance with the Council's decision making risk management guidance.

6.2 The Council's lending & borrowing list was agreed prior to the start of the financial year and the credit ratings are monitored throughout the year. All lending/borrowing transactions are within approved limits and with approved institutions. Investment & Borrowing advice is provided by our Treasury Management consultants SECTOR.

7 EQUALITIES

7.1 An equalities impact assessment has not been carried out as this is an information only report.

8 RATIONALE

8.1 The Prudential Code and CIPFA's Code of Practice on Treasury Management requires regular monitoring and reporting of Treasury Management activities.

9 OTHER OPTIONS CONSIDERED

9.1 None.

10 CONSULTATION

10.1 Cabinet members; Section 151 Finance Officer;

10.2 This report has been circulated to the Cabinet Member for Resources, The Strategic Director - Support Services and the Divisional Director Finance for comments and clearance.

11 ISSUES TO CONSIDER IN REACHING THE DECISION

11.1 Corporate;

12 ADVICE SOUGHT

12.1 The Council's Section 151 Officer (Strategic Director - Support Services) has had the opportunity to input to this report and has cleared it for publication.

Contact person	Gary Adams - Tel: 01225 477107
Background papers	Treasury Management Strategy & Annual Investment Plan 2008/09. Treasury Outturn Report 2007/08.
Please contact the report author if you need to access this report in an alternative format

APPENDIX 1

Interest & Capital Financing Costs - Budget Monitoring 2008/09 (April to June)

	YEAR END FORECAST
April to June 2008	Forecast Spend or (Income)	Budgeted Spend or (Income)	Forecast over or (under) spend	ADV/FAV
	£'000	£'000	£'000
Interest & Capital Financing
- Debt Costs	3,354	3,354		ON TARGET
- Ex Avon Debt Costs	1,840	1,840		ON TARGET
- Minimum Revenue Provision (MRP)	2,313	2,313		ON TARGET
- Interest on Balances	(850)	(600)	(250)	FAV
Sub Total - Capital Financing	6,657	6,907	(250)	FAV

The Council's Investment position at 30th June 2008

	Balance at 30th June 2008
	£'000's
Notice (instant access funds)	35,200
Up to 1 month	31,800
1 month to 3 months	29,500
Over 3 months	3,000
Total	99,500

The investment figure of £99.5 million is made up as follows :

	Balance at 30th June 2008
	£'000's
B&NES Council	69,205
Schools	18,090
Pension Fund	12,205
Total	99,500

The Council had an average net positive balance of £60.5m during the period April 2008 to June 2008.

APPENDIX 2

Average rate of return on investments for 2008/09

	April %	May %	June %	Average for Period
Average rate of interest earned	5.18%	5.07%	5.23%	5.16%
Benchmark = Average 7 Day LIBID rate +0.05% (source: Sector)	5.12%	5.04%	5.06%	5.07%
Performance against Benchmark %	+0.06%	+0.03%	+0.17%	+0.09%

APPENDIX 3

Councils External Borrowing at 30^th June 2008

LONG TERM	Amount	Fixed Term	Interest Rate	Variable Term	Interest Rate
PWLB	10,000,000	30 yrs	4.75%	n/a	n/a
PWLB	20,000,000	48 yrs	4.10%	n/a	n/a
PWLB	10,000,000	46 yrs	4.25%	n/a	n/a
PWLB	10,000,000	50 yrs	3.85%	n/a	n/a
PWLB	10,000,000	47 yrs	4.25%	n/a	n/a
KBC Bank N.V*	5,000,000	2 yrs	3.15%	48 yrs	4.5%
KBC Bank N.V*	5,000,000	3 yrs	3.72%	47 yrs	4.5%
Eurohypo Bank*	10,000,000	3 yrs	3.49%	47yrs	4.5%
TOTAL	80,000,000
TEMPORARY	NIL
TOTAL	80,000,000

*All LOBO's (Lender Option / Borrower Option) have reached the end of their fixed interest period and have reverted to the variable rate of 4.5%. The lender has the option to change the interest rate at 6 monthly intervals, however at this point the borrower also has the option to repay the loan without penalty.

APPENDIX 4

Performance against Treasury Management Indicators agreed in Treasury Management Strategy Statement

1. Authorised limit for external debt

These limits include current commitments and proposals in the budget report for capital expenditure, plus additional headroom over & above the operational limit for unusual cash movements.

	2008/09 Prudential Indicator	2008/09 Actual as at 30th June 2008
	£'000	£'000
Borrowing	105,000	80,000
Other long term liabilities	2,000	0
Cumulative Total	107,000	80,000

2. Operational limit for external debt

The operational boundary for external debt is based on the same estimates as the authorised limit but without the additional headroom for unusual cash movements.

	2008/09 Prudential Indicator	2008/09 Actual as at 30th June 2008
	£'000	£'000
Borrowing	100,000	80,000
Other long term liabilities	2,000	0
Cumulative Total	102,000	80,000

3. Upper limit for fixed interest rate exposure

This is the maximum % of total borrowing which can be at fixed interest rate.

	2008/09 Prudential Indicator	2008/09 Actual as at 30th June 2008
	%	%
Fixed interest rate exposure	100	75*

* The £20m of LOBO's are quoted as variable rate in this analysis as the Lender has the option to change the rate at 6 monthly intervals (the Council has the option to repay the loan should the rate increase)

4. Upper limit for variable interest rate exposure

While fixed rate borrowing contributes significantly to reducing uncertainty surrounding interest rate changes, the pursuit of optimum performance levels may justify keeping a degree of flexibility through the use of variable interest rates. This is the maximum % of total borrowing which can be at variable interest rates.

5. Upper limit for total principal sums invested for over 364 days

Given the Councils' financial position, i.e. of having low cash balances, any lending is likely to be the result of the phasing of cash flow. Investment periods are unlikely to be more than 6 months. This is the maximum % of total investments which can be over 364 days.

6. Maturity Structure of new fixed rate borrowing during 2008/09

No new borrowing has been undertaken in 2008/09 so far.

7. Capital Financing as % of Net Revenue Stream

Estimates for net revenue stream based on estimates of the amounts to be met from government grants and local taxpayers.

Note: Capital financing includes the amount paid to Bristol City Council in respect of Ex-Avon Debt.