1. Alan George, Regional Director 26 th March 2015 Treasury Management & Borrowing

2. Audit Scotland – Overview Report 19 th March 2015 32 Councils in Scotland Debt £14.8bn Asset base £39bn 2

3. 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

4. Local Government Acts and Regulations 4

5. 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

6. Key Themes – Long-term Assets/Liabilities 2012/13 £bn 2013/14 £bn % change y/y Long-term Assets – to be financed38.338.91.6% Capital Adjustment A/c / Revaluation Res22.823.00.9% To be financed – Capital Financing Requirement 15.515.92.6% PFI and finance leases2.92.8-3.4% Underlying need to borrow12.613.14.0% External borrowing11.511.93.5% Internal borrowing1.11.2 % Internal borrowing8.97%9.03% 6

7. Key Themes – Cash and Investments 2012/13 £bn 2013/14 £bn % change General Fund balances0.3640.42215.9% HRA balances0.1140.111-2.6% Earmarked reserves1.7271.663-3.7% Capital receipts/grants/provisions0.2400.30125.4% Total reserves and balances2.4452.4972.1% Total cash & investments1.6451.496-9.1% 7 Key point to note; £52m increase in level of reserves But cash and investments decreased by £149m

8. 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

9. 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

10. Treasury Considerations and Risks? Affordability and Sustainability! 10

11. CIPFA Prudential Code - Objectives 11 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? Affordable capital expenditure plans External borrowing and liabilities within prudent and sustainable levels TM decisions in accordance with good practice

12. 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

13. 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

14. 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

15. 15 Ratio of financing costs – General Fund scenario

16. 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

17. 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 17

18. Authorised Limits and Operational Boundary 18

19. 19 Interest Rate Forecasts

20. 20 What is driving the fall in interest rates ?

21. 21 What is driving the fall in interest rates ?

22. 22 What about the Eurozone ?

23. 23 What about the US ?

24. What about the UK? 24

25. What about the UK? 25

26. 26 What about the UK ?

27. 27 What about the UK ?

28. ‘’We’re doomed, we’re all doomed !’’

29. What about the UK? 29

30. What about the UK? 30

31. 31

32. 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

33. 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

34. 34 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?

35. 35 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)

36. 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

37. 37 …and if we did nothing … …. in future years !

38. 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

39. 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

40. 40 Wood and trees ?

41. Any Questions? 41