The Council’s Investment Strategy required regular reports to be presented to the Audit and Standards Committee on the Council’s treasury management activities. In managing these, the Council had implemented the Department of Levelling Up, Housing and Communities investment guidance and followed the Chartered Institute of Public Finance and Accountancy’s Code of Practice on Treasury Management. 

The investment activity to date conformed to the approved strategy and the Council had had no liquidity difficulties, although temporary borrowing was likely to be required in the second half of March 2024 for cash flow purposes. Investment activity was also reported to Members through the monthly Members’ Bulletin.  Members noted that that the figures quoted within the report were either actuals or estimates as stated and the outturn position at year end was draft, subject to change following availability of final data for the year and the final Rother DC Housing Company Ltd loan agreement.

The report provided an update on a number of areas as follows:

•     As at 31 December 2023, the Council’s total investments were around £29.8m with £21.8m invested in short term call accounts (£28.6m and £20.6m respectively at Quarter 2 2023/24) and £8m in Property Funds (no change from Quarter 2). Funds managed internally were mainly in call accounts, but the Council was regularly reviewing rates available on the market to invest in fixed short-term deposits to benefit from higher rates. The Council had also engaged with the market via an online platform to open MMF (liquidity) funds, which were now being used. Members were asked to note that a significant element of this balance related to cash owed to other public bodies, e.g. council tax precepts and shares of business rates.

•     The Council’s investments were currently predicted to have yielded interest income of £925,000 in total in the first three quarters of this financial year, including income generated by the property funds (CCLA and Hermes).  The budget for the year was £586,000 so the Council had already achieved 157% of it.  This was mainly due to an increased focus on treasury management activities, the pause and review of the capital programme, which had resulted in more cash being available for investment, and the incremental Bank of England interest rates increases earlier in the year.

•     The Council was expecting a £534,000 surplus in terms of interest cash receipts, a significant positive contribution to the revenue budget position. Due to the uncertain profile of capital payments, potentially falling interest rates and falling overall available balances, these funds had been kept liquid as they represented the best option.

•     Cash levels had been falling over the last year as the Council refrained from borrowing for capital programme purposes and used its cash balances instead. Some borrowing for cashflow purposes would be required in Quarter 4, the exact timing and values would depend on the forecast of availability and timing of substantial external government grants expected to be received early in 2024/2025.

•     The total variance (surplus) estimated in the Revenue and Capital Monitoring report for Quarter 3 was £734,000, as it included interest accruing on the Housing Company loan (estimated to be around £200,000 for the year).

•     The Council’s Capital Financing Requirement (CFR) showed how much of its capital expenditure was financed by borrowing, summarised in Appendix B to the report. The capital programme budget was being reviewed in view of the complexity of several of the proposed schemes and their affordability, due to the recent and ongoing financial landscape in terms of inflationary pressures, construction costs and significant borrowing rate increases; the CFR position compared to the budget had changed as a result. The forecast outturn for the year was £50.243m. Members noted that the capital programme continued to be reviewed for affordability as part of ongoing monitoring of the capital programme and a revised budget for the CFR would be developed as part of this work.

•     The value of outstanding loans as at 31 December 2023 was £31.7m.  This was £11.7m lower than the CFR meaning the Council was ‘under-borrowed,’ and effectively borrowed internally using up its cash balances rather than borrowing when interest rates were high. The borrowing portfolio was also shown in Appendix B to the report.

•     The Council’s approved Treasury and Prudential Indicators (affordability limits) were included in the approved Treasury Management Strategy (Appendix C to the report). During the financial year to date, the Council had operated within the treasury and prudential indicators set out in the Council’s Treasury Management Strategy Statement and in compliance with the Council's Treasury Management Practices. Members noted that the current borrowing levels shown in Appendix B to the report were comfortably within both limits, therefore no amendments to the Treasury Management Strategy were proposed as a result of the report.

•     The ratio of Net Financing Costs (NFC) to the Net Revenue Stream in the original budget was to be 5.06% but was now predicted to be -1.42%. This was a welcome change, as the investment income had exceeded financing cost, due to both the review of and subsequent delay in the capital programme delivery and the additional investment income received through the increased focus on treasury management, which reduced the NFC.

•     The Council’s non-treasury investments were detailed in the report and split between existing assets and those purchased through the Property Investment Strategy (PIS).  Non-PIS assets yielded a 5.73% return on investment and PIS assets a 6.51% return.

•     Following months of high increases in prices (the steepest for the last 40 years), which had significantly eroded the Council’s spending power, twelve-month CPI inflation fell to 4% in December 2023. Wholesale energy prices had fallen significantly along with prices of core goods and services, however domestic inflationary pressures persisted with wage growth slightly easing, but still very elevated. CPI was expected to fall temporarily to 2% target in 2024 Quarter 2, only to increase again in Quarter 3 and Quarter 4 and to be around 2% in 2-3 years’ time.

•     The global economic outlook was uncertain in light of the possible adverse impacts of continuing conflicts in Ukraine and the Middle East. The second half of the year would see presidential elections in the United States and parliamentary ones in the UK, which could also affect it.    

•     At the recent meeting of the Bank of England’s (BoE) Monetary Policy Committee (MPC) in January 2024, it was agreed to keep the bank base rate at 5.25% to help control inflation, which was predicted to have peaked. The first decreases were likely earlier than previously projected, possibly within Quarter 1 of 2024, with the BoE itself forecasting a possibility of a cut to 5.1%, with Quarter 1 results of 3.9% and 3.3% in the equivalent periods for the next two years.

•     Forecasting economic activity in the current climate was fraught with difficulties, but best data and forecasts available had been used in the updated Medium Term Financial Strategy report and 2024/25 budget presented to Members in February.

•     The value of investments in Property Funds had decreased by £207,000 since the end of the last financial year and was £7.26m, £720,682 less than originally invested. Members were reminded that any gains or losses on such long-term investments would only be realised at the point of withdrawal from the fund. Property funds still provided a healthy income stream in the form of quarterly distributions and were expected to contribute around £300,000 in the financial year to 31 March 2024.

The investment activity conformed to the approved strategy, and the Council had no liquidity difficulties. 

Members were given the opportunity to ask questions and the following points were noted during the discussions:

•     as interest rates were falling and therefore return on investments would reduce, it would be important to return to a balanced budget position;

•     if the expected Government grants were not received later in the week necessitating short-term borrowing for cash flow purposes, this would be by way of an agreement with another local authority, at a rate of 5.3%;

•     the Interim Deputy Chief Executive hoped that the Housing Company loan would be finalised in the next couple of months;

•     gains realised through the Council’s investments were one-off and could not be used to ‘prop up’ the budget, however, could be used to invest in homelessness which would in turn decrease the Council’s overall spend in that area; and

•     the Council’s external auditor, as part of their final review, had requested that the Housing Company be consolidated into Group Accounts.  Work had already been completed and the external auditor would be signing off the accounts shortly.

As this was his final Audit and Standards meeting, the Chair, on behalf of the Committee and the rest of the Council, paid tribute to the Interim Deputy Chief Executive and his team for their outstanding work for the Council and thanked him for assisting Members with their understanding of accounts.

RESOLVED: That:

1)     the report be noted; and

2)   tribute be paid to the Interim Deputy Chief Executive and his team for their outstanding work for the Council.