Agenda item
Q3 Treasury Management Prudential Indicators
To report to the Audit and Governance Committee the quarter three
Treasury Management Indicators as required by the CIPFA Treasury
Management Code.
Minutes:
The Committee received an interim treasury management update, in line with CIPFA guidance. Members noted that three formal reports are presented annually: the strategy (January), a mid-year update (December), and the outturn report (July), alongside this additional update to provide more regular oversight. The report reviewed performance for the previous quarter and confirmed that the Council remained compliant with its Treasury Management Strategy, including investment limits and the principles of security, liquidity and yield.
An update was given on the Prudential Indicators, including the liability benchmark, which had shifted to a negative position, reflecting changes in financing arrangements, notably in relation to the waste fleet. This indicated that the Council was not expected to undertake external borrowing and would continue to fund its capital programme from internal resources. One area of non-compliance was noted in relation to interest rate exposure, reflecting surplus cash levels and recent rate movements although interest rate expectations had become more uncertain. Officers advised that, despite their volatility, higher-than-anticipated interest rates might have a positive impact on treasury income relative to earlier budget assumptions.
The Committee requested an explanation of the factors shaping the Council’s investment strategy, which was driven primarily by cash flow requirements and the timing of income and expenditure. It was noted that balances typically increased following council tax and business rates receipts at this point in the financial year. The Council maintained a mix of long-term investments, including strategic pooled funds, alongside shorter-term investments, such as deposits with the UK Government’s Debt Management Office, money market funds, and bank deposits with varying maturities. Cash flow forecasting was used to align investment decisions with planned expenditure, including provision for the £6m waste fleet purchase later in the year.
Inflationary pressures, particularly rising energy costs and fuel costs, were highlighted as a key risk, which were expected to create additional financial pressure across other areas, including energy costs for buildings and contracted services. It was noted that these factors may require a greater proportion of cash to be held in short-term, liquid investments to meet increased costs. Officers further advised that timing uncertainties, including potential delays to capital purchases, could affect cash flow forecasts by deferring the release of associated funds into the following financial year.
The Council’s exposure to inflation on cash holdings was discussed, noting that holding approximately £3 million in cash could result in a real-terms loss of around £150,000 per year if inflation and interest rates rose to 5%. Questions were also raised about the approach to fuel procurement, noting the potential real-time impact of holding cash in a higher inflation environment. In response, the officer advised that waste fleet fuel was currently purchased at pump prices, due to the absence of on-site fuel storage, although plans were underway within the capital programme to install a fuel bunker, with work underway to determine the location, complete necessary civil engineering, and decide whether it would store diesel or hydrotreated vegetable oil (HVO). By contrast, gas and electricity used across council properties was procured through a consortium with neighbouring councils and the use of an energy broker. This arrangement had enabled forward purchasing and partial hedging of energy costs, which had reduced exposure to spot market volatility compared to previous arrangements.
On treasury management, the officer explained that a working cash balance must be maintained to meet day-to-day obligations including payroll, supplier payments, and distribution of council tax receipts to partner bodies. Surplus funds were actively managed and regularly transferred into money market funds to mitigate the impact of inflation. It was noted that reported balances represented a point-in time snapshot and fluctuated frequently depending on operational needs.
Members noted that there was an error in Table 1: Investment Limits, Officers then provided the corrected table (below)
The Committee discussed the Council’s approach to investment returns, risk, and timescales. Members queried long-term return expectations, and whether performance was assessed against market benchmarks or subject to review in the event of underperformance and asked whether underperformance would prompt a change of provider.
The Deputy CEO advised that investment decisions were governed by the principles of security, liquidity, and yield, with yield considered only after the first two objectives were met. It was explained that the Council sought to manage risk through diversified portfolios, particularly pooled funds, and that performance was monitored and reported regularly to Members, who had the opportunity to challenge returns in comparison to other funds; however, it was noted that past performance is not a reliable indicator of future returns and that practical constraints, such as exit costs and liquidity constraints particularly for property funds also influenced decision making. arrangements. Members were offered the opportunity to receive more detailed performance information and analysis through existing reporting arrangements.
The Committee noted the importance of aligning investment strategy with timescales, recognising that longer investments could reduce risk and enhance returns, whereas shorter-term investments may require a more conservative approach.
The Deputy CEO agreed with this point and proposed further discussion outside f the Committee. He reiterated that yield was not a primary objective and highlighted that most treasury investments were medium-term, (typically five to ten years), with shorter-term planning horizons driven by financial planning cycles and liquidity needs. He also advised that future arrangements, including those arising from local government reorganisation, would require a reassessment of investment strategies in light of inherited assets and cash flow requirements.
Supporting documents:
PDF 574 KB