Agenda item

This report provides an update to the Audit Committee on the Council’s treasury management activities and performance during the quarter ending 30 June 2023, in accordance with the CIPFA Code

Mr Tim Mpofu, Head of Finance, presented the item.

Members queried the report and asked questions. In response to questions, Mr Mpofu and Mr Kaycee Ikegwu, Head of Finance (Housing and Chief Accountant) provided the answers to the queries.

•             A query was raised regarding paragraph 6.13 which noted that a significant capital programme which extended into the foreseeable future and a large portion of this would need to be financed by borrowing. With the cost of borrowing having increased, it raised a question of checks or risk management being in place to ensure that there was an appropriate balance and if the high interest rate and uncertainty put that balance at risk. In response, the meeting heard that there were various times in the economic cycle where there could be opportunities to take advantage of lower rates. When the Treasury strategy was set, the target rate at the time was at 4.5% and it was assumed that any new borrowing would be at that rate. There were times when it was possible for the rate to fall below 4.5%, creating an opportunity to borrow whilst still being within budget. The maturity structure displayed on page 24 of the agenda papers showed the spread of risk of when loans needed to be refinanced and provided an opportunity to take advantage of the different maturity structures. The Council would assess how risk could be spread over time and will keep in touch with the Treasury advisor who would advise on rates. During times of economic uncertainty, it was not always the case that rates continued to increase as there were occasions when there could be a downward movement. In such circumstances, actions would be taken wen borrowing to ensure that the Council would be able to stay within its budget. Various efforts were being made such as ensuring that cash balances remained healthy so that there would not be an over-reliance on borrowing whilst attempting to provide certainty on what the cost of any borrowing would be. The main difference was that the cost of borrowing was originally at 2% and was now at 4.5%, which was higher, but was within the MTFs guidelines.

•             A query was raised regarding capital projects, particularly, long-term capital projects and the appropriateness of determining which capital projects should go ahead. In response, the meeting heard that for general fund capital schemes to progress, there was an overall model of capital programmes set at the beginning of the year in line with the borrowing strategy. The schemes would be expressed with assumptions, costs and level of borrowing. Any scheme that did not meet those viability tests were not included in the programme.  A scheme generally would not progress if viability tests were not met. From a Treasury perspective, it was important to advise on what the cost would be and anticipate the trajectory of interest. In light of the economic conditions this year, the assumption had been raised to 5% for the general fund capital schemes. Business case implications were always being discussed and considered on an ongoing basis. 

•             A further query was raised regarding the table outlined on paragraph 8.9 of the appendix regarding how to navigate short-term borrowing as the Council would have to rely on borrowing for a longer period of time than usual. The table outlined in 8.9 of the appendix which had a target of 30% on short term borrowing had been set out in previous years. In normal circumstances, there was an upward moving slope so that borrowing short-term was cheaper than borrowing long-term. During the course of this year, in the last few months, borrowing short term had become more expensive than borrowing long term. Therefore, it was unattractive to the Council to borrow short-term (anything under a year) as this would be more expensive. A 50 year loan would still have a 50 year interest payments that would need to be paid, but a one year loan would usually meet the target rates so the Council was attempting to strike a balance in the portfolio. The short-term rates allowed for flexibility and if the macroeconomic conditions were to change, then it would be possible to use some of the short-term lending as maturity to refinance a lower maturity borrowing. 

•             Members noted section 4.8 of the appendix which stated that £35.5 million worth of loans was allowed to mature without immediate replacement and queried how a decision was made not proceed with a project if it was found not be financially viable. In response, the meeting heard that when schemes were set, part of the scheme set-up included standard requirements. There were also other things that could allow a scheme to go through, such as grants from government and borrowing. Once that was brought together in the aggregation, this would be when a capital programme was created. There was also a capital finance requirement. This was the aggregate of the borrowing requirements of all the individual schemes. From a maturity perspective, the borrowing was done for the aggregate. The table shown on paragraph  3.1 of the appendix displayed the total requirements for the Council to borrow to be at £1,169.5 billion, but the Council only externalised £783 million of the borrowing. There was still a gap of £300 to £400 million that would need to be filled in over the time period. The Council was not borrowing extensively because the Council had a cash requirement for cash flow purposes. This was about £50 million. Instead of taking £300 million and pay rates on it, the Council preferred to be more flexible and take opportunities when borrowing becomes more efficient for the Council.

•             A query was also raised regarding if the Council's financial viability assessments could be improved. In response, the meeting heard that it was possible to improve financial viability assessments. The Council reviewed the individual schemes collectively and quarterly updates were completed on the viability models. Updates were also completed on various areas such as housing.

•             Members noted that other local authorities were in considerable financial difficulty and wished to query if there were differences between the process occurring at those boroughs different to the processes at Haringey and the size of the risk. In response, the meeting heard that it was a difficult financial time for many local authorities with funding having been reduced for the last few years. Some of the issues that had occurred in other local authorities was different in comparison to Haringey. In some cases, there had been budgetary issues or other unexpected events. In the case of Birmingham City Council, there had been a legal case that had brought trauma to the budget and this could be something that was relatively difficult to predict. There was also an IT implementation issue. Other local authorities had issues with their capital programs which had not been appropriately provided for. The Council was reviewing its own internal processes to ensure that such issues did not occur. It was also important to ensure that the governance structure at the Council was robust and to ensure that officers were held to account.

At this point in the proceedings, the Legal advisor to the Committee stated that although local authority finances were audited, some of the auditors did not pick up on some of the issues. The statutory officers such as the chief executive, director of finance and monitoring officer were very important and, in some cases, in other local authorities, the advice given to them had not been taken. There also had been problems with statutory officers feeling that they were unable to express their concerns.

•             A query was raised regarding the re-profiling of council programmes in the current economic situations, particularly if a scheme was several times more expensive than originally assessed. In response, the meeting heard that such conversations were in progress and that there would be a review of the capital program at the next Cabinet meeting. There had been a change in the in-year interest rate assumption. This was not something that was done usually but changes in perceived risk needed to be taken into consideration. This was now at 5.5% and all the schemes were being reassessed based on that rate.

•             A query was raised regarding learning in general, partly due to the constant change in the economic climate. In response, the meeting heard that there was always opportunities to learn, especially where there had been observed failures from other authorities. Effort was always placed into risk management and mitigating risks where possible.

•             A query was raised regarding price increases in a scheme which had already started, in particular if a scheme would be stopped once it had been started. In response, the meeting heard that any works being carried out on schemes would take into account the rate up to 5.5%. If the rate increased past 5.5%, consideration would need to be given regarding the work being carried out. However, this had not previously happened in the immediate past.  All efforts were made to ensure that costing for any scheme would be evaluated correctly

RESOLVED

1. To note the treasury management activity undertaken during the quarter to 30 June 2023 and the performance achieved attached as Appendix 1 to the report.

2. To note that all treasury activities were undertaken in line with the approved Treasury Management Strategy.