Item 7
Glasgow City Council
2nd December 2009
Report to the Finance and Audit Scrutiny Committee
Report by the Executive Director of Financial Services
Contact: Morag Johnston Ext: 74316
TREASURY MANAGEMENT ANNUAL REPORT 2008/09 AND 2009/10 UPDATE
Purpose of Report:
To advise members of the outturn Treasury Management position for 2008/09 and
provide an update on 2009/10.
Recommendations:
The Committee is invited to note
(a)
the Treasury Management Annual Report for 2008/09, and
(b)
the Treasury Management Update for 2009/10.
Ward No(s):
Citywide:
Local member(s) advised: Yes No
Consulted: Yes No
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FINANCE AND AUDIT SCRUTINY COMMITTEE
TREASURY MANAGEMENT ANNUAL REPORT 2008/09 AND 2009/10 UPDATE
INTRODUCTION
1. The Treasury Management Policy Statement approved by the Policy and Resources
Committee on 27th March 2002 included the requirement to regularly report to committee on the
review of treasury management activity.
REVIEW OF TREASURY MANAGEMENT ACTIVITY 2008/09 2. Committee previously considered an interim report for the year in January 2009. This report
considers the overall performance for the year.
Summary Position
3. A summary of the Council’s debt portfolio and investment position as at 31st March 2009 is
outlined in Appendix 1.
The Economy and Interest Rates
4.
The major economic events of the financial year and the impact they had on interest rates was
without precedent. The financial crisis had a major downward impact on the levels of interest
rates around the world. Although interest rates initially fell sharply in the US they were
followed, eventually, by the Bank of England. Investment income returns have been badly hit
but lower borrowing rates in short to medium periods has benefited Glasgow City Council.
5. When the Treasury Strategy for 2008/09 was approved, it was anticipated that the Bank Rate
would be stable in 2008-09 at 5.25%. This was based on the Monetary Policy Committee
(MPC) balancing the opposing risks of rising inflationary pressures on one hand, and the
impact of the credit crunch on the economy and the knock on impact on world economic growth
rates on the other hand.
6. On 1st April 2008 Bank Rate was 5% and the Bank of England was focused on addressing
inflation, which was sitting above the 2% CPI target. Lehman Brothers, a US investment bank,
filed for bankruptcy on 15 September 2008. This event caused a huge shock wave in world
financial markets and threatened to completely destabilise them. Shortly thereafter the
Icelandic government took control of their banks and the UK government provided £37bn to
three UK clearing banks, RBS/HBOS/Lloyds, as liquidity in the markets dried up. In the
meantime, the MPC had reduced interest rates by 0.5% to 4.5% on 9th October. Market focus
shifted from inflation concerns to concerns about recession, depression and deflation.
7. The MPC duly delivered another cut in interest rates in November, this time by an
unprecedented 1.5% to 3%, and as the ramifications of the ‘credit crunch’ became increasingly
clear the Bank of England cut interest rates further by 1% in December, 0.5% in January, 0.5%
in February and 0.5% in March, closing the year at 0.5%, a record low.
8. The market assumption, when the Treasury Strategy for 2008/09 was approved, was that long-
term interest rates (50 years) would remain static at around 4.45% for the whole year. The
Public Works Loans Board (PWLB) 45-50 year rate was generally within a band of 4.3 - 4.6%
until mid October when there was a spike up to 4.84%, followed by a plunge down to 3.86% in
early December. Further spikes of 4.84% and 4.72% occurred in late January and early
February, before closing the year at 4.58%. It was not uncommon to see rates fluctuating by
40-50 basis points within a few weeks during this year.
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Borrowing Strategy
9. The forecast when the 2008/09 strategy was approved was that short-term interest rates would
be higher than long-term rates throughout 2008/09. Against this background, the Council
planned to undertake the majority of its long-term borrowing activity at the back end of the
financial year. However, as little variation was expected in average quarterly rates during the
year, it was possible that attractive rates could be available at any time. The Executive
Director of Financial Services would continue to monitor the interest rate market and adopt a
pragmatic approach to changing circumstances as opportunities arose. New PWLB borrowing
of £95.7m was secured in 2008/09 at an average interest rate of 2.62%.
10. During 2008/09 the Council restructured a total of £116m PWLB loans. Loans with interest
rates as high as 9.75% were repaid and replaced with new PWLB loans with an average
interest rate of 2.96%. Appendix 2 provides details of the PWLB loans restructured in 2008/09,
while Appendix 3 provides details of the replacement loans taken. This resulted in annual
interest savings of £3.4m.
Investment Strategy
11. The Council manages day-to-day cashflow requirements by investing with banks and other
financial instituitions on its approved lending list, the ‘counterparty investment list’, up to the
approved investment limit of £15m with any one institution. The counterparty investment list
has been updated as part of the regular review of the credit ratings of the banks and other
financial institutions with which the Council invests its surplus funds. Investments are made for
a range of periods from overnight to a maximum of 364 days, dependent on the Council’s
cashflows and the interest rates on offer. The investment limit of £15m was approved several
years ago as part of the approved treasury management policy. No institutions in which
investments were made had any difficulty in repaying investments and accrued interest in full
during the year.
12. In addition to internally managed investments, the Council also holds externally managed
investments in respect of the Insurance Fund, and on behalf of the Common Good and Sundry
Trust Funds. As at 31 March 2009, the Council held investments of £28.5m with investment
brokers Ruffer Limited Liability Partnership in respect of the Insurance Fund (£16.9m) and
Common Good Fund (£11.6m), and £8.1m with Standard Life Investments in respect of Sundry
Trust Funds.
Performance Indicators
13. The headline performance indicator for Treasury Management is the average cost of servicing
loans as reflected in the Loans Fund Interest Rate. In the 2007/08 Annual and 2008/09 Update
Report, the forecast interest rate for 2008/09 was 5.8%. The final outturn rate achieved for
2008/09 was an improvement on expectations at 5.7%.
14. The rate of return on externally managed investments can be compared to appropriate industry
benchmarks. Both investment fund managers out-performed their respective benchmarks in
2008/09. The rate of return in respect of investments managed by Ruffer Limited Liability
Partnership was 12.66% compared to a benchmark of 7.34%. Investments managed by
Standard Life Investments achieved a rate of return of –7.92% compared to a benchmark of –
20.39%.
15. It is worth noting that the Council withdrew its investment with Standard Life in respect of the
Capital Fund in February 2009, in order to safeguard these resources against further exposure
to changing market conditions since these resources will be required in the short to medium
term. These resources are now being managed internally, with capital preservation being the
key priority.
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Compliance with Treasury Limits
16. The Local Government in Scotland Act 2003 requires the Council to set Prudential Indicators
to ensure that the Council’s capital investment plans are affordable, prudent and sustainable.
During 2008/09, the Council operated within the treasury limits set for the management of the
Treasury function. The 2008/09 Prudential Indicators final outturn position is outlined in
Appendix 4.
Operating Leases 17. A summary of the operating leases entered into during 2008/09 is outlined in Appendix 5.
TREASURY MANAGEMENT UPDATE 2009/10
18. This report provides an interim analysis of the Council’s treasury management activities to 30th
September 2009 and covers:
• Summary
Position
• Interest
Rates
• Borrowing
Strategy
• Investment
Strategy
• Performance
Indicators
•
Adherence to Treasury Limits
•
Counterparty Investment List Update and
• Operating
Leases
Summary Position
19. A summary of the Council’s debt portfolio and investment position as at 30 September 2009 is
outlined in Appendix 6.
Interest Rates
20. In approving its strategy for 2009/10, the committee noted the market assumptions of long
term interest rates in the range of 3.9% to 3.95% and short term interest rates at a stable
0.5%. The current position is as follows:
(a)
Long
Term
The 50 year PWLB rate started the year at 4.57% and was 4.25% as at 30
September 2009. The rate is expected to reach 4.55% by 31st March 2010.
b)
Short
Term
Short term rates started the year and have remained stable at 0.5% as at 30
September 2009. Forecasters are not anticipating any change to the rate by 31st
March 2010.
Borrowing Strategy
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21. The Executive Director of Financial Services will continue to monitor the interest rate market
and adopt a pragmatic approach to changing circumstances as opportunities arise.
22. The PWLB are the main source of capital funding to local authorities, offering loans at interest
rates set by reference to Government borrowing rates in the gilt markets. In addition to these
rates, the flexibility and transparency in the terms under which loans were advanced have been
attractive to local authorities, allowing a reduction in risk in managing our debt portfolio.
23. In 2009/10 to date, new PWLB borrowing of £21.1m has been secured at an average interest
rate of 3.91%. This is in line with the Council’s Capital Forecast model and delivery of the
approved Investment Programme, and reflects the use of internal resources.
24. The Council’s reserve and fund balances may be utilised to limit the new external borrowing
requirement, as an alternative to investing these resources. Reducing investment balances
rather than increasing external borrowing will both reduce interest payable, as short term rates
on investments are likely to be lower than rates paid on external borrowing, and limit exposure
to investment risk. In 2009/2010 to date, this strategy has facilitated the early repayment of
PWLB debt totalling £75m, with an average interest rate of 4.32%. This has generated a non-
recurring discount of £0.5m and ongoing annual revenue savings of £3.2m.
25. The introduction of different PWLB rates in November 2007 for new borrowing, as opposed to
early repayment of debt, has meant that loan debt restructuring is now less attractive than
before. Nevertheless, opportunities for restructuring still remain.
26. In order to minimise interest charges, the Council has actively monitored potential restructuring
opportunities in order to generate cash savings at a minimum risk and improve the balance of
the loan debt maturity profile. In 2009/10 to date, the Council has repaid £53.9m of PWLB
loans, with an average interest rate of 4.4%. These loans were replaced with new PWLB loans
totalling £53.9m, with an average interest rate of 2.9%. This restructuring has resulted in
annual net savings of £0.8m.
27. Pro-active debt management, therefore, will continue to be very important to the Council in
procuring financial savings and delivering our financial strategies, as can be seen from the
examples detailed above.
Investment Strategy
28. In light of the current economic climate, including the collapse of Icelandic banks, the Council
has strengthened its strategy in respect of investments. The key priority of the strategy is to
preserve the principal investment, minimising the risk of any loss on the principal sum
invested. The Council will also aim to achieve the optimum return on its investments within an
agreed risk framework and liquidity requirements.
29. The Council will continue to manage day-to-day cashflow requirements by investing with
instituitions on its approved counterparty investment list. The counterparty investment list will
continue to be updated as part of the regular review of the credit ratings of the banks and other
financial institutions with which the Council invests its surplus funds. The current counterparty
investment list is outlined in Appendix 7. Given that investment rates are to remain at a
historically low level throughout the year and with uncertainty in the banking sector is still
prevalent, the Council will keep investments short dated throughout 2009/10. The limit of
investments will reflect the level of available Council reserve balances, subject to paragraph 24
above, together with provision for managing the Council’s day-to-day cashflow requirements.
30. In addition to internally managed investments, externally managed investments are currently
held in respect of the Insurance Fund and on behalf of the Common Good Fund and Sundry
Trusts. Investments in respect of the Insurance Fund and Common Good Fund are currently
held with investment brokers Ruffer Limited Liability Partnership, while investments in respect
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of Sundry Trusts are held with Standard Life Investments. Although these investments will be
impacted upon by the recent downturn in the value of shares and equities, given that these
funds are all invested on a longer term basis, there are currently no changes proposed to the
management of these resources.
31. The Executive Director of Financial Services will continue to monitor the economic
environment and adopt a pragmatic approach to changing circumstances. A balanced view of
risk against return will be taken in respect of all investments. It is anticipated that return on
investments will be limited in 2009/10 as a result of Bank Rate forecasts and the over-riding
principal of risk aversion.
Performance Indicators
32. The estimated pooled interest rate for 2009/10, as outlined in the 2009/10 strategy, is 5.7%.
However, as a result of the borrowing and investment strategy outlined above and significant
decreases in Base Rate, it is forecast that the 2009/10 rate will be 4.6% for the full financial
year.
33. The rate of return on externally managed investments can be compared to appropriate
industry benchmarks. In 2009/10 to date, both investment fund managers out-performed their
respective benchmarks. The rate of return in respect of investments managed by Ruffer
Limited Liability Partnership was 11.34% compared to a benchmark of 1.04%. Investments
managed by Standard Life Investments achieved a rate of return of 26.81% compared to a
benchmark of 17.86%.
Adherence to Treasury Limits
34. In 2009/10 to date, the Council has adhered to the limits set for the management of the
Treasury function.
Operating Leases
35. A summary of the operating leases entered into in 2009/10 to 30 September 2009 is outlined
in Appendix 8.
FINANCIAL ISSUES
36. The impact on the pooled interest rate detailed above will be utilized in the management of the
Council’s overall budget.
PERSONNEL ISSUES 37. There are no personnel implications.
LEGAL ISSUES 38. There are no legal implications.
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SERVICE PLAN ISSUES
39. These matters currently form part of the operational activities of the department and there are
no specific service plan issues to be considered.
ENVIRONMENTAL CONSIDERATIONS
40. There are no environmental considerations.
RECOMMENDATIONS 41. The Finance and Audit Scrutiny Committee is invited to note
(a) the Treasury Management Annual Report for 2008/09, and
(b) the Treasury Management Update for 2009/10.
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APPENDIX 1
CORPORATE RISK REGISTER WORKING GROUP
MEMBERSHIP 2009/2010
Service
Name
Post
Financial Services
Tom McCabe
Head of Service Development
Chief Executive / Corporate Services
Iain Scott
Assistant Director
Chief Executive / Corporate Services
John Watson
Senior Health and Safety Officer
Development & Regeneration Services
Gerry Gormal
Assistant Director
Education Services
Jim Wilson
Head of Performance & Review
Land & Environmental Services
David McClelland Head of Service Development
Social Work Services
John Donaldson
Head of Immigration &
Emergency Services
Culture & Sport Glasgow
Susan Deighan
Strategic Planning &
Corporate Services
Cordia
Andy Clark
Finance Director
The following substitutions were made for the workshop held 23rd July 2009
Service
Name
Post
Culture & Sport Glasgow
Joe Larkin
Assistant Business Support Manager
Cordia
Fiona Wade
Financial Accounant
Education Services
Alasdair Henderson Manager, Children & Young
People Support
The following sent their apologies and were consulted to gain their input.
Service
Name
Post
Chief Executive / Corporate Services
Iain Scott
Assistant Director
Development & Regeneration Services
Gerry Gormal
Assistant Director
Land & Environmental Services
David McClelland Head of Service Development
APPENDIX 2
Glasgow City Council
PWLB Loans Restructured 2008/09
Loan Ref.
Amount
Interest Rate
£
466953
3,059,999.73
9.750%
465161
1,380,132.69
9.500%
465027
14,222,749.70
9.500%
466623
14,222,749.70
9.375%
467697
1,380,132.69
9.875%
492759
25,000,000.00
4.250%
492836
20,000,000.00
4.250%
493351
26,000,000.00
4.600%
493908
7,000,000.00
4.550%
493913
4,000,000.00
4.550%
Total
116,265,764.51
5.900%
APPENDIX 3
Glasgow City Council
Replacement Loans 2008/09
Interest
Loan Details
Reference Maturity Date
Interest Dates
Amount
Rate
£
PWLB Loans
New Loans 23/10/08
50 Year maturity at 4.47%
494958
22/10/2058
22 Apr and 22 Oct
14,265,765
4.47%
New Loans 2/12/08
50 year maturity at 4.12%
495097
01/12/2058
1 Jun and 1 Dec
20,000,000
4.12%
New Loans 2/02/09
3 year maturity at 2.10%
495277
01/02/2012
1 Feb and 1 Aug
27,000,000
2.10%
3.5 year maturity at 2.35%
495278
01/08/2012
1 Feb and 1 Aug
27,000,000
2.35%
4.5 year maturity at 2.77%
495279
01/08/2013
1 Feb and 1 Aug
28,000,000
2.77%
Total Replacement Loans
116,265,765
2.96%
APPENDIX 4
Glasgow City Council
2008/09 Prudential Indicators Final Outturn
2008/09
Actual
Affordability Indicators
1) Actual Ratio of Financing Costs to Net Revenue Stream
5.48%
2) Actual Incremental Impact of Capital Investment Decisions on the Council Tax
None
Prudential Indicators
3) Actual Net Borrowing Less the Capital Financing Requirement
-£51m
4) Actual Capital Expenditure for 2008/09
£212m
5) Actual Capital Financing Requirement as at 31/03/09
£1,444m
External Debt
6) Authorised Limit
£1,700m
Within Limit
7) Operational Boundary
£1,600m
Within Limit
Treasury Management
8) CIPFA Code of Practice for Treasury Management
Adopted
9) Upper Limit on Fixed Interest Rate Exposures
90%
Within Limit
10) Upper Limit on Variable Interest Rate Exposures
40%
Within Limit
11) Maturity Structure of Borrowing
a)
Under 12 months
18.50%
b)
12 months and within 24 months
2.19%
c)
24 months and within 5 years
7.62%
d)
5 years and within 10 years
8.81%
e)
10 years and above
62.88%
APPENDIX 5
Glasgow City Council
Summary New Operating Leases 2008/09
Revenue
Number of
Original
Rental
Lease
Service Department
Agreements Capital Value
per annum
Terms
£
£
Land and Environmental
34
12,670,980.62 2,419,470.99 2, 3, 4, 5, 6 & 7 years
Services
Total
34
12,670,980.62 2,419,470.99
Vehicles and plant were leased during the period.
The lessors used were Societe Generale Equipment Finance, Siemens Financial Services
JCB Finance Limited and Asset Advantage Limited.
All contracts were awarded after a full tendering process in compliance with the procedures
for public procurement in respect of the local authorities' tendering requirements.
APPENDIX 6
Glasgow City Council
Summary Debt and Investment Position as at 30 September 2009
Annual
Annual
Amount
Average % Share
Amount
Average
% Share
as at 30/9/09
Interest
Total
as at 31/3/09
Interest
Total
£ 000s
Rate
Debt
£ 000s
Rate
Debt
Debt
Public Works Loan Board
832,074
5.49%
61.6%
885,968
5.52%
58.70%
Temporary Loans
70,774
0.63%
5.2%
173,332
3.50%
11.50%
Market Loans & Local Bonds
449,008
4.42%
33.2%
449,008
4.35%
29.70%
European Investment Bank*
0
0.00%
0.0%
1,667
8.05%
0.10%
Stock
9
3.50%
0.0%
9
3.50%
0.00%
Total Debt
1,351,865
4.88%
100.0%
1,509,984
4.94%
100.0%
Investments
Internally Managed Investments
127,360
0.83%
27,597
4.80%
Externally Managed Investments:
Ruffer LLP
32,578
11.34%
28,542
12.66%
Standard Life Investments
10,323
26.81%
8,117
-7.92%
Total Investments
170,261
4.42%
64,256
6.68%
*Note
European Investment Bank loans were repaid in full at 30 June 2009.
APPENDIX 7
Glasgow City Council
Counterparty Investment List
Long
Short
Term
Term
Support
Institution
Country
Rating
rating
Rating
Abbey National plc **
GBR
AA-
F1+
1
ABN AMRO Bank N.V.
NLD
AA-
F1+
1
Alliance & Liecester
GBR
AA-
F1+
1
Australia & New Zealand Banking Group
AUS
AA-
F1+
1
Banco Bilbao Vizcaya Argentaria (BBVA)
ESP
AA-
F1+
1
Banco Popular Espanol
ESP
AA-
F1+
2
Banco Santander Central Hispano
ESP
AA
F1+
1
Banco Santander Totta SA
POR
AA
F1+
1
Bank Netherlandse Gemeenten
NLD
AAA
F1+
1
Bank of Montreal
CAN
AA-
F1+
1
Bank of Nova Scotia
CAN
AA-
F1+
1
Halifax/Bank of Scotland Plc
GBR
AA
F1+
1
Barclays Bank plc
GBR
AA-
F1+
1
BNP Paribas
FRA
AA
F1+
1
Caixa Geral de Depositos
PRT
AA-
F1+
1
CALYON
FRA
AA
F1+
1
Canadian Imperial Bank of Commerce
CAN
AA-
F1+
1
Clearstream Banking
LUX
AA+
F1+
1
Clydesdale Bank **
UK
AA-
F1+
1
Commonwealth Bank of Australia
AUS
AA
F1+
1
Ahorros
ESP
AA-
F1+
2
Credit Agricole
FRA
AA
F1+
1
Credit Industriel et Commercial(CIC)
FRA
AA-
F1+
1
Credit Suisse
GBR
AA-
F1+
1
Deutsche Bank AG
DEU
AA-
F1+
1
Corporation
HKG
AA
F1+
1
HSBC Bank plc
GBR
AA
F1+
1
HSBC Bank USA
USA
AA
F1+
1
Intesa Sanpaola
ITA
AA-
F1+
1
Landwirtschaftliche Rentenbank
DEU
AAA
F1+
1
Lloyds TSB Bank
GBR
AA-
F1+
1
National Australia Bank **
AUS
AA
F1+
1
National Westminster Bank
GBR
AA-
F1+
1
Nationwide Building Society
GBR
AA-
F1+
2
Noredea Bank AB
SWE
AA-
F1+
1
Nordea Bank Finland plc
FIN
AA-
F1+
1
Northern Trust Company
USA
AA-
F1+
3
Rabobank International
NLD
AA+
F1+
1
Royal Bank of Canada
CAN
AA
F1+
1
Royal Bank of Scotland plc (The)
GBR
AA
F1+
1
Svenska Handelsbanken
SWE
AA-
F1+
1
Toronto-Dominion Bank
CAN
AA-
F1+
1
Westpac Banking Corporation
AUS
AA-
F1+
1
APPENDIX 8
Glasgow City Council
Summary New Operating Leases 2009/10 to 30 September 2009
Revenue
Number of
Original
Rental
Lease
Service Department
Agreements
Capital Value
per annum
Terms
£
£
Land and Environmental
9
4,519,725.61
870,954.70 3, 4, 5 & 7 years
Services
Total
9
4,519,725.61
870,954.70
Vehicles and plant were leased during the period.
The lessors used were Siemens Financial Services, Societe Generale Equipment Finance and
JCB Finance Limited.
All contracts were awarded after a full tendering process in compliance with the procedures for
public procurement in respect of the local authorities' tendering requirements.
