Agenda item

Purpose of the report: The Council Overview Board is asked to review the report and consider whether it wishes to make any recommendations to Cabinet.

Report to Follow

Witnesses:
Sheila Little, Director of Finance
Phil Triggs, Strategic Finance Manager

Key points of discussion:

1.    The Board considered the report on the Municipal Bonds Agency (MBA) Framework Agreement and Guarantee and sought clarification from officers regarding the operation of the proposed arrangements.  The Board was keen to understand more about the knowledge and experience of the MBA Board members, as well as the risks and benefits of seeking loans from the MBA compared to other existing options.

2.    Officers reported that Surrey County Council had access to a number wide range of options to fund capital projects and that the MBA was one such option. While it was noted that this option was not risk-free, it was noted that there was a probability of lower interest rates on future long term loans.

3.    The Board raised the concern over who was ultimately responsible for the triggering process regarding bonds purchased from the MBA. It was noted that, in the treasury management strategy, the Director of Finance had delegated power to make borrowing decisions but, for the purposes of loans from the MBA, consultation was to take place with the Cabinet Member for Business Services and Resident Experience prior to a loan decision. It was felt that for practical reasons relating to possible absences, it may be better if the delegation of borrowing decisions to the Director of Finance should be after consultation with either the Leader of the Council or the Cabinet Member for Business Services and Resident Experience, rather than just the Cabinet Member.

4.    The Board queried whether a special control should be put in place to limit the risk of borrowing from the MBA. Officers responded that the MBA had its own rigorous scrutiny and assessment and would only allow authorities on its lending list if it felt that they were capable of future repayment. It was suggested that their scrutiny processes amounted to a sufficient safeguard to minimise risk without unduly hindering process.

[Bill Chapman left the meeting at 11.32am and returned at 11.34am]

5.    Members queried how the bonds and loans system functioned. Officers clarified that loans from the MBA could only be used to finance capital spending commitments in the Medium Term Financial Plan (MTFP). It was also noted that any debts undertaken by Surrey County Council must be accounted for by law in its MTFP and fell within its Prudential Indicators, ensuring that the authority cannot borrow more than its means allows, limiting risk to the authority.

6.    The Board questioned officers regarding the relationship between Surrey County Council and the MBA, noting that the authority was an equity investor in the MBA and querying what the risks would be to the authority to acquiring long term loans in addition. It was noted by officers that the mechanism being proposed was not an amendment to Surrey County Council’s status as an equity investor and the possible benefits that this entails, but an extension of treasury management policy to allow for the taking out of loans from the MBA.
[Bob Gardner left the meeting at 11.41am and returned at 11.51am]

7.    The Board queried the possible benefits of being a significant equity investor in the MBA. It was noted that, while this would not effect this proposal, the authority was projected to receive dividends on its equity investment in the future.

8.    A query was raised by the Board regarding the financial risk of borrowing and if this will be added as a liability on the balance sheets. Officers responded that adding any source of long term capital finance would constitute a balance sheet liability. It was also noted that adding these loans as a balance sheet liability was not necessary due to bonds purchased from the MBA being used by the authority to exclusively fund capital projects rather than to make property investments.

9.    The Board asked officers to clarify the liabilities of MBA loans to the authority. It was noted that, if one investor authority defaulted on repayments relating to a loan, there was a proportional pro rata guarantee from all other local authorities forming part of the bond that provided those loans. It was also noted that the Agency had a robust local authority credit rating system to minimise risk of local authority default. It was clarified that any risk would only relate to a specific bond taken by Surrey County Council. 

10.  The Board questioned the level of expertise that was present within the MBA and whether the experience of its board members and staff was sufficient to reduce failure risk. Officers responded that the level of experience of members of the Agency was high, listing key members such as Sir Merrick Cockell and Sir Stephen Houghton as having a good level of expertise in this field.

11.  The Board noted the likely future changes in the administration of the Public Works Loan Board (PWLB) could result in an increased viability for the use of the MBA as an alternative funding method for capital projects.

12.  Members questioned what arrangements had been put in place for monitoring MBA local authority clients. It was explained by officers that the monitoring processes were outlined in the Cabinet report and that there was emphasis on the transparency of the monitoring process. It was noted that the MBA had final responsibility to ensure that proper monitoring of client local authorities took place.

Recommended (to Cabinet):

a)    That a process be put in place to allow appropriate scrutiny of any proposal to seek a loan from the Municipal Bonds Agency, taking into account the need to review the risks involved, the terms available from any alternative sources of capital borrowing, and the need for timely decision-making.

b)    That the second recommendation of the Cabinet report be amended to read ‘delegate borrowing decisions to the Director of Finance in consultation with the Leader of the Council or the Cabinet Member for Business Services and Resident Experience.