Agenda item

Purpose of the item: For the Select Committee to review and comment on the 2021/22 Treasury Management Strategy (TMS) – report to follow.

Witnesses:

Anna D’Alessandro, Director of Corporate Finance

Mel Few, Cabinet Member for Resources

Mark Hak-Sanders, Strategic Finance Business Partner

Becky Rush, Deputy Cabinet Member for Resources

Key points raised during the discussion:

1.    The Strategic Finance Business Partner stated that the purpose of the Treasury Management Strategy (TMS) was to set a strategy for the prudent management of surplus cash and for managing borrowing costs. The Council consulted treasury advisor Arlingclose for advice on the external economic background and on the strategy. The Strategic Finance Business Partner explained that the strategy and fundamental approach in the 2021/22 TMS remained generally unchanged since the 2020/21 version. The aim was to maximise the Council’s use of its available cash to avoid borrowing. Given low interest rates at present, using the Council’s available cash instead of borrowing was currently more cost-effective than investing cash. Borrowing in the short term entailed an average 0.5% interest rate at the moment, whereas longer term borrowing through the Public Works Loan Board (PWLB) averaged a 1.5% interest rate. The Council currently held its surplus cash in money market funds, which were completely liquid. Moreover, the 2021/22 TMS proposed to remove the £150m limit on money market fund investment, in order to avoid having to hold any excess funds in the Council’s current account on the rare occasions that that amount was exceeded. The limit on any one money market fund was £25m, in order to spread the risk of the investment over a number of parties.

2.    The Strategic Finance Business Partner continued to explain that the Council had changed its approach to minimum revenue provision (MRP) in response to advice from its external auditors, Grant Thornton. Currently, Halsey Garton (the company owned by Surrey County Council through which the Council invested in property) owed debts to the Council on a long-term maturity basis. The proposed change was that, if any investment property fell below its carrying value in terms of the outstanding debt owed by Halsey Garton, Halsey Garton would start to make a principle payment immediately on that loan, thereby giving Surrey County Council the cash it would need to repay the external debt.

3.    The Strategic Finance Business Partner informed the Select Committee that the other change set out in the 2021/22 TMS was an increase in planned borrowing over the course of the Medium-Term Financial Strategy (MTFS), increasing the proportion of borrowing costs against net revenue budget from 6% by 2024/25 in the 2020/21 TMS, to 8% by 2025/26 in the latest TMS. This figure was in line with other counties; the average proportion of borrowing cost was 7% and the range was 4-10%. In terms of the £0.2bn increase in borrowing, the majority of that figure represented borrowing that would generate income, such as investment in Extra Care Housing and Independent Living schemes, which would result in rental income and efficiencies, offsetting borrowing costs. Finally, the risk profile had been reduced in 2021/22 compared to 2020/21. The Council had the option of borrowing long-term at a fixed rate of 1.5% from the PWLB if desired. This rate had reduced by circa 1% during 2020/21.

4.    The Select Committee thanked the Strategic Finance Business Partner for his comprehensive introduction. A Member asked what the main differences were between borrowing from the PWLB and borrowing through the UK Municipal Bonds Agency (UKMBA). The Strategic Finance Business Partner replied that the PWLB provided more certainty as the Council was guaranteed access to it; the PWLB published its rates, and the Council could draw funds from the PWLB on the same day with the rates fixed for up to 40 years. When borrowing via the UKMBA, the agency would put together a bond issuance for the Council with other local authorities, and the bond would be issued to the market. Whilst borrowing through the PWLB the Council would be responsible for its own debt and nothing else, through the UKMBA, the Council would be signing up to a collective share of the risk of the whole bond. In order for the Council to consider borrowing from the UKMBA, it would need to see that the agency was able to offer a better rate than the PWLB.

5.    A Member remarked that the Council aimed to minimise long-term debt, yet it was borrowing £100m for the Your Fund Surrey project. The Member suggested that the Council should borrow in order to invest in areas that would reduce future expenditure, rather than investing in new projects that might not help the Council to save money. The Strategic Finance Business Partner responded that the TMS aimed to set out how the capital programme would be financed through the use of cash balances and borrowing strategy while minimising the amount the Council would have to borrow; the TMS was not involved in the setting of the capital programme itself. Furthermore, the Council prioritised its capital expenditure, with a balance of schemes maintaining current assets and new developments. A large proportion of the capital programme would reap benefits in the long term. The Deputy Cabinet Member for Resources added that, with regards to Your Fund Surrey, the Council would not borrow £100m upfront; rather, funds would be borrowed as and when required. This was a long-term scheme.