Wealden District Council
You are using an unsupported version of Internet Explorer.
Parts of our website may display incorrectly or not work at all. Please consider downloading an up to date browser such as Chrome or Firefox.

The Council’s Revenue and Capital Budgets

Medium Term Financial Strategy (MTFS)

(General Fund and Housing Revenue Account)

The purpose of this Medium Term Financial Strategy (MTFS) is to set out the overall framework on which the Council draws together the strategic planning priorities, demand and resource forecasts and impact of the wider service delivery environment to produce a costed plan for the impact of proposed policies and plans on the longer-term financial sustainability of the Council. The MTFS pulls together in one place all known factors affecting the Council’s financial position and financial sustainability over the medium term (i.e. over a five-year period). The MTFS integrates revenue allocations, savings targets, reserves and capital investment, and provides a budget upon which the Council Tax level (General Fund) and rent levels (Housing Revenue Account(‘’HRA’’)) are determined, and sets out the forecasts for the period following years.

2022-23 to 2026-27

Welcome to this latest version of Wealden’s General Fund Medium Term Financial Strategy covering the period 2022-2027.

Wealden District Council (“The Council”, “Wealden”, “we”, “our”) is continuing to operate in an environment of uncertainty due to the on-going Covid-19 crisis. As a result financial planning is becoming increasingly complex, requiring multiple variables to be balanced in an environment of increasing uncertainty. Having a thorough understanding of the financial outlook and the associated impact on the organisation’s ability to achieve its strategic objectives is an essential starting position for future planning and ensuring sustainability. Resources are becoming scarcer, which coupled with increasing pressures and demands on services, makes it more challenging to ensure that resources are effectively targeted.

This Medium Term Financial Strategy (“MTFS”) sets out how the Council will use its financial resources to underpin the strategic priorities within the Corporate Plan, and builds on its track record of:

  • Managing growth to meet future needs;
  • Protecting and enhancing Wealden’s unique rural character and environment;
  • Supporting our local economy and local businesses;
  • Generating sustainable sources of income to invest in local priorities; and
  • Helping to improve connectivity and access to services for all our communities.

It is the Council’s commitment to use the financial resources it employs over the coming years to make a positive difference to the area and its residents, and achieve value for money.

Since 2010 the Council, alongside the majority of other local authorities, has experienced unprecedented financial challenges in various forms and has had to adapt to:

  • The impact of Central Government funding reductions;
  • The Coronavirus (‘’Covid-19’’) pandemic which has reshaped the Council’s services and changed the way Wealden’s residents live, work and socialise;
  • The local impacts of the economic crisis and Covid-19 pandemic affecting jobs, housing and business growth, which has in turn created pressure on the generation of local income streams and incurring additional costs;
  • The national impacts of the economic crisis and Covid-19 pandemic on the financial markets and subsequent low returns on investments;
  • The local impacts of the economic crisis and Covid-19 pandemic creating a rising demand, and increased cost pressures, for council services from customers who rely on the safety net provided by local government; and
  • The impact of the vote to leave the EU and the consequent impact on the economic and political landscapes.

During this same period, the basis on which local government is funded has undergone radical reform, heralding a new era where local government is funded from local taxes with limited reliance on Central Government. This new methodology for funding local government is inextricably linked to the performance of the local economy via business rates, new homes bonus funding arrangements, council tax and local council tax reduction schemes, and Housing Revenue Account Self-Financing.

Each change to the funding brings new elements of uncertainty and volatility. However, it does present opportunities for local authorities with the freedom from and removal of reliance on Central Government and a key stake in the financial prosperity of its local economy. The Government’s three-year spending review for 2022-23 to 2024-25 (“Spending Review 2021”) announced by the Chancellor on 27 October 2021, is welcomed and represents the first return to multi-year statements since 2015.

On 7 February 2022, the Secretary of State for the Department for Levelling Up, Housing and Communities (DLUHC), Rt. Hon. Michael Gove MP, released a written statement to Parliament on the final local government finance settlement 2022/23 and supporting figures for individual authorities. However, the 2022/23 local government finance settlement is for one year only and is based on the Spending Review 2021 funding levels. This is the first time since 2015 that, in the context of a multi-year Spending Review, the government has only provided local authorities with a single-year settlement. Therefore, uncertainty still exists with regard to future settlements for Wealden, in addition to the on-going impact of the Covid-19 pandemic, Government’s fair funding review, business rates reform and the levelling up agenda.

In response to this environment the Council has delivered a track record of strong financial discipline. Planning ahead, undertaking a transformation programme which secures savings in advance, re-investing in more efficient ways of working, adopting a more commercial approach, whilst making careful use of reserves to meet funding gaps and mitigate risks, is an approach that has served the Council well.

The Council’s successful financial management to date has enabled the protection of core services for the people of Wealden while at the same time allowing the redirection of resources to the priority areas in the Corporate Plan, and the MTFS 2022-23 to 2026-27 builds on this approach. This MTFS will be kept under constant review and will need to adapt in response to new risks and opportunities during this unprecedented period of uncertainty and change.

Laurence Woolven

Head of Financial Services (S151 Officer)

Background

The purpose of this MTFS is to set out the overall framework on which the Council draws together the strategic planning priorities, demand and resource forecasts and impact of the wider service delivery environment to produce a costed plan for the impact of proposed policies and plans on the longer-term financial sustainability of the Council. The MTFS pulls together in one place all known factors affecting the Council’s financial position and financial sustainability over the medium term (i.e. over a five-year period).

In order to achieve its priorities the Council has a clear and robust financial strategy, which focuses on its long-term financial sustainability. The MTFS does this by balancing the financial implications of objectives and policies against constraints in resources and provides the basis for decisions to be made about its finances.

The MTFS integrates revenue allocations, savings targets, reserves and capital investment, and provides a budget for 2022-23 upon which the 2022-23 Council Tax level (General Fund) and rent levels (Housing Revenue Account(‘’HRA’’)) are determined, and sets out the forecasts for the period 2023-24 to 2026-27.

Whilst the purpose of this MTFS is to provide a costed plan over the period 2022-23 to 2026-27, it must be recognised that this plan becomes more uncertain the further out in time the forecast moves. However, uncertainty is more of a reason to produce a MTFS as the identification of potential longer-term revenues and expenses and the key risks associated with those forecasts and income and expense streams provide valuable insight for the Council and aids decision-making.

The MTFS is a living document that forms the basis of the Council’s fiscal strategy. Inevitably the Council’s plans will need to evolve and develop in response to new financial opportunities and risks and new policy directions during the period of the Strategy and the dynamic nature of local government funding. Therefore, the Strategy will be reviewed on a regular basis and at least annually.

The MTFS is underpinned by a sound finance system, coupled with a solid internal control framework, sufficiently flexible to allow the Council to respond to changing demands over time and opportunities that arise.

Objectives

This MTFS seeks to achieve a number of specific objectives:

  • Ensure the Council’s limited resources are directed to achieving the vision and strategic priorities within the Council’s Corporate Plan and HRA Business Plan;
  • Ensure the Council maintains a sound and sustainable financial base, delivering a balanced budget over the life of the MTFS;
  • Provide a range of good quality services that people expect, and offer excellent value for money;
  • Deliver key projects that enhance quality of life and wellbeing across Wealden, thoughtfully generating reasonable income streams in line with our Commercial Strategy to achieve a financially stable and self-sufficient council;
  • Maintain our measured, professional approach to managing the Council’s finance and investments, and continue to develop our enterprise culture for the benefit of the District as a whole;
  • Deliver more by working with partners, continue to extend our use of technology, minimise transaction costs and sustain customer satisfaction;
  • Growing the Council Tax and Business Rates tax base, whilst ensuring that Council Tax rate increases are kept an acceptable level;
  • Ensure the Council maintains robust, but not excessive, levels of reserve and balances to address any future risks and unforeseen events without jeopardising key services and the delivery of outcomes; and
  • Continue to manage down the Council’s recurrent cost base, in line with reductions in overall resources by ensuring the provision of efficient, effective and economic services which demonstrate value for money.

In order to set the framework for the Council’s approach to policy and financial planning it is important to understand the potential impact of the Covid-19 pandemic, economic conditions and overall national policy context, as well as the policy and delivery priorities for the Council over the MTFS period.

Local Priorities

This MTFS is central to identifying the Council’s capacity to deliver its local priority outcomes and it reflects:

  • The Council’s current financial position and outlook.
  • The Council’s overall financial strategy, including use of reserves.
  • Internal and external pressures which may influence the council’s financial position.

The following sub-sections set out the local context and priorities, that we have had regard to in producing a costed plan over the period 2022-23 to 2026-27.

Wealden as a Place:

Wealden is the largest local government district in East Sussex covering 323 square miles and has a population of 160,175[1]. Half the population live in five main towns: Crowborough, Hailsham, Heathfield, Polegate and Uckfield. The rest live in villages and hamlets in some of the most attractive countryside in the South of England.

With two-thirds of the district covered by the High Weald Area of Outstanding Natural Beauty and the South Downs National Park, as well as 41 conservation areas (33 of which are administered by the Council) and 2,241 listed buildings, Wealden has to place a high value on protecting the environment.

Wealden has 8,495 businesses, with small and micro businesses forming a fundamental part of the Wealden economy. 91.3% of Wealden’s businesses employ fewer than 10 people[2].

The largest proportion of business enterprise in the District is in the Professional, Scientific & Technical category at 16.5% followed by construction at 14.5%[3].

The most common age group within Wealden is those aged 50-64 years old (22%). Just under a quarter (23%) of the population is traditional retirement age or above (65+).

Three quarters (78%) of Wealden residents own their home; more (44%) own it outright than do through a mortgage (34%).

90% of Wealden residents are happy with where they live, and 76% happy with the way the Council is run – nationally the figures are 79% and 61% respectively.

Financially Stable and Self-sufficient Council:

To avoid cuts to services, the Council continues to explore alternative options of service delivery to ensure that services remain fit for purpose in the context of smaller budgets. This may mean revisiting the expectations of residents in order to protect services for the most vulnerable. It is also an opportunity to work with partners and neighbouring authorities to maintain and improve outcomes against a backdrop of reducing public spending.

A key component of the Council being financially stable and self-sufficient, is the Council’s Commercial Strategy, which provides a framework for activities that:

  • Form an essential part of the solution to the funding gap, which has arisen due to public sector budget cuts, a restructuring of how local authorities are funded and increasing demographic pressures;
  • Potentially lead to the generation of disposable income, to provide additional resource to meet the Council’s ambitions and statutory duties for Wealden as set out in other strategies and plans; and
  • Deliver functions, services and outputs that bring benefits to local people and in doing so helps meet Corporate Plan objectives.

Partners and the Community:

In line with the values from the Corporate Plan to “deliver more by working with partners”, the Council continues to work with those partners, as well as service users and our communities, to protect and deliver services in new ways:

  • Parish and Town Councils – have been proactive in identifying services important to their local communities and working with the District Council and other bodies on local priorities. For example, Mayfield and Five Ashes Parish Council has agreed to commit funding towards a proposed community facility in conjunction with a new doctors’ surgery to be built with funding by Wealden District Council;
  • The voluntary sector – has also been keen to deliver services with 16 organisations operating service level agreements with the Council in 2020-21 with £0.257 million of Council funding;
  • Wealden Strategic Partnership – is a non-statutory, multi-agency body, which matches Wealden District Council boundaries, and brings together the different parts of the public, private, community & voluntary, and special interest sectors to work to help improve the life of the residents of Wealden;
  • Safer Wealden Partnership – brings together a number of agencies from the public, private, education and voluntary sector to improve people’s lives in the area by working together to reduce the levels of crime and anti-social behaviour and to manage the fear of crime;
  • East Sussex Strategic Partnership – brings together different parts of our local community – public services, local businesses, community groups, voluntary sector organisations and local people. The Partnership helps organisations and individuals work together in a co-ordinated way to plan local services, tackle the issues that matter to local people and improve quality of life in East Sussex; and
  • Sussex Weald Homes Limited – An initiative to contribute towards the self-financing objective was the Council setting up Sussex Weald Homes Limited in December 2017, a 100% owned subsidiary to build properties that will be rented or sold to the Council and privately, and acquisition of commercial properties.

Corporate Plan 2019-23 (mid-term update 2021)

The Council’s Corporate Plan sets out our direction and priorities for the next four years, building on our previous Plan 2015-19.

“Shaping Wealden as a District which offers a fulfilling and worthwhile quality of life for our residents, a thriving and prosperous place for businesses where local people and visitors can enjoy the outstanding beauty and heritage of our landscape and environment.
We will continue to chart a course for the District founded on lean, efficient principles, based on sound business management with a considered approach to investment and income generation. In a post- EU Exit, the Council will play its part in achieving strong, self-reliant and vibrant conditions for the wellbeing of our residents, our businesses and our environment.”

The Council’s vision for the future is:

These two significant issues for Wealden have led us to review our Corporate Plan for 2019-23 and update it for the remaining two years. Whilst our vision for the future remains strong and our ambitions to achieve it the same, we think now is the time to reshape our targets, keeping and enhancing the positive changes enforced upon us and building forwards to a carbon neutral future.

Our approach – we will continue for the District to be founded on lean, efficient principles, based on sound business management with a considered approach to investment and income generation.

We are a council centered on community that strives to:

  • Work Together with colleagues and Partners to deliver the best for our communities.
  • Be Excellent in serving our customers.
  • Aspire to be the best we can.
  • Provide first class Leadership for our staff and our Communities.
  • Be a modern, forward thinking Dynamic Council.
  • Be Efficient and effective in all we do.
  • Act with iNtegrity and be trustworthy, open, honest and dependable.

At the mid-point of the Corporate Plan, we are re-focussing our efforts on our 8 most important aims

  • Engaged, resilient, active communities;
  • Access to suitable housing, local jobs, services, facilities, leisure and recreational opportunities;
  • Sustainable economic growth; and
  • Sound business management.

We aim to:

  • Ensure development meets future needs, with associated investment in infrastructure.
  • Ensure that Wealden is Carbon Zero by 2050 at the latest.
  • Improve access to essential services for all our communities.
  • Promote a better quality of life for Wealden people through activities that improve health, resilience and well-being.
  • Generate ongoing sources of income to reinvest in local priorities and optimise funding from external sources.
  • Support our local businesses, tourism sector and entrepreneurs to achieve a locally sustainable economy.
  • Work with partners to regenerate our diverse market towns, creating jobs and attracting investment.
  • Protect and enhance Wealden’s unique natural environment and heritage.

National Priorities

The following sub-sections set out the national priorities, that we have had regard to in producing a costed plan over the period 2022-23 to 2026-27.

Covid-19:

The continuing priority for Central Government is providing businesses and individuals with financial support during the Covid-19 pandemic (and administered by Council’s), and protecting vulnerable people. On 21 December 2021 Her Majesty’s Treasury announced additional measures to support businesses during the current surge of the Omicron Variant of Covid-19. These measures are contained in the Business Rates Information Letter 2021 No. 9, which includes details of the Retail, Hospitality and Leisure Relief scheme for 2022/23, the extension of Transitional Relief and Supporting Small Business Relief for 2022/23, and new arrangements for business rates bills for schools.

The significant levels of public sector debt as a result of Central Government spending to support the economy during the Covid-19 pandemic, as well as lower tax receipts, will need to be repaid and could lead to significant reductions in grant funding over the medium term. However, the successful vaccine rollout has allowed the economy to reopen largely on schedule despite continuing high numbers of coronavirus cases, and the stronger economic recovery has also helped to reduce the fiscal cost of pandemic-related support.

Housing, Infrastructure and Other Services:

The Government’s ambition is to increase the numbers of new homes built to 300,000 per annum by the middle of the 2020s.

In March 2020 the Government announced a wide breadth of measures in the Ministry of Housing, Communities and Local Government (‘’MHCLG’’) briefing paper ‘Planning for the Future’, to provide local authorities with greater funding for infrastructure, ensuring that those who strive to build enough homes for their communities and make the most of brownfield land and urban areas are able to access sufficient resources. These measures included:

  • Investing another £1.1 billion in local infrastructure to unlock almost 70,000 new homes;
  • A new £10 billion Single Housing Infrastructure Fund; and
  • Reforming the New Homes Bonus (‘’NHB’’) to reward delivery

Following the briefing paper, MHCLG (now known as DLUHC) issued a consultation white paper in August 2020, which covered a package of proposals for reform of the planning system in England, covering plan-making, development management, development contributions, and other related policy proposals. The consultation has proposed to replace the Community Infrastructure Levy (‘’CIL’’) and Section 106 planning obligations with a new consolidated Infrastructure Levy, which is charged as a fixed proportion of development value above a set threshold. The Secretary of State for DLUHC in a letter dated 28 October 2021 to all Council Leaders stated; ”I am reviewing planning reforms and an announcement on next steps will be made in due course. The Government is committed to improving the planning system, which we are delivering through a new digital system that provides more certainty and better outcomes for the environment, growth and quality of design. The additional £65m announced is critical to achieving this vision.”

The Spending Review 2021, on 27 October 2021 included announcements on the following policies and programmes that are relevant to local authorities:

  • Investing in growth – through a range of changes to the taxation system and by increasing capital DEL expenditure on research and development from £14.8bn in 2021-22 to £20.0bn in 2024-25; through further investment in infrastructure across road, rail, digital and locally; and by a package of additional measures aimed at boosting skills.
  • Supporting people and businesses – through a range of measures, including reducing the taper on Universal Credit from 63% to 55% and a 6.6% increase to the National Living Wage (NLW), to £9.50 an hour, starting on 1 April 2022. There will be adjustments to business rates, including a temporary relief of £1.7bn across 400,000 retail, hospitality and leisure properties in 2022/23, a freeze on the business rates multiplier for 2022-23 and a new business rates relief for investment in property improvements from 2023.
  • Building back greener – through measures aimed at reducing transport as an emitter of greenhouse gases; extending efforts to reduce greenhouse contributions from buildings; supporting decarbonisation of energy and industry through new technologies and protecting and enhancing the natural environment.
  • Levelling up – with the government publishing a Levelling Up White Paper by the end of the year, setting out in more detail the framework and next steps towards levelling up opportunities and boosting livelihoods across the country. The Spending Review 2021 has also announced the first £1.7 billion of allocations through the Levelling Up Fund.

HRA: On 29 October 2018, the government confirmed that the HRA borrowing cap was abolished with immediate effect. As a result, local authorities with an HRA are no longer constrained by government controls over borrowing for housebuilding and are able to borrow against their expected rental income, in line with the Prudential Code.

Local Government Funding:

The Government’s aim through funding reforms (i.e. localised business rates) is to significantly reduce reliance on central grants (i.e. Revenue Support Grant) and move councils to be self-financing. This has required council’s to focus on more local self-sufficiency through other forms of local income generation, such as:

  • Council Tax rate increases, within prescribed referendum limits;
  • Increases to fees and charges;
  • Widening the scope of fees and charges by introducing charges for services not previously charged for;
  • Increasing trading activities to generate surpluses for reinvestment, including the establishment of trading companies; and
  • Look at ways of commercialising existing services and seeking opportunities to ‘sell’ goods and services externally.

The Spending Review 2021 included the following announcement for local government headline funding:

  • An average real-terms increase of 3% a year in core spending power.

Technology

  • COVID-19 has reaffirmed how crucial modern technology can be to enabling the delivery of local public services. The Government will therefore be making an additional £37.8 million available to help improve and maintain cyber resilience in local authorities.

Housing

  • Investment was announced in affordable housing, with £1.8bn added, with a view to delivering £10bn of investment during the Parliament, and 1m new homes in the SR21 period. Of this, £300m will be distributed to local authorities (and mayoral combined authorities) to support the development of smaller brownfield sites.
  • Adjustments were announced to the regime for Right to Buy receipts. Authorities will now be allowed to spend these over a longer timeframe (increasing to five years from three years), to pay up to 40% of the cost of a new home (up from 30%), and to allow them to be used for shared ownership and First Homes.
  • By 2024/25, an additional £639m will have been committed to rough sleeping. The Rough Sleeping Initiative and Homelessness Prevention Grant will be continued.

Planning

  • £65m to ‘digitise’ the planning system.

Other Funding

  • Funding of £38m was also made available to support authorities with cyber security and £35m to “strengthen local delivery and transparency”, though some of this will be required to set up the new Audit Reporting and Governance Authority (ARGA) as a new system leader for local audit.
  • £560m was announced for youth services, and £850m over the SR period for “cultural and heritage infrastructure”.
  • No statements are made about the Better Care Fund.

 

Fair Funding Review and Business Rates Retention Scheme:

The fair funding review aims to provide updated formulas for assessing councils’ spending needs, and it will change how central grants are distributed between councils. The original intention of Government was for the outcomes of the fair funding review to be implemented alongside the introduction of 75% business rate retention. However, it is still uncertain if and when the funding review and the introduction of 75% business rate retention will happen, especially in the context of the levelling the up agenda, whereby the impact of any reforms need to be seen to be taking account of the principle of levelling up across the different regions of local government.

Fundamental Review of Business Rates:

In the Budget 2020 (11 March 2020), Central Government published the terms of reference for a fundamental review of the business rates system to be carried out by HM Treasury. This review is wide-ranging: it will consider all elements of the current system, as well as exploring the potential strengths and weaknesses of alternative property and online taxes put forward as possible replacements for rates, as recommended by the Treasury Select Committee in its report of 31 October 2019. The review’s final conclusions were published in a report dated October 2021, and were included in the Spending Review 2021 announcements. The report main conclusions were:

  • The government does not intend to abolish business rates, though the review states that the government will launch a consultation on an Online Sales Tax.
  • There will be a further freeze of the business rates multiplier for 2022/23 (following a freeze for 2021-22).
  • An extension of the Retail, Hospitality and Leisure relief through 2022/23 (this time at 50% lower than the 66% currently applicable, with a cash cap of £110,000 – up from the £105,000 cap applicable in 2021-22). The government anticipates that the relief will cost £1.7bn nationally in 2022-23.
  • After the next revaluation in 2023, revaluations will take place every three years. The delay to 2023 of the next revaluation means that there is currently a gap in the Transitional Relief and Supporting Small Business schemes, and so these have been extended for 2022-23. A consultation on the Transitional Relief scheme for the 2023 revaluation will be carried out in 2022.
  • There will also be a new relief introduced from 2023, which will allow businesses to benefit from 100% relief for 12-months from when they make improvements to a hereditament. There will be a consultation on this prior to implementation, and then it will be reviewed after five years. A relief will also be introduced for plant and machinery used in onsite renewable energy generation and storage.

The above could lead to big changes in the design and yield of the tax, which would matter greatly for local government given that it currently contributes around 30% of non-schools revenues. However, all of these measures (additional reliefs, multiplier freeze, and revaluations) have historically been implemented with a view to ensuring a neutral impact on local government finance, with s31 grants provided (or top up/tariff adjustments, in the case of revaluation) to cover the costs involved. There is no reason to believe that this would change for these announcements, but this is risk to the Council’s level of resources.

Covid-19 Pandemic

The impact of Coronavirus (‘’Covid-19’’) pandemic on the Council was first felt towards the end of March 2020, and continues to have an effect in the 2021-22 financial year but to a lesser degree. In 2021-22, the Council’s substantial losses that occurred in 2020-21 across many of its largest streams of income building control fees, commercial rents and licensing fees, have abated. This is mainly due to successful rollout of the vaccine programme and easing of restrictions. However, the Council is still experiencing lower collection rates for council tax and business rates, and although the position has improved since the rollout of the vaccine and ending of lockdown restrictions, the impact could still lead to an increase in the write off arrears or increased debt provision.

On the expenditure front, some of the key areas of additional pressure that continue include accommodation and support for rough sleepers – some of whom may not have required our support previously and support our vulnerable residents. Whilst Central Government has provided funding for these areas it does not cover all the financial pressures.

It is uncertain if these losses will continue over the period of the MTFS (i.e. 2022-23 to 2026-27), in addition to the potential adverse impact on the growth of the council and business rate tax base.

At the end of 2020/21, the Government announced that the sales, fees and charges scheme (which refunds 75% of eligible income loss beyond a 5% threshold) would be extended on a pro-rata basis into the first three months of 2021-22. In addition, Wealden received £0.671 million of unringfenced Covid grant funding. It is currently unclear if this funding the Council will continue into 2022-23.

The Council has sought in recent years to build up the General Fund reserve balance to ensure the Council is financially resilient.

Economic and Fiscal Climate

It is important to note up front that the next few years are particularly uncertain economically and fiscally. There are a number of questions where definitive answers cannot be provided. How high will unemployment rise, how quickly and fully will the economy recover, and what will this mean for councils’ revenues? To what extent will changes in service provision made in an effort to control the Covid-19 pandemic continue, and what will this imply for service delivery costs?

The public sector finances are increasingly coming under pressure, due to the significant increase in government spending to support the economy during the Covid-19 pandemic, as well as lower tax receipts. The Office for Budget Responsibility’s (“OBR’s”) Economic and fiscal outlook, published on 27 October 2021 (alongside the Spending Review 2021) paints a better picture than was original forecast, however challenges do lie ahead with the following forecasts/expectations:

  • The economy is now expected to grow by 6.5% in 2021 (2.4% faster than OBR predicted in March);
  • Unemployment to rise only modestly to 5¼% this winter (1¼% lower than March), which helps the budget deficit to almost halve to £183 billion in 2021-22 (£51 billion lower than March);
  • Inflation peaking at close to 5% next year, and it could hit the highest rate seen in the UK for three decades;
  • Revised up nominal GDP[4][5] – the key driver of tax revenues – by 4.1% in 2025-26 relative to March;
  • While higher inflation also boosts public spending, overall the pre-measures forecast for borrowing is lower by £38 billion a year on average relative to OBR March forecast;
  • Borrowing reached a peacetime record of £320 billion (15.2% of GDP) in 2020-21, but was £35 billion (1.7% of GDP) lower than we estimated in March; and
  • Borrowing falls back below £100 billion next year, declining more slowly thereafter to stabilise at around £44 billion (1.5% of GDP) in the medium term.

The economic and interest forecast[6] by the Council’s Treasury Management Advisors, Arlingclose, highlights the follows:

  • The Bank of England (BoE) increased Bank Rate to 0.25% in December 2021 while maintaining its Quantitative Easing programme at £895 billion. The Monetary Policy Committee (“MPC”) voted 8-1 in favour of raising rates, and unanimously to maintain the asset purchase programme.
  • Within the announcement the MPC noted that the pace of the global recovery was broadly in line with its November Monetary Policy Report. Prior to the emergence of the Omicron coronavirus variant, the Bank also considered the UK economy to be evolving in line with expectations, however the increased uncertainty and risk to activity the new variant presents, the Bank revised down its estimates for Q4 GDP growth to 0.6% from 1.0%. Inflation was projected to be higher than previously forecast, with CPI likely to remain above 5% throughout the winter and peak at 6% in April 2022. The labour market was generally performing better than previously forecast and the BoE now expects the unemployment rate to fall to 4% compared to 4.5% forecast previously, but notes that Omicron could weaken the demand for labour.
  • UK CPI for November 2021 registered 5.1% year on year, up from 4.2% in the previous month. Core inflation, which excludes the more volatile components, rose to 4.0% y/y from 3.4%. The most recent labour market data for the three months to October 2021 showed the unemployment rate fell to 4.2% while the employment rate rose to 75.5%.
  • In October 2021, the headline 3-month average annual growth rate for wages were 4.9% for total pay and 4.3% for regular pay. In real terms, after adjusting for inflation, total pay growth was up 1.7% while regular pay was up 1.0%. The change in pay growth has been affected by a change in composition of employee jobs, where there has been a fall in the number and proportion of lower paid jobs.
  • Gross domestic product (“GDP”) grew by 1.3% in the third calendar quarter of 2021 according to the initial estimate, compared to a gain of 5.5% q/q in the previous quarter, with the annual rate slowing to 6.6% from 23.6%. The Q3 gain was modestly below the consensus forecast of a 1.5% q/q rise. During the quarter activity measures were boosted by sectors that reopened following pandemic restrictions, suggesting that wider spending was flat. Looking ahead, while monthly GDP readings suggest there had been some increase in momentum in the latter part of Q3, Q4 growth is expected to be soft.
  • GDP growth in the euro zone increased by 2.2% in calendar Q3 2021 following a gain of 2.1% in the second quarter and a decline of -0.3% in the first. Headline inflation has been strong, with CPI registering 4.9% year-on-year in November, the fifth successive month of inflation. Core CPI inflation was 2.6% y/y in November, the fourth month of successive increases from July’s 0.7% y/y. At these levels, inflation is above the European Central Bank’s target of ‘below, but close to 2%’, putting some pressure on its long-term stance of holding its main interest rate of 0%.

ONS 2018 mid-year estimate

ONS/Inter Departmental Business Register (IDBR) 2019

[3]  ONS/Inter Departmental Business Register (IDBR) 2019

[4] GDP measures the total value of all of the goods made, and services provided, during a specific period of time

[6]   Source: Economic and Interest Rate Forecast, December 2021, Arlingclose

Spending Plans

This MTFS is central to identifying the Council’s financial capacity to deliver its vision and strategic priorities within the Corporate Plan 2019-23, and requires a balance to be struck between the need to support the delivery of the vision with the need to maintain a sustainable financial position. Striking the correct balance between these two requirements becomes ever more difficult in the challenging financial context in which the Council operates. This is compounded by the continuing impact of Covid-19, and the localised business rates funding which is subject to uncertainty and volatility.

The Council’s Corporate Plan is supported by a programme of work containing a range of projects that will meet each of the four strategic themes. In the absence of any new Government funding and in the context of the continuing impact of Covid-19, general cost pressures, and savings underpinning the MTFS, the resources to finance these projects have been made possible by allowing the redirection of resources to the priority areas as well as seeking external financial support in the form of grants and contributions.

It should be noted that the full financial implications of a number of major projects i.e. Hailsham Aspires, Crowborough Leisure Centre – Teaching Pool, Knights Farm – Sports Park and Knights Farm – Employment Park, have not been reflected in the costed General Fund Revenue Summary and Capital Programme 2022-23 to 2026-27, because these projects are still being developed.  At the point when a full business case has been assessed and finalised to demonstrate that the capital investment is affordable and sustainable, the full revenue and capital implications will be built into future iterations of the MTFS.

Climate Change:

As the Council has declared a Climate Emergency, there will be costs associated with addressing this, where these are known they are built into the MTFS, for example £5 million in the HRA Capital Programme for decarbonisation works. In addition to these costs, it is anticipated that there will be further impact on the MTFS and therefore the Council has set aside earmarked reserves to finance climate change initiatives totalling £5 million (General Fund £1.1 million, and HRA £3.9 million), which demonstrates the Council’s commitment to reducing the impact of climate change.

The UK Environment Bill 2021 received royal assent on 9 November 2021. This Bill covers a wide range of changes including expanding the responsibility for recyclable waste. This could have a significant impact on the Council’s General Fund Revenue and Capital Programme. However, the detail of the Bill and how this affects local authorities is not know at this time to say what this impact would be. Once the detail is known the financial implications will need to be assessed and appropriate funding identified.

Spending Pressures

A review of the financial pressures facing the Council over the period of the MTFS has been undertaken. This information has been drawn from a Star Chamber budget challenge process involving members of the Council’s corporate management team, heads of service and budget holders. This challenge process had regard to the experience of previous years, the current economic climate and local and national issues that are likely to influence the financial outcomes.

Inflation – Pay and Prices:

The General Fund MTFS follows the Spending Review 2021 announcement on public sector pay to increase Officer salaries by 2.5% and increase the hourly rate for staff earning the national living wage to £9.50 per hour rate. 

An allowance has been included for a 2% pay award for staff in 2023-24 to 2026-27, plus an estimate of staff increments.   

Automatic inflationary increases of budgets are not provided for all goods and services, instead individual inflation rates have been applied for specific items of expenditure (i.e. contracts), all remaining areas of expenditure are maintained at the previous year’s levels, which is in effect a real terms reduction in spending power.

Revenue implications of the General Fund Capital Programme:

In section 4. ‘General Fund Capital Programme’, the expenditure for major projects (where known) such as Hailsham Aspires, Crowborough Leisure Centre Teaching Pool and the development phase of Knight’s Farm – Sports Park and Employment Park, and the loan to Sussex Weald Homes Ltd, has been built into general fund capital programme. This has the following implications for the General Fund – revenue.

  • Interest Payable on External Loans

Capital expenditure totalling £12.485 million is anticipated to be funded from borrowing and the interest payable associated with this additional borrowing has been built into the MTFS.

  • Minimum Revenue Provision (“MRP”)

As detailed in the Council’s Capital Strategy, the method of charging MRP[1] will reflect the repayment profile of how the benefits of assets financed by borrowing are consumed over their useful life. MRP however, is only charged once an asset becomes operational, and for the Council’s major projects this is expected to be towards the end of the MTFS period or beyond.

  • Capital Expenditure Charged to Revenue

Increases in the amount of revenue being used to fund the capital programme are partly negated on the General Fund through the contribution from S106, CIL and earmarked reserves i.e. Capital Investment Fund.

Resources

Business Rates:

The MTFS has assumed that Wealden will continue being part of the existing East Sussex Business Rates Pool based on a 50% rate retention, over the period 2022-23 to 2026-27, the agreement to pool is one that is reviewed on an annual basis.

At budget setting 2021-22, business rates for 2022-23 were estimated to be £3.1 million, this has improved significantly since then to an estimated £5.3 million. This increase is due to the anticipated reset of business rates from 2023-24 as opposed to in 2022-23 (delayed from 2020-21).  This delay is consistent with recent announcements by DLUHC and was confirmed in the 2022-23 finance settlement. As part of the reset, the Council will lose any growth it has built up since the last baseline reset in 2013-14. In effect, the Council has benefitted from keeping its growth since 2013, and this reset redistributes the growth. This is a result of how the current redistribution system was designed and implemented in 2013.

The MTFS currently reflects our predicted worst case scenario, as there a number of unknowns that may occur between now and 2023-24 and beyond; including:

  • The reset being delayed further (post 2023-24);
  • The government giving some form of transitional relief to those who lose out and also the impact of the fair funding review;
  • Any impact this may have on the reform of the business rates system; and
  • Whether lower tier service and service grants will continue and at what levels.

The estimates will be reviewed throughout the remainder of this year and through next year ahead of setting the budget for 2023-24.

As part of the measures put in place to help councils during the Covid-19 pandemic the Government announced additional legislation in early November, the Local Authorities (Collection Fund: Surplus and Deficit) (Coronavirus) (England) Regulations 2020, which allows councils to spread the estimated 2021-22 collection fund surplus/deficit equally across the next three years. The business rates estimate within the MTFS takes this into account.

Council Tax: 

The Council’s main income stream is from Council Tax. The Localism Act 2011 introduced a power for residents to approve or veto excessive council tax increases. This means that any local authority setting an excessive increase as set by the Secretary of State would trigger a referendum of all registered electors in their area. The higher of 2% or £5 referendum threshold for 2022-23 was highlighted in the Spending Review 2021 and was confirmed alongside the 2022/23 final finance settlement.

In light of the financial position of the Council and mindful of the potential referendum thresholds the MTFS assumes the following indicative council tax increases and subsequent overall yields:

 

2022-23

2023-24

2024-25

2025-26

2026-26

Band D Council Tax

£202.44

£207.44

£212.44

£217.44

£222.44

Band D Increase (£)

£5.00

£5.00

£5.00

£5.00

£5.00

Band D Increase (%)

2.53%

2.47%

2.41%

2.35%

2.30%

Council Tax Base (Number of Properties) for Tax Setting Purposes

67,187.90

67,587.90

68,087.90

68,587.90

69,087.90

Council Tax Income Estimate – Demand on the Collection Fund

£13.601m

£14.020m

£14.464m

£14.913m

£15.367m

 

The tax base estimate has been calculated in accordance with legislation in December 2021.

Actual council tax increases will be decided on an annual basis taking into account financial circumstances of the Council at the time and the level of resources available. Annual increases remain subject to the decision of both Cabinet and Council.

Revenue Support Grant (“RSG”):

The core grant funding from Government is known as RSG. This MTFS assumes zero RSG in line with government announcements of the intention to remove all core grant.

Central and Specific Grants:

Over recent years the number of grants received by the Council from Government has been very limited. Within the revenue budget we receive a small amount of Rural Services Delivery Grant. As part of the 2022/23 final finance settlement, the Council received an increase in general grants covering New Homes Bonus, Lower Tier Services Grant and Services Grant, which have helped to achieve a balanced MTFS.

However, it is uncertain [and unlikely] this level of funding will be maintained in following years. As set out in the National Priorities section above, there are a number of Government reviews that will change how central grants are distributed between councils i.e. reforming the NHB to reward delivery and the fair funding review which aims to provide updated formulas for assessing councils’ spending needs. When the outcome of these reviews are known the implications for Wealden and the MTFS will be determined.

Within some services there are specific grants such as the Homelessness Grant and Housing Benefit & Council Tax Benefit Administration, which are ring-fenced grants and can only be used for clearly defined purposes.

Fees and Charges:

The fees and charges levied by the Council are an important source of income. The fees and charges levied include planning fees, garden waste collection and building control.

It is normal practice for the Council to review fees and charges annually and propose revised and new charges from 1 April each year. This will include the development of any policies in respect of discounts and concessions. As part of the annual review, all fees and charges are considered.

The fees and charges are approved separately from this MTFS as part of the February round of budget setting for the forth-coming year. Any impact on income budgets arising from these fees and charges are reflected in the income budgets included in this MTFS.

Bridging the gap

Last year’s General Fund MTFS included a savings/additional income target of £0.5 million from 2022-23, which has been fully met (and hence no savings/additional target has been included in this year’s MTFS – see Appendix 1). The Council’s approach to achieving this target has centred on planning ahead, securing savings in advance, re-investing in more efficient ways of working and digital services, and adopting a more commercial approach whilst making careful use of reserves to meet funding gaps, and has sought to protect its core services that matter most.

General Fund Revenue Budget and Forecast

Based on the preceding financial objectives, underlying principles, national and local priorities, savings targets, spending pressures and resources assumptions, Appendix 1 provides a five-year (2022-23 to 2026-27) General Fund revenue estimate for the Council.

As highlighted earlier the full costings (i.e. capital financing implications, and operating costs and income) of the Council’s major projects have not been reflected in the General Fund Revenue Budget and Forecast 2022-23 to 2026-27, because some projects are still being developed i.e. Hailsham Aspires, Crowborough Leisure Centre – Teaching Pool, Knights Farm – Sports Park and Knights Farm – Employment Park. The affordability of these schemes are being assessed in the context of the MTFS and if the business cases are approved, the financial implications will be built into the MTFS.

Risks to the General Fund Revenue Budget and Forecast

The Council has adopted a corporate approach to risk management, and financial risk management is integrated into the Council’s overall management and decision-making processes.

A number of key high-level risks have been identified which could have a positive impact that could yield additional resources, but conversely some risks may have a negative impact and result in a reduction of resources. These key risks are action planned and continually reviewed as the MTFS develops.

The main areas the key risks cover are:

  • Future impact of the Covid-19 pandemic;
  • Fluctuations in the Business Rates tax base;
  • Future changes to the retained Business Rates system;
  • Future levels of Central Government funding;
  • Impact of current economic climate on both demand for services and income streams;
  • Changes to other key external funding sources;
  • Changes to other key assumptions within the MTFS; and
  • Financial and budget management issues.

These risks form part of our financial risk assessment, Officers will continually monitor and appraise these risks as part of the on-going financial management

[1] MRP is statutory requirement for a Council to make a charge to its General Fund to make provision for the repayment of the Council’s capital borrowing

The Council’s approach to determining and funding its investment programmes is set out in the Council’s Capital Strategy, which explains the Council’s financial framework for capital investment in support of its strategic priorities. The General Fund Capital Programme covers all aspects of capital expenditure within the Council, with the exception of the Council’s housing stock, and includes external capital investment that assists in achievement of the Council’s Strategic Priorities.

General Fund Capital Priorities

The Capital Programme is made up of a number of rolling programmes which include repairs, maintenance and improvement programmes to car parks, leisure centres and open spaces, as well as continuing investment in IT and Digital services, and waste containers.

In addition to this, the programme includes a number of major projects that the Council is embarking on:

  • Hailsham Aspires;
  • Mayfield Community and Health Centre;
  • Crowborough Leisure Centre – Teaching Pool;
  • Knights Farm – Sports Park; and
  • Knights Farm – Employment Park.

The total of these major projects total £27.7 million over the period of the MTFS. However, as highlighted earlier the full costings have not been reflected in the Capital Programme 2022-23 to 2026-27, because some of these projects are still being developed i.e. Hailsham Aspires, Knights Farm – Sports Park and Knights Farm – Employment Park. The affordability of these schemes are being assessed in the context of the MTFS and if the business cases are approved, the financial implications will be built into the MTFS.

Indicative allowances have been included within the capital programme to support an additional £3.685 million of borrowing in excess of the allocations within the existing approved programme over the period bringing the total borrowing up to £12.485 million, and this position will be reviewed as the capital programme is developed.

Any capital investment decision will have implications for the revenue budget. The revenue costs over the lifetime of each proposed capital project are considered when the project is being developed to ensure that the impact can be incorporated within the Council’s financial plans and to demonstrate that the capital investment is affordable. Revenue implications may include the costs associated with supporting additional borrowing as well as any changes to the running costs associated with the asset or wider benefits to the Council such as the delivery of on-going revenue budget savings or additional income through the generation of business rates, lease income and council tax.

Resources

The resources necessary to fund the Council’s General Fund Capital Programme are fully identified in Appendix 2, and are summarised below.

Capital receipts:

The Council holds a balance of capital receipts from the disposal of land and buildings. These can only be used to fund capital expenditure unless permission is sought from the Secretary of State to use them for a set of specific revenue purposes such as transformation purposes.

The generation of capital receipts can help to provide resources to support additional capital investment or can help to reduce the borrowing requirement and therefore the cost to the revenue budget. Capital receipts totalling £3.797 million have been included as funding over the period of the capital programme. This will leave a balance of unused capital receipts of £0.625 million (this balance assumes no additional sales of general fund assets. If additional capital receipts are generated over and above this balance, this would provide the Council with the flexibility to consider the introduction of additional projects to the capital programme or the ability to reduce the current estimated borrowing requirement built into the capital programme.

Grants and Contributions:

The Council continues to explore external funding possibilities when developing capital projects to minimise the borrowing requirement as far as possible. Within the MTFS, assumptions have been made around the level of external funding in the future but detailed work programmes will not be committed to until the allocations have been confirmed. Projects and investment plans may therefore be re-prioritised depending on the availability of external funding.

In the capital programme we are anticipating (or have already) to secure external contributions to support a number of project (i.e. Mayfield Community and Health Centre), details of which can be seen in Appendix 2.

Grants incorporated in the capital programme include the Disabled Facilities Grant (“DFG”) (£5 million). The continuation of the DFG and the amount has not yet been confirmed, and there is a risk that this funding will reduce, however, even without this grant we have a legal obligation to deliver a number of adaptations to some of our residents and would therefore have to look at other sources of funding to support this.

A number of capital schemes are being funded by CIL (£9 million in total) i.e. Knights Farm – Sports Park and Crowborough Leisure Centre – Teaching Pool.

Council Resources:

The Council uses revenue (referred to as ‘Capital Expenditure Charged to Revenue’) to fund some projects in the capital programme. However, the impact of this is partly negated on the General Fund through a contribution from earmarked reserves i.e. Capital Investment Fund, and income i.e. CIL and S106.

Borrowing:

The basic principle of the Prudential System is that local authorities are free to borrow so long as their capital spending plans are affordable, prudent and sustainable. The Council will need to meet the whole of the capital financing costs associated with any level of extra borrowing through its revenue account. These financing costs cover MRP and interest. The use of prudential borrowing will be as a funding mechanism for some key projects i.e. Hailsham Aspires (following a full financial assessment), and may be used as a short-term measure to fund capital expenditure prior to a capital receipt being received i.e. for the loans to Sussex Weald Homes. The MTFS includes a prudential borrowing requirement of £12.485 million over the period 2022-23 to 2026-27.

PWLB loans are no longer available to local authorities planning to buy investment assets primarily for yield. The Council intends to avoid this activity in order to retain its access to PWLB loans.

On 20 December 2021 CIPFA published its revised Prudential Code for Capital Finance and Treasury Management in the Public Services: Code of Practice. In line with the permitted ‘soft implementation’ the Council will be implementing the revised reporting requirements from 2023/24. The key changes in the two codes are around permitted reasons to borrow, knowledge and skills, and the management of non-treasury investments. There are also various tweaks to the capital prudential indicators. In practice the impact on Wealden will be minimal and is confined to additional reporting requirements as opposed to the Council having to change its existing investment and borrowing practices.

The Council’s General Fund Capital Programme does not include capital expenditure to buy or construct capital assets primarily for income, nor does the Council have commercial investments which it would need to use instead of borrowing.

Further details about the Council’s borrowing requirements (and impact of the changes to the Prudential Code) and the Prudential Indicators can be found in the Council’s Capital Strategy and Treasury Management Strategy.

General Fund Capital Programme

The capital spending plans for the next five years include the delivery of key capital schemes identified to support the delivery of the Council’s Corporate Plan. Appendix 2 provides a five-year (2022-23 to 2026-27) General Fund Capital Programme for the Council.

Risks to the General Fund Capital Programme

The Council has adopted a corporate approach to risk management and financial risk management is integrated into the Council’s overall management and decision-making processes.

A number of key high-level risks have been identified which could have a positive impact but conversely some risks may have a negative impact and result in a reduction of resources. These key risks are action planned and continually reviewed as the MTFS develops. The main areas they cover are:

  • Achievement of capital receipts/other capital funding target of £1 million of the period of the MTFS;
  • Loss of anticipated external resources;
  • Increased project costs; and
  • Unplanned emergency maintenance to Council’s corporate properties.

The Housing Revenue Account (‘’HRA’’) shows all expenditure and income relating to the Council’s responsibilities as landlord of dwellings and associated property. It is a ‘ring-fenced’ account within the Council’s General Fund.

Housing Revenue Account Business Planning

HRA Self-financing was implemented from 1 April 2012 following a one-off settlement to the Treasury, in order to ‘buy out’ of the old subsidy system. The new system incentivised landlords to manage their assets well and yield efficiency savings. It was anticipated that there would be greater certainty about future income as councils were no longer subject to annual funding decisions by Central Government, enabling them to develop long-term plans, and to retain income for reinvestment. Council landlords were to have greater flexibility to manage their stock in the way that best suits local need with more opportunity for tenants to have a real say in setting priorities looking to the longer term.

Self-financing, however, also significantly increased risks from Central Government to local authorities, meaning that the Council:

  • Now bears the responsibility for the long term security and viability of council housing in Wealden;
  • Has to fund all activity related to council housing, from the income generated from rents, through to long term business planning;
  • Is more exposed to changes in interest rates, high inflation and the financial impact of falling stock numbers;
  • Needs to factor in the impact of changes in government policy e.g. the impacts of the welfare reform on income recovery, and rent setting; and

This places a greater emphasis on the need for long-term planning for the management, maintenance and investment in the housing service and housing stock.

The HRA Business Plan

A key element of the self-financing regime is for the Council to construct a 30-year Business Plan for the HRA. The HRA Business plan is a key contributor to the Council’s overall aims and the Council’s Housing Strategy.  The Council has also fully embraced the Government priority of “fixing our broken housing market” by delivering new build Council Housing to contribute to diversification of the local housing market.

The Council’s Housing Revenue Account Business Plan 2021-2051, approved by Cabinet in October 2021, had been updated to reflect national and housing policy, legislation and best practice.

Major changes to the Business Plan since the previous plan, included the need for further improvements to the energy efficiency of our homes to reduce carbon emissions, additional fire safety measures in anticipation of changes to the Building Regulations and ongoing investment in building new homes. The Business Plan reflects the impact of Government policy changes and financial assumptions at the time. The Business plan sets out:

  • The long term plans for the Council’s housing stock, including the decarbonisation of our homes;
  • The finances to deliver plans;
  • How the Council will manage the income from its stock, demand for housing and stock condition; and
  • Identifies resources for building new council dwellings.

The current Business Plan is reflected in this MTFS for the period 2022-23 to 2026-27, and been framed in the light of:

  • Government Policy on rents for Social Housing increasing rents from 2022-23 by CPI plus 1% for three years thereafter CPI only;
  • One for one replacement of Right to Buy sales and continuation of the Council’s New Build programme;
  • Appropriate capital investment in maintaining the quality of the housing stock through planned maintenance and replacement works; and
  • Servicing and repaying debt so that new borrowing is available for future maintenance works or investment in further new build schemes.

The Business Plan is a living document which sets out our short, medium and long-term strategies for the management, maintenance, improvement and addition to the Council’s housing stock. It is continually reviewed on a regular basis to ensure that the priorities reflect local need and political aspirations, to ensure the investment proposals remain fundable and the assumptions on which the plan are based remain correct and that the HRA remains a sustainable and viable entity over the 30-year period. The 30 year Business Plan will next be updated in three years’ time.

Spending Plans

Spending plans included within the HRA support the delivery of the Council’s strategic priorities within the Corporate Plan and Housing Strategy. The revenue expenditure has been forecast to manage and maintain the Council’s housing stock.

Spending Pressures

A high level review of the financial pressures facing the Council over the period of the MTFS has been undertaken. This information has been drawn from experience in previous years, the advice of Corporate Directors, Heads of Service and Budget holders. This process had regard to the experience of previous years, the current economic climate and local and national issues that are likely to influence the financial outcomes.

Inflation – Pay and Prices:

The General Fund MTFS follows the Spending Review 2021 announcement on public sector pay to increase Officer salaries by 2.5% and increase the hourly rate for staff earning the national living wage to £9.50 per hour rate. 

Thereafter an allowance has been included for a 2% pay award for staff in 2023-24 to 2026-27, plus an estimate of staff increments.  The pay award 2022-23 is subject to being agreed and the HRA MTFS will be updated following the decision if required. 

Automatic inflationary increases of budgets are not provided for all goods and services, instead individual inflation rates have been applied for specific items of expenditure (i.e. contracts), all remaining areas of expenditure are maintained at the previous year’s levels, which is in effect a real terms reduction in spending power

Repairs and Maintenance:

The level of expenditure for revenue repairs proposed for 2022/23 is £3.124 million.  This covers costs such as responsive repairs, cyclical works, void repairs and redecoration.

Revenue implications of the HRA Capital Programme:

  • Depreciation – must be charged to the HRA in accordance with proper accounting practices, it reflects the decline in the value of the HRA council’s stock over time due to wear and tear. The calculation is based on the social housing valuation of the councils stock. The Councils stock is revalued each year and the depreciation value will fluctuate depending on the annual valuations of the Council’s housing stock. Depreciation is transferred to a major repairs reserve to fund the HRA capital programme. This amounts to £4.110 million for 2022-23 and increases in future years to reflect the increases in housing stock from new builds and inflation.
  • Interest Payableis associated with additional borrowing for capital expenditure on the Housing investment programme, including interest payable on the balance of £44.3 million for the self- financing transaction from 2011-12.
  • Provision for Loan Repaymentsplanned loan repayments have been updated in the MTFS which is key to self-financing and creating opportunities for new borrowing for investment in new builds and major repairs.
  • Capital Expenditure Charged to Revenuethe amount of revenue that is being used to fund the capital programme between 2022-23 to 2024-25 includes £4.36 million funding for the development of the former Streatfield House site into 20 new homes, which is mainly being funded out of general HRA revenue reserves. Revenue funding is also used to support the planned maintenance programme over the MTFS period.

Debt write off and impairment:

Income collection became more challenging due to the impact of the Covid-19 pandemic, and although the position has improved since the rollout of the vaccine and ending of lockdown restrictions, the impact could still lead to an increase in the write off arrears or increased debt provision.

Similarly, the transition to universal credit means that some rents that would have been received automatically are now recoverable from the tenant. Where tenants suffer a financial impact from the current economic climate arrears are likely to increase, with a potential for further write offs/debt provision, which represents a cost to the council. Therefore the budget provision for debt write offs and impairment has been increased to £0.180 million.

Resources

Rents and Service Charges:

This is the third year since 1 April 2016 that the Council has been permitted to increase rents. For four years the Government imposed mandatory rent cuts of 1% per annum as part of welfare reform reducing income over that period. The Government introduced the new social rent policy that was effective from 2020-21 for a five year period, enabling councils to increase rents by CPI + 1% per annum, which restores some medium term certainty about income levels.

In line with Government Policy on rents for social housing, rents will be increasing by 4.1% (CPI at September 2021 = 3.1% + 1%) in 2022-23. The average rents are shown in the table below:

 

 

Rent per week

(52 week basis)

2021-22

2022-23

General Needs – Social Rent

£89.10

£92.75

Retirement Living – Social Rent

£76.35

£79.48

General Needs – Affordable Rent

£146.12

£152.11

Retirement Living – Affordable Rent

£104.78

£109.08

 

When properties become vacant, they will continue to be re-let at Formula Rent, in line with the social rent policy. 

The additional income generated by the rent increase of 4.1%, if agreed, will be utilised on a number of HRA items including; maintenance of the stock, supervision and management resources, paying for the cost of investment and running costs where appropriate for the stock.

The MTFS assumes rent increases in line with social rent policy of CPI + 1% per annum up to 2024-25 and thereafter increases are assumed at CPI. The dwellings rent budget also allows for increased rental income from new build properties and reductions in rental income from RTB sales and voids.

Service Charges:

  • Tenantsin addition to the rent some tenants may also pay service charges. Rents are generally taken to include all charges associated with the occupation of the property, such as maintenance and general housing management services. Service charges reflect additional services which may not be provided to every tenant, or which may be connected with communal facilities. These service charges are reviewed annually and calculated on a per property basis to recover the actual cost of the service. Tenants will be notified in writing of any changes in their rent and service charges for the coming year April to March. The rent notification letter will set out a schedule of services that will be provided and how much we will charge for them. We will only increase service charges within the legal requirement that they will not exceed the cost of the services and will always be reasonable
  • Leaseholders (Retirement Living, Shared Ownership and Right-to-Buy) service charges to leaseholder are charged in accordance with their lease. Service charges are calculated to recover the costs of providing communal services, such as cleaning, repairs, grounds maintenance and electricity. Not all leaseholders receive additional services and the amount that is charged will depend on the type of property a leaseholder lives in, and what services are provided.

Shared ownership Retirement Living leaseholders will be notified in writing how much service charges they will have to pay for the year, April to March. The notification will also tell them of any changes in their rent, where payable, for the coming year.

Right-to-Buy leaseholders are usually notified in April with an annual estimated charge and again within six months of the year end with the Final account figures.

Interest Receivable:

Interest is received on HRA cash balances during the year. This is reducing partly due to lower interest rates forecast and reducing general reserve balances.

Other Income:

Other Income includes income received from feed in tariffs on solar panels on council dwellings of approximately £0.075 million per annum.

Housing Revenue Account Budget and Forecast

Appendix 3 provides a summary HRA revenue budget and forecast for the period 2022-23 to 2026-27.

Risks to the HRA Budget and Forecast

The Council has adopted a corporate approach to risk management, and financial risk management is integrated into the Council’s overall management and decision-making processes.

A number of key high-level risks have been identified which could have a positive impact that could yield additional resources, but conversely some risks may have a negative impact and result in a reduction of resources. These key risks are action planned and continually reviewed as the MTFS develops. The main areas they cover are:  

  • Future impact of the Covid-19 pandemic;
  • Risk of government announcements limiting the flexibilities and freedoms offered by the HRA Self -Financing regime;
  • Government changes to legislations such as the Decent Homes review, Building Safety regulations and uncertainty of rent policy after four-years (i.e. from 2025-26);
  • Economic shocks such as shortage of labour, building costs;
  • Changes to key assumptions within the MTFS e.g.inflation, interest rates etc;
  • Efficient delivery of housing repairs;
  • Impact on the rental income estimates included in the MTFS from any delays in the delivery of the New Build Programme;
  • Ability to release further revenue resources for investment and improvements;
  • The impacts of the Welfare Reform Act; and
  • Financial and budget management issues.

HRA Capital Priorities

The Housing Revenue Account Capital Programme covers all aspects of capital expenditure relating to the Council’s landlord function. The Council’s approach to determining and funding its investment programmes is set out in the Council’s Capital Strategy, which explains the Council’s financial framework for capital investment in support of its strategic priorities. The Capital Strategy for the Housing Revenue Account capital programme reflects the self-financing housing regime.

The five-year Housing Revenue Account Capital Programme has been drawn up to ensure that the Council meets its legal obligations as a landlord. The Council has already invested significant resources over recent years to achieve the Decent Homes Standard.

The five-year housing programme comprises the following main areas of work:

  • Maintenance of the Decent Homes;
  • Health & Safety Requirements – covers the work to meet statutory requirements, and includes fire safety, communal lighting and asbestos removal;
  • Decarbonisation works;
  • New Build and acquisition programme to deliver approximately 166 new council dwellings within the HRA.
  • ICT investment for a new Housing Management system to be procured over the next few years and for the installation of Wi-Fi in retirement living communal areas.

Investment in our existing stock has been increased to reflect the stock condition survey requirements and deliverability of these requirements through our contractors. The cost implications of the government’s Decent Homes Standard review are not yet known and are therefore not included in the current HRA investment plan. A review of the programmed works will be required once the new standard is announced.

Wealden has the ambition to become carbon neutral by 2050. This will require changes in the way that we manage our existing stock, cost and policy implications and our plans for investing in new council homes. The investment programme now includes £1 million per annum from 2022/23 for decarbonisation works. This is based an approximate benchmark cost of £20,000 per property. This will only go half way to meeting the 2050 target. The level of external funding potentially available is currently unknown and the cost of new technology may also reduce as new solutions become mainstream. An amount of £3.9 million is included in HRA earmarked reserves balances for future use towards the decarbonisation programme. This area of the capital programme will need to be reviewed and updated once we have a clear development plan.

Resources

The resources necessary to fund the Council’s HRA Capital Programme are fully identified in Appendix 4.

Major Repairs Reserve:

The Major Repairs Reserve (‘’MRR’’) is the main source of capital funding and the mechanism by which timing differences between resources becoming available and being applied are managed. The MRR may be used to fund capital expenditure and to repay existing debt. Depreciation is a real charge on the HRA and is paid into the MRR from the Housing Revenue Account (see Appendix 3) to fund capital expenditure. The total support to the capital programme over the five-year MTFS period 2022-23 to 2026-27 through depreciation is £24.88 million.

Capital Receipts:

Housing capital receipts fall within the Governments pooling regime. Under these arrangements capital receipts from Right-to-Buy (‘’RTB’’) sales are pooled until a pre-set limit for government share of the income generated has been achieved. Non-RTB sales primarily are excluded from the pooling arrangement and are now retained in full by the Council for use as the Council sees fit.

Once the target for the government share of the RTB receipts has been reached, the Council may retain 100% of the receipts from any additional RTB sales. These are subject to a formal retention agreement between the Council and the DLUHC. Following the announcement in the Spending Review 2021, the Council will now be allowed to spend these over a longer timeframe (increasing to five years from three years), to pay up to 40% of the cost of a new home (up from 30%), and to allow them to be used for shared ownership and First Homes

New Build Shared ownership sales receipts are used towards funding the New Build shared ownership housing.

The New Build programme is primarily funded by retained RTB receipts, shared ownership receipts and borrowing. 

The proceeds of dwelling sales under the RTB scheme provide a regular source of capital receipts with the number of sales increasing in recent years. The MTFS assumes 12 sales per year from 2022-23 to 2026-27. However, this is a difficult area to predict accurately as it is affected by external factors, such as interest rates, property prices and Government initiatives aimed at further stimulating RTB sales.

Council Resources:

The MTFS 2022-23 to 2026-27 includes £7.520 million of direct revenue contributions over the five year period. This includes funding of £4.4 million for the development of the former Streatfield House site into 20 new homes, which is being funded out of general HRA revenue reserves and borrowing. Revenue funding is also used to support the planned maintenance programme over the MTFS period.

Borrowing:

The Prudential Code allows the Council to take borrowing if it can demonstrate that such borrowing is affordable, sustainable and prudent in its Prudential Indicators (detailed in the Capital Strategy and Treasury Management Strategy). In October 2018, the government announced the removal of the HRA borrowing cap and issued local authorities determinations to confirm that the removal of the cap was to take immediate effect. Prior to the lifting of the debt cap, Wealden had reached its maximum borrowing it could undertake without eating into the margins of safety (the debt limit imposed was £71.679 million). The Council has now set its own prudential limit for the HRA of £95 million. As with all borrowing decisions, the council will still need to take into account the affordability of borrowing against available revenue streams.

The removal of the debt cap and high value council housing levy gives local housing authorities more certainty for future HRA Business Planning. In light of this, the Council previously agreed the use of HRA balances to fund the HRA Capital New build investment programme. The HRA balances minimum recommended level is 5% of the budget, which is in the region of £0.9 million. The use of the HRA general balances over the MTFS period reduces the balances to £1.3 million, which is still above the recommended level.

The graph below shows the position of the budget proposals for borrowing for the HRA Capital Programme against the prudential borrowing limit of £95 million.

CFR = HRA Capital Financing Requirement, measures the HRA underlying need to borrow to finance the capital programme

Following the implementation of HRA self-financing on 1 April 2012 the Council has £44.3 million[i] of external debt relating to housing stock, which is being repaid over 30-years. In addition to this, the Council has undertaken further internal borrowing of £27.9 million as at 2021-22. The provision to repay debt over the MTFS period is £10.6 million with further borrowing of £27.4 million to fund the HRA Capital Programme. This leaves borrowing headroom of £5.9 million.

HRA Capital Programme

Based on the spending requirements and resource assumptions, Appendix 4 provides a summary HRA capital programme, 2022-23 to 2026-27.

The revenue implications of all capital schemes, have been taken account of and included within the HRA budget (see Appendix 3).

Risks to the HRA Capital Programme

The Council has adopted a corporate approach to risk management and financial risk management is integrated into the Council’s overall management and decision-making processes.

A number of key high-level risks have been identified which could have a positive impact but conversely some risks may have a negative impact and result in a reduction of resources. These key risks are action planned and continually reviewed as the MTFS develops. The main areas they cover are:

  • Generation of sufficient revenue surpluses to resource required investment;
  • Achievement of capital receipts (including Right to Buy sales) targets;
  • Future building costs; and
  • Interest rate increases impacting on future borrowing costs.

[1] External debt of £44.3 million is net of a repayment of £2.282 million due 28 March 2022.

The minimum prudent levels of reserves and balances that the Council should maintain are a matter of judgement. It is the Council’s safety net for unforeseen circumstances and must last the lifetime of the Council unless contributions are made from future years’ revenue budgets. CIPFA guidance does not set a statutory minimum level but it is up to local authorities themselves, taking into account all the relevant local circumstances, to make a professional judgement on what the appropriate level of reserves and balances should be.

Some reserves and balances are essential for the prudent management of the Council’s financial affairs. These will provide a working balance to cushion the impact of uneven cash flow, a contingency for the impact of unexpected events or emergencies and allow the creation of earmarked reserves to meet known liabilities. The consequences of not keeping a minimum level of reserves can be serious and is therefore one of the considerations taken into account when setting the MTFS.

The Council has a very proactive approach to managing risk and there are effective arrangements for financial control already in place. However, as a result of the changes to the core system of local government funding introduced in April 2013, which saw a move from an absolute funding level to one which is very sensitive to changes in the level of local business rates, the level of volatility and risk to the Council significantly increased. Given this uncertainty of funding that this poses to the Council’s financial position, the prudent minimum level of general reserves is now held at a level greater than previously.

The financial risks identified throughout this document, and an assessment of the estimated exposure, likelihood and possible mitigation of these has been made in the context of the Council’s overall approach to risk management and internal financial controls. This information has been used to determine the optimum level of reserve holdings needed to meet the requirements of a working balance and contingency. The conclusion of this risk assessment is that it is deemed prudent that General Fund reserves are maintained at around £2 million – £3 million, and that Housing Revenue Account reserves are maintained at around £0.9 million – £1 million, over the period of the MTFS.

Having regard to these prudent levels, General Fund reserves were at a level at the end of 2020-21 whereby £3 million was transferred to an earmarked reserve to support the Council’s capital projects. 

The general reserves at the end of each year for 2022-23 to 2026-27 are summarised in the table below:

 

2022-23

£(000)

2023-24

£(000)

2024-25

£000

2025-26

£(000)

2026-27

£(000)

General Fund (see Appendix 1)

4,431

4,222

4,116

3,887

3,133

HRA (see Appendix 3)

2,825

1,294

1,153

1,119

1,254

 

The overall levels of General Fund and Housing Revenue Account balances are in line with the prudently assessed minimum level of balances, and are believed to be sufficient to meet all of the Council’s obligations over the duration of the MTFS and have been based on a detailed risk assessment.

 

General Fund Summary

2022-23

2023-24

2024-25

2025-26

2026-27

Estimate

Estimate

Estimate

Estimate

Estimate

£(000)

£(000)

£(000)

£(000)

£(000)

Members

380

386

393

399

406

Chief Executive’s Directorate

5,531

5,535

5,554

5,574

5,591

District Council Elections

0

300

0

0

0

Customer & Community Services

9,232

9,801

9,751

9,930

10,122

Planning, Policy & Environmental Services

3,958

3,908

3,923

3,928

3,963

Central Costs

496

496

496

496

496

Total Cost of Services

19,597

20,426

20,117

20,327

20,578

Provision for future pay awards & increments

0

455

866

1,233

1,607

Drainage Levies

87

90

92

95

98

Interest from Investments/ Dividend from SWH

(1,240)

(1,190)

(980)

(950)

(910)

Interest payable on external loans

220

200

180

160

150

Charges to the Housing Revenue Account:

 

 

 

 

 

Support Services

(1,147)

(1,170)

(1,205)

(1,239)

(1,274)

Minimum Revenue Provision

305

199

206

233

353

Capital Expenditure Charged to Revenue

3,663

15,200

1,025

494

553

Net Cost of Services

21,485

34,210

20,301

20,353

21,155

 

 

 

 

 

 

Business Rates/Revenue Support Grant

 

 

 

 

 

East Sussex Business Rates Pool

(5,300)

(3,100)

(3,300)

(3,300)

(3,300)

General Grants

 

 

 

 

 

Rural Services Delivery Grant/ New Homes Bonus Grant/ Lower Tier Services Grant/CIL

(2,798)

(8,617)

(1,617)

(617)

(617)

Other Financing

 

 

 

 

 

Collection Fund (Surplus)/Deficit

0

0

0

0

0

Contributions to/(from) Earmarked Reserves

134

(8,264)

(814)

(1,294)

(1,117)

Contributions to/(from) General Fund Balance

80

(209)

(106)

(229)

(754)

Council Tax Requirement

13,601

14,020

14,464

14,913

15,367

 

 

 

 

 

 

Funded By:

 

 

 

 

 

Council Tax Demand on the Collection Fund

(13,601)

(14,020)

(14,464)

(14,913)

(15,367)

 

 

 

 

 

 

Council Tax Base

 

 

 

 

 

Tax Base for Tax Setting Purposes

67,187.90

67,587.90

68,087.90

68,587.90

69,087.90

 

Note: The figures in the ‘cost of services’ section above are net figures, these therefore include income we receive from planning fees, crematorium, vicarage field etc.

Appendix 1 General Fund Revenue Summary (cont’d)

 

Council Tax

2022-23

2023-24

2024-25

2025-26

2026-27

Estimate

Estimate

Estimate

Estimate

Estimate

Band D Council Tax – previous year

197.44

202.44

207.44

212.44

217.44

Increase in Band D

5.00

5.00

5.00

5.00

5.00

% increase

2.53%

2.47%

2.41%

2.35%

2.30%

Band D Council Tax

202.44

207.44

212.44

217.44

222.44

Council Tax Income Estimate

13,601,518

14,020,434

14,464,593

14,913,753

15,367,912

 

General Fund Balance

2022-23

2023-24

2024-25

2025-26

2026-27

 Estimate

 Estimate

 Estimate

 Estimate

Estimate

£(000)

£(000)

£(000)

£(000)

£(000)

Opening Balance

4,351

4,431

4,222

4,116

3,887

Movement in Year

80

(209)

(106)

(229)

(754)

Closing Balance

4,431

4,222

4,116

3,887

3,133

 

Earmarked Reserves Balance

2022-23

2023-24

2024-25

2025-26

2026-27

Estimate

Estimate

Estimate

Estimate

Estimate

£(000)

£(000)

£(000)

£(000)

£(000)

Opening Balance

27,598

27,732

19,468

18,654

17,360

Movement in Year

134

(8,264)

(814)

(1,294)

(1,117)

Closing Balance

27,732

19,468

18,654

17,360

16,243

 


General Fund Capital Programme

2022/23 Forecast

2023/24 Forecast

2024/25 Forecast

2025/26 Forecast

2026/27 Forecast

£(000)

£(000)

£(000)

£(000)

£(000)

Housing

     

Disabled Facilities Grants

1,000

1,000

1,000

1,000

1,000

Housing Renewal Grants

10

10

10

10

10

Total Housing

1,010

1,010

1,010

1,010

1,010

Land and Buildings

     

Hailsham Aspires

4,340

3,354

55

56

57

Mayfield Community and Health Centre

1,093

3,038

0

0

0

Knights Farm – Sports Park

0

6,057

2,058

0

0

Knights Farm – Employment Park

0

5,057

58

59

61

Leisure Centres – Crowborough Teaching Pool

48

2,319

0

0

0

Leisure Centres

25

25

25

25

25

Vicarage Lane Office & Civic Community Hall

10

10

10

10

10

Jack Cade memorial

0

15

0

0

0

Birling Gap Steps

0

0

150

0

0

Car Parks & unadopted roads

155

65

60

50

50

SANGS Crowborough

11

10

10

10

10

SANGS Uckfield

25

15

15

15

15

Cuckoo Trail

25

25

25

25

25

Public Conveniences

95

35

0

0

0

Investment Property

10

0

0

0

0

Total Land and Buildings

5,837

20,025

2,466

250

253

Vehicles and Equipment

     

ICT Investment Programme

100

550

100

100

100

IT Visualisation Environment

150

0

0

0

0

Refuse & Recycling Containers

200

200

200

200

200

Total Vehicles and Equipment

450

750

300

300

300

Other Capital Expenditure

     

Investment in Sussex Weald Homes Ltd

6,535

0

2,150

0

0

Total Other Capital Expenditure

6,535

0

2,150

0

0

 

     

Total General Fund Capital Programme

13,832

21,785

5,926

1,560

1,563

      

FUNDED BY:

     

Borrowing

(8,035)

(1,300)

(3,150)

0

0

Capital Receipts

(544)

(2,531)

(666)

(56)

0

Government Grants – Better Care Fund DFG

(1,000)

(1,000)

(1,000)

(1,000)

(1,000)

Home Improvement Loans Repayments

(10)

(10)

(10)

(10)

(10)

Capital Expenditure Charged to Revenue

(3,663)

(15,200)

(1,025)

(494)

(553)

Contribution from Mayfield Parish Council

(580)

(1,744)

0

0

0

Contribution from National Trust

0

0

(75)

0

0

Total GF Capital Programme Funding

(13,832)

(21,785)

(5,926)

(1,560)

(1,563)

 

Housing Revenue Account

2022-23

2023-24

2024-25

2025-26

2026-27

Estimate

Estimate

Estimate

Estimate

Estimate

£(000)

£(000)

£(000)

£(000)

£(000)

Dwelling Rents

(14,555)

(15,354)

(16,311)

(17,223)

(17,282)

Non-Dwelling Rents

(167)

(170)

(174)

(177)

(181)

Charges for Services & Facilities

(1,278)

(1,304)

(1,330)

(1,356)

(1,383)

Interest Income

(60)

(50)

(50)

(50)

(50)

Contribution to amenities shared by the community

(70)

(70)

(70)

(70)

(70)

Other Income

(95)

(95)

(95)

(95)

(95)

Total Income

(16,225)

(17,043)

(18,030)

(18,972)

(19,061)

 

 

 

 

 

 

Supervision & Management

2,538

2,543

2,553

2,563

2,571

Repairs & Maintenance

3,124

3,177

3,231

3,287

3,343

Retirement Living Courts

1,184

1,178

1,189

1,197

1,207

Rents, Rates, Taxes & Other Charges

163

163

163

164

164

Depreciation

4,110

4,650

5,000

5,360

5,760

Debt Management Expenses

57

52

52

52

52

Loan Interest

1,901

2,168

2,368

2,438

2,471

Provision for loan repayments

2,282

1,800

2,100

2,100

2,282

Capital Expenditure Charged to Revenue

2,360

2,360

1,000

1,300

500

Write Offs and Debt Impairment Charges

180

180

180

180

180

Sub Total

17,899

18,271

17,837

18,641

18,531

Provision for future pay awards

 

28

57

87

117

HRA Contribution to Corporate Costs

          253

          251

          252

          252

          254

Contributions to/(from) Earmarked Reserves

25

25

25

25

25

Total Expenditure

18,177

18,575

18,171

19,005

18,927

 

 

 

 

 

 

(Surplus)/Deficit for the year

1,953

1,532

141

33

(134)

 

    

 

 

Housing Revenue Account Balance

 

2022-23

2023-24

2024-25

2025-26

2026-27

Estimate

Estimate

Estimate

Estimate

Estimate

£(000)

£(000)

£(000)

£(000)

£(000)

Opening Balance

4,778

2,825

1,294

1,153

1,119

Movement in Year

(1,953)

(1,532)

(141)

(33)

134

Closing Balance

2,825

1,294

1,153

1,119

1,254

 

Earmarked Reserves Balance

2022-23

2023-24

2024-25

2025-26

2026-27

Estimate

Estimate

Estimate

Estimate

Estimate

£(000)

£(000)

£(000)

£(000)

£(000)

Opening Balance

4,379

4,404

4,429

4,454

4,479

Movement in Year

25

25

25

25

25

Closing Balance

4,404

4,429

4,454

4,479

4,504

 

Housing Revenue Account Capital Programme

2022-23

2023-24

2024-25

2025-26

2026-27

Estimate

Estimate

Estimate

Estimate

Estimate

£(000)

£(000)

£(000)

£(000)

£(000)

 

 

 

 

 

 

New Build Programme

11,005

17,831

4,863

3,300

3,300

Planned Maintenance

5,430

5,380

5,380

5,380

5,380

Decarbonisation Programme

1,000

1,000

1,000

1,000

1,000

IT Investment

35

235

0

0

0

Shared Ownership Repurchases

500

500

500

500

500

Total HRA Capital Programme

17,970

24,946

11,743

10,180

10,180

 

 

 

 

 

 

FUNDED BY:

 

 

 

 

 

Loan

(7,660)

(11,395)

(4,437)

(1,760)

(2,160)

1-4-1 Right to Buy Receipts

(3,130)

(4,257)

(716)

(1,320)

(1,320)

Other Capital Receipts

(710)

(2,284)

(590)

(440)

(440)

Major Repairs Reserve

(4,110)

(4,650)

(5,000)

(5,360)

(5,760)

Capital Expenditure Charged to Revenue

(2,360)

(2,360)

(1,000)

(1,300)

(500)

Total HRA Capital Programme Funding

(17,970)

(24,946)

(11,743)

(10,180)

(10,180)

2021-22 to 2025-26

Welcome to this latest version of Wealden’s General Fund Medium Term Financial Strategy covering the period 2021-2026.

Wealden District Council (“The Council”, “Wealden”, “we”, “our”) is operating in an environment of greater uncertainties than any other year as a result of the Covid-19 crisis. As a result financial planning is becoming increasingly complex, requiring multiple variables to be balanced in an environment of increasing uncertainty. Having a thorough understanding of the financial outlook and the associated impact on the organisation’s ability to achieve its strategic objectives is an essential starting position for future planning and ensuring sustainability. Resources are becoming scarcer, which coupled with increasing pressures and demands on services, makes it more challenging to ensure that resources are effectively targeted.

This Medium Term Financial Strategy (“MTFS”) sets out how the Council will use its financial resources to underpin the strategic priorities within the Corporate Plan, and builds on its track record of:

  • Managing growth to meet future needs;
  • Protecting and enhancing Wealden’s unique rural character and environment;
  • Supporting our local economy and local businesses;
  • Generating sustainable sources of income to invest in local priorities; and
  • Helping to improve connectivity and access to services for all our communities.

It is the Council’s commitment to use the financial resources it employs over the coming years to make a positive difference to the area and its residents, and achieve value for money.

Since 2010 the Council, alongside the majority of other local authorities, has experienced unprecedented financial challenges in various forms and has had to adapt to:

  • The impact of Central Government funding reductions;
  • The Coronavirus (‘’Covid-19’’) pandemic which has reshaped the Council’s services and changed the way Wealden’s residents live, work and socialise;
  • The local impacts of the economic crisis and Covid-19 pandemic affecting jobs, housing and business growth, which has in turn created pressure on the generation of local income streams and incurring additional costs;
  • The national impacts of the economic crisis and Covid-19 pandemic on the financial markets and subsequent low returns on investments;
  • The local impacts of the economic crisis and Covid-19 pandemic creating a rising demand, and increased cost pressures, for council services from customers who rely on the safety net provided by local government; and
  • The impact of the vote to leave the EU and the consequent impact on the economic and political landscapes.

During this same period the basis on which local government is funded has undergone radical reform, heralding a new era where local government is funded from local taxes with limited reliance on Central Government. This new methodology for funding local government is inextricably linked to the performance of the local economy via business rates, new homes bonus funding arrangements, council tax and local council tax reduction schemes, and Housing Revenue Account Self-Financing.

Each change to the funding brings new elements of uncertainty and volatility. However, it does present opportunities for local authorities with the freedom from and removal of reliance on Central Government and a key stake in the financial prosperity of its local economy. The Government’s one-year spending review for 2021-22 (“Spending Review 2020”) announced by the Chancellor on 25 November 2020, as opposed to a multi-year review and subsequent 2021-22 Local Government Finance Settlement, provides further longer-term financial uncertainty as to the level of funding the Council will receive.

In response to this environment the Council has delivered a track record of strong financial discipline. Planning ahead, undertaking a transformation programme which secures savings in advance, re-investing in more efficient ways of working, adopting a more commercial approach, whilst making careful use of reserves to meet funding gaps and mitigate risks, is an approach that has served the Council well.

The Council’s successful financial management to date has enabled the protection of core services for the people of Wealden while at the same time allowing the redirection of resources to the priority areas in the Corporate Plan, and the MTFS 2021-22 to 2025-26 builds on this approach. This MTFS will be kept under constant review and will need to adapt in response to new risks and opportunities during this unprecedented period of uncertainty and change.

Laurence Woolven

Head of Finance (S151 Officer)

Background

The purpose of this MTFS is to set out the overall framework on which the Council draws together the strategic planning priorities, demand and resource forecasts and impact of the wider service delivery environment to produce a costed plan for the impact of proposed policies and plans on the longer-term financial sustainability of the Council. The MTFS pulls together in one place all known factors affecting the Council’s financial position and financial sustainability over the medium term (i.e. over a five year period).

In order to achieve its priorities the Council has a clear and robust financial strategy which focuses on its long term financial sustainability. The MTFS does this by balancing the financial implications of objectives and policies against constraints in resources and provides the basis for decisions to be made about its finances.

The MTFS integrates revenue allocations, savings targets, reserves and capital investment, and provides a budget for 2021-22 upon which the 2021-22 Council Tax level (General Fund) and rent levels (Housing Revenue Account(‘’HRA’’)) are determined, and sets out the forecasts for the period 2022-23 to 2025-26.

Whilst the purpose of this MTFS is to provide a costed plan over the period 2021-22 to 2025-26, it must be recognised that this plan becomes more uncertain the further out in time the forecast moves. However, uncertainty is more of a reason to produce a MTFS as the identification of potential longer-term revenues and expenses and the key risks associated with those forecasts and income and expense streams provide valuable insight for the Council and aids decision making.

The MTFS is a living document that forms the basis of the Council’s fiscal strategy. Inevitably the Council’s plans will need to evolve and develop in response to new financial opportunities and risks and new policy directions during the period of the Strategy and the dynamic nature of local government funding. Therefore, the Strategy will be reviewed on a regular basis and at least annually.

The MTFS is underpinned by a sound finance system, coupled with a solid internal control framework, sufficiently flexible to allow the Council to respond to changing demands over time and opportunities that arise.

Objectives

This MTFS seeks to achieve a number of specific objectives:

  • Ensure the Council’s limited resources are directed to achieving the vision and strategic priorities within the Council’s Corporate Plan and HRA Business Plan;
  • Ensure the Council maintains a sound and sustainable financial base, delivering a balanced budget over the life of the MTFS;
  • Provide a range of good quality services that people expect, and offer excellent value for money;
  • Deliver key projects that enhance quality of life and wellbeing across Wealden, thoughtfully generating reasonable income streams in line with our Commercial Strategy to achieve a financially stable and self-sufficient council;
  • Maintain our measured, professional approach to managing the Council’s finance and investments, and continue to develop our enterprise culture for the benefit of the District as a whole;
  • Deliver more by working with partners, continue to extend our use of technology, minimise transaction costs and sustain customer satisfaction;
  • Growing the Council Tax and Business Rates tax base, whilst ensuring that Council Tax rate increases are kept an acceptable level;
  • Ensure the Council maintains robust, but not excessive, levels of reserve and balances to address any future risks and unforeseen events without jeopardising key services and the delivery of outcomes; and
  • Continue to manage down the Council’s recurrent cost base, in line with reductions in overall resources by ensuring the provision of efficient, effective and economic services which demonstrate value for money.

In order to set the framework for the Council’s approach to policy and financial planning it is important to understand the potential impact of the Covid-19 pandemic, economic conditions and overall national policy context, as well as the policy and delivery priorities for the Council over the MTFS period.

Local Priorities

This MTFS is central to identifying the Council’s capacity to deliver its local priority outcomes and it reflects:

  • The Council’s current financial position and outlook.
  • The Council’s overall financial strategy, including use of reserves.
  • Internal and external pressures which may influence the council’s financial position.

The following sub-sections set out the local context and priorities, that we have had regard to in producing a costed plan over the period 2021-22 to 2025-26.

Wealden as a Place:

Wealden is the largest local government district in East Sussex covering 323 square miles and has a population of 160,175[1]. Half the population live in five main towns: Crowborough, Hailsham, Heathfield, Polegate and Uckfield. The rest live in villages and hamlets in some of the most attractive countryside in the South of England.

With two-thirds of the district covered by the High Weald Area of Outstanding Natural Beauty and the South Downs National Park, as well as 41 conservation areas (33 of which are administered by the Council) and 2,241 listed buildings, Wealden has to place a high value on protecting the environment.

Wealden has 8,495 businesses, with small and micro businesses forming a fundamental part of the Wealden economy. 91.3% of Wealden’s businesses employ fewer than 10 people[2].

The largest proportion of business enterprise in the District is in the Professional, Scientific & Technical category at 16.5% followed by construction at 14.5%[3].

Just under a quarter (23%) of the population of the District is traditional retirement age or above (65+).

Three quarters (78%) of Wealden residents own their home; more (44%) own it outright than do through a mortgage (34%).

90% of Wealden residents are happy with where they live, and 76% happy with the way the Council is run – nationally the figures are 79% and 61% respectively.

Financially Stable and Self-sufficient Council:

To avoid cuts to services, the Council continues to explore alternative options of service delivery to ensure that services remain fit for purpose in the context of smaller budgets. This may mean revisiting the expectations of residents in order to protect services for the most vulnerable. It is also an opportunity to work with partners and neighbouring authorities to maintain and improve outcomes against a back drop of reducing public spending.

A key component of the Council being financially stable and self-sufficient, is the Council’s Commercial Strategy which provides a framework for activities that:

  • Form an essential part of the solution to the funding gap, which has arisen due to public sector budget cuts, a restructuring of how local authorities are funded and increasing demographic pressures;
  • Potentially lead to the generation of disposable income, to provide additional resource to meet the Council’s ambitions and statutory duties for Wealden as set out in other strategies and plans; and
  • Deliver functions, services and outputs that bring benefits to local people and in doing so helps meet Corporate Plan objectives.

Partners and the Community:

In line with the values from the Corporate Plan to “deliver more by working with partners”, the Council continues to work with those partners, as well as service users and our communities, to protect and deliver services in new ways:

  • Parish and Town Councils – have been proactive in identifying services important to their local communities and working with the District Council and other bodies on local priorities. For example, Mayfield and Five Ashes Parish Council has agreed to commit funding towards a proposed community facility in conjunction with a new doctors’ surgery to be built with funding by Wealden District Council;
  • The voluntary sector – has also been keen to deliver services with 16 organisations operating service level agreements with the Council in 2019/20 with £0.271 million of Council funding;
  • Wealden Strategic Partnership – is a non-statutory, multi-agency body, which matches Wealden District Council boundaries, and brings together the different parts of the public, private, community & voluntary, and special interest sectors to work to help improve the life of the residents of Wealden;
  • Safer Wealden Partnership – brings together a number of agencies from the public, private, education and voluntary sector to improve people’s lives in the area by working together to reduce the levels of crime and anti-social behaviour and to manage the fear of crime;
  • East Sussex Strategic Partnership – brings together different parts of our local community – public services, local businesses, community groups, voluntary sector organisations and local people. The Partnership helps organisations and individuals work together in a co-ordinated way to plan local services, tackle the issues that matter to local people and improve quality of life in East Sussex; and
  • Sussex Weald Homes Limited – An initiative to contribute towards the self-financing objective was the Council setting up Sussex Weald Homes Limited in December 2017, a 100% owned subsidiary to build properties that will be rented or sold to the Council and privately, and acquisition of commercial properties.

Corporate Plan 2019-23:

The Council’s Corporate Plan sets out our direction and priorities for the next four years, building on our previous Plan 2015-19.

“Shaping Wealden as a District which offers a fulfilling and worthwhile quality of life for our residents, a thriving and prosperous place for businesses where local people and visitors can enjoy the outstanding beauty and heritage of our landscape and environment. We will continue to chart a course for the District founded on lean, efficient principles, based on sound business management with a considered approach to investment and income generation. In a post- EU Exit, the Council will play its part in achieving strong, self-reliant and vibrant conditions for the wellbeing of our residents, our businesses and our environment.”

The Council’s vision for the future is:

We will continue to work with our partners to support Wealden’s communities, environment and economy with:

  • Engaged, resilient, active communities;
  • Access to suitable housing, local jobs, services, facilities, leisure and recreational opportunities;
  • Sustainable economic growth; and
  • Sound business management.

We aim to:

  • Protect and enhance Wealden’s high quality natural environment and heritage;
  • Promote a better quality of life for Wealden people through activities that improve health, resilience and well-being;
  • Improve access to essential services for all our communities;
  • Ensure development meets future needs, with associated investment in infrastructure;
  • Take advantage of opportunities to promote new, cleaner technologies;
  • Work with partners to regenerate our diverse market towns, creating jobs and attracting investment;
  • Support our local businesses and entrepreneurs to achieve a locally sustainable economy; and
  • Generate ongoing sources of income to reinvest in local priorities and optimise funding from external sources.

Our strategic priorities for Wealden over 2019-23 cover four themes:

  1. Communities

We want people in Wealden’s communities to have the opportunity to enjoy an excellent quality of life through:

  • Active, healthy and fulfilling lifestyles;
  • Access to good health care;
  • Safe environments for all ages;
  • Positive democratic engagement;
  • Strong community leadership;
  •  Skills that match local opportunities and worthwhile jobs;
  • Thriving community clubs, sport, recreation and leisure; and
  • Good housing local people can afford, in places they want to live.
  1. Environment

We are steadfast in our duty and desire to protect Wealden’s beautiful landscape. We want people in Wealden to be able to access and enjoy the outstanding natural beauty and heritage of our landscape and environment, including conservation areas. Also, for residents to live in good quality housing that integrates harmoniously.

Key strands:

  • Planned growth that respects our environment;
  • Ongoing improvements to infrastructure;
  • Working with partners for more renewable energy use;
  • Securing sustainable growth in our towns and villages;
  • Accessible open spaces close to homes and workplaces;
  • Increased action within communities to improve the environment;
  • Harnessing our natural resources for sustainable rural enterprise;
  • Valuing our green spaces and biodiversity assets;
  •  Conserving and enhancing the character of our rural areas; and
  • Managing the street scene.
  1. Local economy

We want Wealden businesses, communities and residents to thrive and prosper in the District. We are committed to planning and promoting opportunities for sustainable growth through:

  • Vibrant town centres and villages;
  • Business innovation in a green environment;
  • Promoting Wealden as a tourist destination;
  • Stimulating high quality tourism experiences;
  • Better broadband, 4G and 5G connectivity;
  • Appropriate employment spaces;
  • Leveraging funding into the District;
  • Working with the South East Local Enterprise Partnership;
  • Supporting local businesses, the Chambers of Commerce & the Federation of Small Businesses; and
  • Re-balancing the housing market to reflect local needs.
  1. Sound business management

Wealden will continue to be a well-run Council, well thought of and respected by our residents, peers and partners.

We will:

  • Provide the range of good quality services that people expect, and offer excellent value for money;
  • Deliver key projects that enhance quality of life and wellbeing across Wealden, thoughtfully generating reasonable income streams in line with our Commercial Strategy to achieve a financially stable and self-sufficient council;
  • Maintain our measured, professional approach to managing the Council’s finance and investments, and continue to develop our enterprise culture for the benefit of the District as a whole; and
  • Deliver more by working with partners continue to extend our use of technology, minimise transaction costs and sustain customer satisfaction.

National Priorities

The following sub-sections set out the national priorities, that we have had regard to in producing a costed plan over the period 2021-22 to 2025-26.

Covid-19:

The immediate priority for Central Government is providing businesses and individuals with financial support during the Covid-19 pandemic (and administered by Council’s), and protecting vulnerable people.

The significant levels of public sector debt as a result of Central Government spending to support the economy during the Covid-19 pandemic, as well as lower tax receipts, will need to be repaid and could lead to significant reductions in grant funding over the medium term.

Housing, Infrastructure and Other Services:

The Government’s ambition is to increase the numbers of new homes built to 300,000 per annum by the middle of the 2020s.

In March 2020 the Government announced a wide breadth of measures in the Ministry of Housing, Communities and Local Government (‘’MHCLG’’) briefing paper ‘Planning for the Future’, to provide local authorities with greater funding for infrastructure, ensuring that those who strive to build enough homes for their communities and make the most of brownfield land and urban areas are able to access sufficient resources. These measures included:

  • Investing another £1.1 billion in local infrastructure to unlock almost 70,000 new homes;
  • A new £10 billion Single Housing Infrastructure Fund; and
  • Reforming the New Homes Bonus (‘’NHB’’) to reward delivery[4].

Following the briefing paper, MHCLG issued a consultation white paper in August 2020, which covered a package of proposals for reform of the planning system in England, covering plan-making, development management, development contributions, and other related policy proposals. The consultation has proposed to replace the Community Infrastructure Levy (‘’CIL’’) and Section 106 planning obligations with a new consolidated Infrastructure Levy, which is charged as a fixed proportion of development value above a set threshold. Subject to the outcome of the consultation, The Government will seek to bring forward legislation and policy changes to implement the reforms.

The Spending Review 2020, on 25 November 2020 included announcements on the following policies and programmes that are relevant to local authorities:

  • £16 million to support modernisation of local authorities’ cyber security systems;
  • £254 million of additional resource funding to support rough sleepers and those at risk of homelessness during COVID-19, including £103 million announced earlier this year for accommodation and substance misuse support;
  • £165 million for Troubled Families;
  • £60 million for Social Housing Decarbonisation;
  • £621 million to regenerate high streets, town centres and communities through the Towns Fund; and
  • £4 billion levelling up fund, which will invest in local infrastructure that has a visible impact on people and their communities and will support economic recovery.

HRA: On 29 October 2018, the government confirmed that the HRA borrowing cap was abolished with immediate effect. As a result, local authorities with an HRA are no longer constrained by government controls over borrowing for housebuilding and are able to borrow against their expected rental income, in line with the Prudential Code.

Local Government Funding

The Central Government aim through funding reforms (i.e. localised business rates) is to significantly reduce reliance on central grants (i.e. Revenue Support Grant) and move councils to be self-financing. This has required council’s to focus on more local self-sufficiency through other forms of local income generation, such as:

  • Council Tax rate increases, within prescribed referendum limits;
  • Increases to fees and charges;
  • Widening the scope of fees and charges by introducing charges for services not previously charged for;
  • Increasing trading activities to generate surpluses for reinvestment, including the establishment of trading companies; and
  • Look at ways of commercialising existing services and seeking opportunities to ‘sell’ goods and services externally.

Fair Funding Review and Business Rates Retention Scheme

The fair funding review aims to provide updated formulas for assessing councils’ spending needs, and it will change how central grants are distributed between Councils. The outcomes of the fair funding review are to be implemented alongside the introduction of 75% business rate retention.

The Secretary of State for MHCLG announced in April 2020 (and reaffirmed in the Spending Review 2020), that the fair funding review and changes to the business rates retention scheme due to be implemented from April 2021, were to be postponed because of the Covid-19 pandemic. No date was provided as to when the review will be implemented, but the Secretary of State stated that the Government are committed to reforming the funding framework for local government so that it is simpler, more up to date, and more transparent. The Government has established a steering group and a number of working groups, chaired jointly by MHCLG and the Local Government Association, to develop these reforms.

Business Rates Revaluation

In July 2020, Central Government confirmed that the 2021 revaluation would be postponed to reduce uncertainty for businesses.  Central Government has announced that the next revaluation is likely take effect in 2023. To enable the next revaluation to reflect the impact of Covid-19 more closely, this revaluation will be based on property values as of 1 April 2021.

Fundamental Review of Business Rates

In the Budget 2020 (11 March 2020), Central Government published the terms of reference for a fundamental review of the business rates system to be carried out by HM Treasury. This review is wide-ranging: it will consider all elements of the current system, as well as exploring the potential strengths and weaknesses of alternative property and online taxes put forward as possible replacements for rates, as recommended by the Treasury Select Committee in its report of 31 October 2019. The reviews final conclusions are expected in Spring 2021. This could lead to big changes in the design and yield of the tax, which would matter greatly for local government given that it currently contributes around 30% of non-schools revenues.

Covid-19 Pandemic

The impact of Coronavirus (‘’Covid-19’’) pandemic on the Council was first felt towards the end of March 2020, and continues to have an effect in the 2020-21 financial year. In 2020-21, the Council is experiencing substantial losses across many of its largest streams of income. These include council tax and business rates, building control fees, commercial rents and licensing fees. As with any recession, investment income is reducing which will create further pressures on the Council’s finances. On the expenditure front, some of the key areas of additional pressure include accommodation and support for rough sleepers – some of whom may not have required our support previously, shield and hub costs to protect and support our vulnerable residents, and additional staff costs to cope with the increased demand for some services i.e. revenues and benefits. Whilst Central Government has provided emergency Covid-19 funding to the Council for 2020-21 and 2021-22 this funding does not cover all the financial pressures.

It is uncertain if these losses will continue over the period of the MTFS (i.e. 2021-22 to 2025-26), in addition to the potential adverse impact on the growth of the council and business rate tax base.

In the Spending Review 2020, the Chancellor announced that current sales, fees and charges scheme (which refunds 75% of eligible income loss beyond a 5% threshold) is being extended on a pro-rata basis into the first three months of 2021-22. In addition, councils will receive £670 million of unringfenced grant funding to enable them to continue reducing council tax bills for those least able to pay, including households affected by Covid-19.

The Council has sought in recent years to build up the General Fund reserve balance to ensure the Council is financially resilient. The Council is therefore in a position to draw upon its General Fund reserve balance to balance its budget (within a certain tolerance level) if required.

It is also uncertain over the period of the MTFS if Central Government will be providing further support to businesses and individuals, through schemes that are administered by Wealden on behalf the Government and how these schemes would financially impact the Council.

Economic and Fiscal Climate

It is important to note up front that the next few years are particularly uncertain economically and fiscally. There are a number of questions where definitive answers cannot be provided. How high will unemployment rise, how quickly and fully will the economy recover, and what will this mean for councils’ revenues? To what extent will changes in service provision made in an effort to control the Covid-19 pandemic continue, and what will this imply for service delivery costs?

The Public sector finances are increasingly coming under pressure, due to the significant increase in government spending to support the economy during the Covid-19 pandemic, as well as lower tax receipts. The Office for Budget Responsibility’s (“OBR’s”) Economic and fiscal outlook, published on 25 November 2020 (alongside the Spending Review 2020) puts these pressures into stark focus with the following forecasts/expectations:

  • Economic outlook remains “highly uncertain”;
  • GDP[5] to shrink by 11.3% in 2020;
  • Unemployment rate to average 4.4% across 2020, rising to 7.5% at its peak in Q2 2021-21. The unemployment rate is then projected to fall to 4.4% by 2025; and
  • Borrowing peaks at £393.5 billion[6], 19.0% of GDP in 2020-21, the highest peacetime level on record, before forecasting to fall to 3.9 per cent in 2025. However, borrowing costs continue to be very low, driven by interest rates that are low by historical standards, making the current costs of servicing this increase in debt affordable.

Provisional estimates indicate that the £173.7 billion borrowed in the first five months of 2020-21 (April to August 2020) was just over three times the £55.8 billion borrowed in the whole of 2019-20.[7]

The economic outlook forecast[8] by the Council’s Treasury Management Advisors, Arlingclose, highlights the follows:

  • While the strict initial lockdown restrictions have eased, coronavirus has not been supressed and second waves have prompted more restrictive measures on a regional and national basis. This ebb and flow of restrictions on normal activity will continue for the foreseeable future, at least until an effective vaccine is produced and importantly, distributed;
  • However, the scale of the economic shock to demand, ongoing social distancing measures, regional lock downs and reduced fiscal support will mean that the subsequent pace of recovery is limited. Early signs of this are already evident in UK monthly GDP data, even before the latest restrictions; and
  • This situation will result in the Bank of England maintaining low interest rates for the medium term. In the UK, the EU Exit is a further complication. Bank Rate is therefore likely to remain at low levels for a very long time (currently 0.1%), with a distinct possibility of being cut to zero. Money markets have priced in a chance of negative Bank Rate.

The Consumer Price Index (‘’CPI’’) fell to 0.3%[9] in November 2020, and is further below Central Government’s target rate of 2%, with the Retail Price Index (‘’RPI’’) standing at 0.9%[10] in November 2020. Both indexes are anticipated to remain low for the foreseeable future[11].

Pressures loom in 2021-22 and beyond. Firstly, falls in council tax and business rates collected will have to be reflected in the following years. Secondly, tax collections and potentially income from sales, fees and charges and commercial activities could remain depressed looking forward, as higher unemployment pushes up the cost of council tax support (‘’CTS’’) schemes and changed consumer behaviour impacts the viability of high streets. Thirdly, a range of spending pressures could persist (or arise) as some services see increased costs and demands, and councils’ pension schemes are revalued in April 2023.

Spending Plans

This MTFS is central to identifying the Council’s financial capacity to deliver its vision and strategic priorities within the Corporate Plan 2019-23, and requires a balance to be struck between the need to support the delivery of the vision with the need to maintain a sustainable financial position. Striking the correct balance between these two requirements becomes ever more difficult in the challenging financial context in which the Council operates. This is compounded by Government funding reductions, the impact of Covid-19, and the localised business rates funding which is subject to uncertainty and volatility.

The Council’s Corporate Plan is supported by a programme of work containing a range of projects that will meet each of the four strategic themes. In the absence of any new Government funding and in the context of the impact of Covid-19, general cost pressures, and savings underpinning the MTFS, the resources to finance these projects have been made possible by allowing the redirection of resources to the priority areas as well as seeking external financial support in the form of grants and contributions.

It should be noted that the full financial implications of the Hailsham Aspires major project, have not been reflected in the costed General Fund Revenue Summary and Capital Programme 2021-22 to 2025-26, because the project is being developed.  At the point when a full business case has been assessed and finalised to demonstrate that the capital investment is affordable and sustainable, the full revenue and capital implications will be built into future iterations of the MTFS.

Spending Pressures

A review of the financial pressures facing the Council over the period of the MTFS has been undertaken. This information has been drawn from a Star Chamber budget challenge process involving members of the Council’s corporate management team, heads of service and budget holders. This challenge process had regard to the experience of previous years, the current economic climate and local and national issues that are likely to influence the financial outcomes.

Inflation – Pay and Prices

The General Fund MTFS follows the Spending Review 2020 announcement on a public sector pay ‘pause’ for 2021-22, except for those earning less than the full-time salary equivalent of £24,000 who will receive a £250 per annum increase (full time equivalent).  Thereafter an allowance has been included for a 2% pay award for staff in 2022-23 to 2025-26, plus an estimate of staff increments.

Automatic inflationary increases of budgets are not provided for all goods and services, instead individual inflation rates have been applied for specific items of expenditure (i.e. contracts), all remaining areas of expenditure are maintained at the previous year’s levels, which is in effect a real terms reduction in spending power.

Revenue implications of the General Fund Capital Programme 

In section 4. ‘General Fund Capital Programme’, the expenditure for major projects such as Hailsham Aspires – phase 1, Crowborough Leisure Centre Teaching Pool and the development phase of Knight’s Farm, has been built into general fund capital programme. This has the following implications for the General Fund – revenue.

  • Interest Payable on External Loans – Capital expenditure totalling £8.8 million is anticipated to be funded from borrowing and the interest payable associated with this additional borrowing has been built into the MTFS.
  • Minimum Revenue Provision (“MRP”) – As detailed in the Council’s Capital Strategy which will be approved in February, there is a proposal to change the method of charging MRP[12] from 2021-22, to better match the repayment profile to how the benefits of assets financed by borrowing are consumed over their useful life. This change will provide some budget headroom over the medium term to cushion the additional MRP from the increase expenditure in the General Fund Capital Programme (i.e. Hailsham Aspires) that is funded from borrowing. In line with the Council’s MRP policy[13] whereby MRP is charged in the year following when assets become operational, MRP has not been reflected in the MTFS, because it is anticipated the Hailsham Aspires properties will not become operational during the period of the MTFS i.e. before the end of 2025-26.
  • Capital Expenditure Charged to Revenue – In 2021-22 and 2022-23 there is an increase in the amount of revenue that is being used to fund the capital programme. However, the impact of this is partly negated on the General Fund through the receipt of the New Homes Bonus grant, and the contribution from earmarked reserves i.e. Capital Investment Fund.

Resources

Business Rates

The MTFS has assumed that Wealden will continue being part of the existing East Sussex Business Rates Pool based on a 50% rate retention, over the period 2021-22 to 2025-26, the agreement to pool is one that is reviewed on an annual basis. The agreement to continue the existing East Sussex Business Rates Pool for 2021-22 was made in early January 2021.

At budget setting 2020-21, business rates for 2021-22 were estimated to reduce to £3.3 million, this has improved significantly since then to an estimated £4.5 million, however then drops off in future years, as previously estimated. The reduction in business rates, which is now expected to be between 2021-22 and 2022-23, is due to the anticipated reset of business rates in 2022-23 (delayed from 2020-21).  This delay to the reset is consistent with the Spending Review 2020 announcement that reaffirmed MHCLG announcements earlier in the year regarding a delay to the implementation of the fair funding review and the move to 75% business rates retention. As part of the reset, the Council will lose any growth it has built up since the last baseline reset in 2013-14. In effect, the Council has benefitted from keeping its growth since 2013, and this reset redistributes the growth. This is a result of how the current redistribution system was designed and implemented in 2013.

The MTFS currently reflects our predicted worst case scenario, as there a number of unknowns that may occur between now and 2022-23 including the reset being delayed further (post 2022-23), the government giving some form of transitional relief to those who lose out and also the impact of the fair funding review and any impact this may have on the reform of the business rates system. The estimates will be reviewed throughout the remainder of this year and through next year ahead of setting the budget for 2022-23.

As part of the measures put in place to help councils during the Covid-19 pandemic the Government announced additional legislation in early November, the Local Authorities (Collection Fund: Surplus and Deficit) (Coronavirus) (England) Regulations 2020, which allows councils to spread the estimated 2021-22 collection fund deficit equally across the next three years. The business rates estimate within the MTFS takes this into account.

Council Tax

The Council’s main income stream is from Council Tax. The Localism Act 2011 introduced a power for residents to approve or veto excessive council tax increases. This means that any local authority setting an excessive increase as set by the Secretary of State would trigger a referendum of all registered electors in their area. The 2% referendum threshold for 2021-22 was highlighted in the Spending Review 2020. MHCLG subsequently confirmed the 2021-22 referendum threshold for shire Districts (which includes Wealden) at 2% or £5.00 whichever is higher[14].

In light of the financial position of the Council and mindful of the potential referendum thresholds the MTFS assumes the following indicative council tax increases and subsequent overall yields:

 

2021-22

2022-23

2023-24

2024-25

2025-26

Band D Council Tax

£197.44

£202.44

£207.44

£212.44

£217.44

Band D Increase (£)

£0.00

£5.00

£5.00

£5.00

£5.00

Band D Increase (%)

0%

2.53%

2.47%

2.41%

2.35%

Council Tax Base (Number of Properties) for Tax Setting Purposes

66,429.20

66,729.20

67,129.20

67,629.20

68,129.20

Council Tax Income Estimate – Demand on the Collection Fund

£13.115m

£13.508m

£13.925m

£14.367m

£14.814m

 

The council tax base estimate has been produced based on the Council Tax Base (“CTB1”) return completed in September 2020 and adjusted for loss of collection and estimated new builds coming on board in 2021-22. This has been calculated in accordance with legislation in December 2020 and the MTFS has been updated.

Actual council tax increases will be decided on an annual basis taking into account financial circumstances of the Council at the time, the level of resources available and the referendum limits set by Government for each respective financial year. Annual increases remain subject to the decision of both Cabinet and Council.

Revenue Support Grant (“RSG”)

The core grant funding from Government is known as RSG. Since the drive for localisation from 2013-14[15] there has been a reduction in RSG for Wealden up to 2017-18. This MTFS assumes zero RSG in line with government announcements of the intention to remove all core grant.

Central and Specific Grants

Currently, the number of grants received by the Council from Government is very limited. Within the revenue budget we receive a small amount of Rural Services Delivery Grant, and a decreasing amount of New Homes Bonus (“NHB”) which is used to fund the General Fund Capital Programme.

As set out in the National Priorities section above, there are a number of Government reviews that will change how central grants are distributed between councils i.e. reforming the NHB to reward delivery and the fair funding review which aims to provide updated formulas for assessing councils’ spending needs. When the outcome of these reviews are known the implications for Wealden and the MTFS will be determined.

Within some services there are specific grants such as the Homelessness Grant and Housing Benefit & Council Tax Benefit Administration, which are ring-fenced grants and can only be used for clearly defined purposes.

Fees and Charges

The fees and charges levied by the Council are an important source of income. The fees and charges levied include planning fees, garden waste collection and building control.

It is normal practice for the Council to review fees and charges annually and propose revised and new charges from 1 April each year. This will include the development of any policies in respect of discounts and concessions. As part of the annual review, all fees and charges are considered. The fees and charges are approved separately from this MTFS as part of the February round of budget setting for the forth-coming year. Any impact on income budgets arising from these fees and charges are reflected in the income budgets included in this MTFS.

2021-22 Local Government Finance Settlement

The provisional 2021-22 Local Government Finance Settlement (“the Settlement”) was announced in Parliament on 17 December 2020 by the Secretary of Statement for the MHCLG. The Final Settlement will be confirmed in early 2021. It sets out the distribution of centrally allocated resources for local authorities and provides authorities with a combination of grant allocations and their baseline figures within the business rates retention scheme. The headline Settlement grant allocations for Wealden built into the MTFS are as follows:

2021-22

  • New Homes Bonus (“NHB”): £1.401 million;
  • Lower Tier Services Grant: £0.126 million*;
  • Covid Grant: £0.671 million*;
  • Rural Services Delivery Grant: £0.217 million*;
  • Flexible Homelessness Support Grant: £0.545 million*; and
  • Local income guarantee for 2020-21: compensation for BR losses.[16]

In addition to the above, the following grants announced in the Settlement have not been built into the MTFS because either the expenditure that the grant is funding has not been reflected in the MTFS or the amount of the grant is unknown at the time of developing the MTFS:

2021-22

  • Sales, fees and charges compensation April – June (amount unknown).

2021-22 to 2023-24 (assumes Collection Fund deficit spread of 3-years)[17]

  • Local Council Tax Scheme (“LCTS”) Grant c.£0.200 million; and
  • Local income guarantee for 2020-21: compensation for council tax.

In view of the 2021-22 Settlement only being for one year, as opposed to a multi-year, this creates financial uncertainty for the funding to be received centrally from Government from 2022-23. This has meant that assumptions have had to be made, for example, the grants above marked with an asterix (*) have been assumed to be one-off grants in 2021-22, and the NHB reducing to £0.370 million in 2022-23 and ceasing thereafter.

Bridging the gap

The Council’s approach has centred on planning ahead, securing savings in advance, re-investing in more efficient ways of working and adopting a more commercial approach whilst making careful use of reserves to meet funding gaps, and has sought to protect its core services that matter most. The General Fund MTFS includes savings/additional income targets of £0.5 million from 2022-23.

General Fund Revenue Budget and Forecast

Based on the preceding financial objectives, underlying principles, national and local priorities, savings targets, spending pressures and resources assumptions, Appendix 1 provides a five-year (2021-22 to 2025-26) General Fund revenue estimate for the Council.

Risks to the General Fund Revenue Budget and Forecast

The Council has adopted a corporate approach to risk management, and financial risk management is integrated into the Council’s overall management and decision-making processes.

A number of key high-level risks have been identified which could have a positive impact that could yield additional resources, but conversely some risks may have a negative impact and result in a reduction of resources. These key risks are action planned and continually reviewed as the MTFS develops.

The main areas the key risks cover are:

  • Future impact of the Covid-19 pandemic;
  • Fluctuations in the Business Rates tax base;
  • Future changes to the retained Business Rates system;
  • Future levels of Central Government funding;
  • Delivery of savings targets;
  • Impact of current economic climate on both demand for services and income streams;
  • Changes to other key external funding sources;
  • Changes to other key assumptions within the MTFS; and
  • Financial and budget management issues.

These risks form part of our financial risk assessment, Officers will continually monitor and appraise these risks as part of the on-going financial management.

The Council’s approach to determining and funding its investment programmes is set out in the Council’s Capital Strategy, which explains the Council’s financial framework for capital investment in support of its strategic priorities. The General Fund Capital Programme covers all aspects of capital expenditure within the Council, with the exception of the Council’s housing stock, and includes external capital investment that assists in achievement of the Council’s Strategic Priorities.

General Fund Capital Priorities

The Capital Programme is made up of a number of rolling programmes which include repairs, maintenance and improvement programmes to car parks, leisure centres and the Cuckoo Trail, as well as continuing investment in IT and Digital services, and waste containers.

In addition to this, the programme includes a number of major projects that the Council is embarking on, such as Hailsham Aspires, Crowborough Leisure Centre Teaching Pool and the development phase of Knight’s Farm totalling over £12 million over the period of the MTFS.

Indicative allowances have been included within the capital programme to support an additional £8.8 million of borrowing in excess of the allocations within the existing approved programme over the period and this position will be reviewed as the capital programme is developed.

Any capital investment decision will have implications for the revenue budget. The revenue costs over the lifetime of each proposed capital project are considered when the project is being developed to ensure that the impact can be incorporated within the Council’s financial plans and to demonstrate that the capital investment is affordable. Revenue implications may include the costs associated with supporting additional borrowing as well as any changes to the running costs associated with the asset or wider benefits to the council such as the delivery of on-going revenue budget savings or additional income through the generation of business rates, lease income and council tax.

There is the potential that the government will introduced mandatory food waste collections, which would have an impact on the Council’s Capital Programme, it is too early at this stage to say what this impact would be, but if it is introduced, it will need to be incorporated into the Capital Programme.

Resources

The resources necessary to fund the Council’s General Fund Capital Programme are fully identified in Appendix 2, and are summarised below.

Capital receipts

The Council holds a balance of capital receipts from the disposal of land and buildings. These can only be used to fund capital expenditure unless permission is sought from the Secretary of State to use them for a set of specific revenue purposes such as transformation purposes.

The generation of capital receipts can help to provide resources to support additional capital investment or can help to reduce the borrowing requirement and therefore the cost to the revenue budget. Capital receipts totalling £3.3 million have been included within the MTFS projections. If additional capital receipts are generated during the year this provides the Council with the flexibility to consider the introduction of additional projects to the capital programme or the ability to reduce the borrowing requirement.

Grants and Contributions

The Council continues to explore external funding possibilities when developing capital projects to minimise the borrowing requirement as far as possible. Within the MTFS, assumptions have been made around the level of external funding in the future but detailed work programmes will not be committed to until the allocations have been confirmed. Projects and investment plans may therefore be re-prioritised depending on the availability of external funding.

In the capital programme we are anticipating (or have already) to secure external contributions to support a number of project, details of which can be seen in Appendix 2.

Grants incorporated in the capital programme are the NHB (£1.771 million) and the Disabled Facilities Grant (“DFG”) (£5 million). The continuation of the DFG and the amount has not yet been confirmed, and there is a risk that this funding will reduce, however, even without this grant we have a legal obligation to deliver a number of adaptations to some of our residents and would therefore have to look at other sources of funding to support this.

Council Resources

The Council uses revenue (referred to as ‘Capital Expenditure Charged to Revenue’) to fund some projects in the capital programme. However, the impact of this is partly negated on the General Fund through a contribution from earmarked reserves i.e. Capital Investment Fund. This is illustrated in the table below:

 

2021-22

£(000)

2022-23

£(000)

2023-24

£(000)

2024-25

£(000)

2025-26

£(000)

Capital Expenditure Charged to Revenue (see Appendix 1)

5,052

2,426

25

25

0

Less: Contribution from Earmarked Reserves*

(3,651)

(2,056)

(25)

(25)

0

Net impact on General Fund**

1,401

370

0

0

0

 

* Included in the line ‘Contributions to/(from) Earmarked Reserves’ in Appendix 1.

** The net impact is funded from New Homes Bonus.

Borrowing

The basic principle of the Prudential System is that local authorities are free to invest so long as their capital spending plans are affordable, prudent and sustainable. The Council will need to meet the whole of the capital financing costs associated with any level of extra borrowing through its revenue account. These financing costs cover MRP and interest. The use of prudential borrowing will be as a funding mechanism for some key projects i.e. Hailsham Aspires (following a full financial assessment) and may be used as a short-term measure to fund capital expenditure prior to a capital receipt being received. The MTFS includes a prudential borrowing requirement of £8.8 million over the period 2021/22 to 2025-26. 

In March 2020, Central Government launched a consultation on reforms to the Public Works Loan Board (“PWLB”) intended to prevent the trend, in a minority of local authorities, of taking on debt to buy assets primarily for income.  In the Spending Review 2020 the Government announced the outcome of the consultation[18], which set out that the PWLB will not lend to a local authority that plans to buy investment assets primarily for yield anywhere in their capital plans, regardless of whether the transaction would notionally be financed from a source other than the PWLB.

The Council’s General Fund Capital Programme does not include capital expenditure to buy or construct capital assets primarily for income, in order to retain its access to PWLB loans.

Further details about the Council’s borrowing requirements and the Prudential Indicators can be found in the Council’s Capital Strategy and Treasury Management Strategy.

General Fund Capital Programme

The capital spending plans for the next five years include the delivery of key capital schemes identified to support the delivery of the Council’s Corporate Plan. Appendix 2 provides a five-year (2021-22 to 2025-26) General Fund Capital Programme for the Council.

Risks to the General Fund Capital Programme

The Council has adopted a corporate approach to risk management and financial risk management is integrated into the Council’s overall management and decision-making processes.

A number of key high-level risks have been identified which could have a positive impact but conversely some risks may have a negative impact and result in a reduction of resources. These key risks are action planned and continually reviewed as the MTFS develops. The main areas they cover are:

  • Achievement of capital receipts targets;
  • Loss of anticipated external resources;
  • Increased project costs; and
  • Unplanned emergency maintenance to Council’s corporate properties.

The Housing Revenue Account (‘’HRA’’) shows all expenditure and income relating to the Council’s responsibilities as landlord of dwellings and associated property. It is a ‘ring-fenced’ account within the Council’s General Fund.

Housing Revenue Account Business Planning

HRA Self-financing was implemented from 1 April 2012 following a one-off settlement to the Treasury, in order to ‘buy out’ of the old subsidy system. The new system incentivised landlords to manage their assets well and yield efficiency savings. It was anticipated that there would be greater certainty about future income as councils were no longer subject to annual funding decisions by Central Government, enabling them to develop long-term plans, and to retain income for reinvestment. Council landlords were to have greater flexibility to manage their stock in the way that best suits local need with more opportunity for tenants to have a real say in setting priorities looking to the longer term.

Self-financing, however, also significantly increased risks from Central Government to local authorities, meaning that the Council:

  • Now bears the responsibility for the long term security and viability of council housing in Wealden;
  • Has to fund all activity related to council housing, from the income generated from rents, through to long term business planning;
  • Is more exposed to changes in interest rates, high inflation and the financial impact of falling stock numbers; and
  • Needs to factor in the impact of changes in government policy e.g. the impacts of the welfare reform on income recovery, and rent setting.

This places a greater emphasis on the need for long-term planning for the management, maintenance and investment in the housing service and housing stock.

The HRA Business Plan

A key element of the self-financing regime is for the Council to construct a 30-year Business Plan for the HRA. The HRA Business plan is a key contributor to the Council’s overall aims and the Council’s Housing Strategy.  The Council has also fully embraced the Government priority of “fixing our broken housing market” by delivering new build Council Housing to contribute to diversification of the local housing market.

The Council’s Housing Revenue Account Business Plan 2020-2050 was updated in July 2020 to reflect housing policy, legislation, best practice and work in progress. It did not reflect costs associated with responding to the coronavirus pandemic and achieving the Council’s climate change aspirations. The Business Plan reflects the impact of Government policy changes and financial assumptions at the time. The Business plan sets out:

  • The long term plans for the Council’s housing stock;
  • The finances to deliver plans;
  • How the Council will manage the income from its stock, demand for housing and stock condition; and
  • Identifies resources for building new council dwellings.

The current Business Plan is reflected in this MTFS for the period 2021-22 to 2025-26, and been framed in the light of:

  • Government Policy on rents for Social Housing increasing rents from 2021-22 by CPI plus 1% for five years thereafter CPI only;
  • One for one replacement of Right to Buy sales and continuation of the Council’s New Build programme which is using local builders to promote local growth and jobs;
  • Appropriate capital investment in maintaining the quality of the housing stock through planned maintenance and replacement works; and
  • Servicing and repaying debt so that new borrowing is available for future maintenance works or investment in further new build schemes.

The Business Plan is a living document which sets out our short, medium and long-term strategies for the management, maintenance, improvement and addition to the Council’s housing stock. It is continually reviewed on a regular basis to ensure that the priorities reflect local need and political aspirations, to ensure the investment proposals remain fundable and the assumptions on which the plan are based remain correct and that the HRA remains a sustainable and viable entity over the 30-year period.

A complete review of the 30-year Business Plan is currently underway to reflect the required investment in our stock as a result of the recent 100% stock condition survey, to build in known assumptions relating to achieving the Council’s climate change commitments and to reflect the long term impact of the Covid pandemic.

Spending Plans

Spending plans included within the HRA support the delivery of the Council’s strategic priorities within the Corporate Plan and Housing Strategy. The revenue expenditure has been forecast to manage and maintain the council’s housing stock.

Spending Pressures

A high level review of the financial pressures facing the Council over the period of the MTFS has been undertaken. This information has been drawn from experience in previous years, the advice of Corporate Directors, Heads of Service and Budget holders. This process had regard to the experience of previous years, the current economic climate and local and national issues that are likely to influence the financial outcomes.

Inflation – Pay and Prices

The HRA MTFS follows the Spending Review 2020 announcement on a public sector pay ‘pause’ for 2021-22, except for those earning less than the full-time salary equivalent of £24,000 who will receive a £250 per annum increase (full time equivalent).  Thereafter an allowance has been included for a 2% pay award for staff in 2022-23 to 2025-26, plus an estimate of staff increments. 

Automatic inflationary increases of budgets are not provided for all goods and services, instead individual inflation rates have been applied for specific items of expenditure (i.e. contracts), all remaining areas of expenditure are maintained at the previous year’s levels, which is in effect a real terms reduction in spending power

Repairs and Maintenance

The level of expenditure for revenue repairs proposed for 2021/22 is £2.961 million.  This covers costs such as responsive repairs, cyclical works, void repairs and redecoration.

Revenue implications of the HRA Capital Programme

  • Depreciation – must be charged to the HRA in accordance with proper accounting practices, it reflects the decline in the value of the HRA council’s stock over time due to wear and tear. The calculation is based on the social housing valuation of the councils stock. The Councils stock is revalued each year and the depreciation value will fluctuate depending on the annual valuations of the Council’s housing stock. Depreciation is transferred to a major repairs reserve to fund the HRA capital programme. This amounts to £3.850 million for 2021-22 and increases in future years to reflect the increases in housing stock from New Builds and inflation.
  • Interest Payable – is associated with additional borrowing for capital expenditure on the Housing investment programme, including interest payable on the balance of £46.6 million for the self- financing transaction from 2011-12.
  • Provision for Loan Repayments – planned loan repayments have been updated in the MTFS which is key to self-financing and creating opportunities for new borrowing for investment in new builds and major repairs.
  • Capital Expenditure Charged to Revenue – the amount of revenue that is being used to fund the capital programme between 2021-22 to 2023-24 includes £4.75 million funding for the development of the former Streatfield House site into 20 new homes, which is mainly being funded out of general HRA revenue reserves. Revenue funding is also used to support the planned maintenance programme over the MTFS period.

Debt write off and impairment

Income collection has become more challenging due to the impact of the Covid-19 pandemic and could lead to an increase in the write off arrears or increased debt provision.

Similarly, the transition to universal credit means that some rents that would have been received automatically are now recoverable from the tenant. Where tenants suffer a financial impact from the current economic climate arrears are likely to increase, with a potential for further write offs/debt provision, which represents a cost to the council. Therefore the budget provision for debt write offs and impairment has been increased to £0.170 million.

Resources

Rents and Service Charges

This is the second year since 1 April 2016 that the Council has been permitted to increase rents. For four years the Government imposed mandatory rent cuts of 1% per annum as part of welfare reform reducing income over that period. The Government introduced the new social rent policy that was effective from 2020-21 for a five year period, enabling councils to increase rents by CPI + 1% per annum, which restores some medium term certainty about income levels.

In line with Government Policy on rents for social housing, rents will be increasing by 1.5% (CPI at September 2020 = 0.50% + 1%) in 2021-22. The average rents are shown in the table below:

 

 

Rent per week

(52 week basis)

2020-21

2021-22

General Needs – Social Rent

£88.32

£89.54

Retirement Living – Social Rent

£75.97

£76.95

General Needs – Affordable Rent

£143.74

£145.89

Retirement Living – Affordable Rent

£107.99

£109.61

When properties become vacant they will continue to be re-let at Formula Rent, in line with the social rent policy. 

The additional income generated by the rent increase of 1.5%, if agreed, will be utilised on a number of HRA items including; maintenance of the stock, supervision and management resources, paying for the cost of investment and running costs where appropriate for the stock.

The MTFS assumes rent increases in line with social rent policy of CPI + 1% per annum up to 2024-25 and thereafter increases are assumed at CPI. The dwellings rent budget also allows for increased rental income from new build properties and reductions in rental income from RTB sales and voids.

Service Charges

  • Tenants – in addition to the rent some tenants may also pay service charges. Rents are generally taken to include all charges associated with the occupation of the property, such as maintenance and general housing management services. Service charges reflect additional services which may not be provided to every tenant, or which may be connected with communal facilities. These service charges are reviewed annually and calculated on a per property basis to recover the actual cost of the service. Tenants will be notified in writing of any changes in their rent and service charges for the coming year April to March. The rent notification letter will set out a schedule of services that will be provided and how much we will charge for them. We will only increase service charges within the legal requirement that they will not exceed the cost of the services and will always be reasonable
  • Leaseholders (Retirement Living, Shared Ownership and Right-to-Buy) – service charges to leaseholder are charged in accordance with their lease. Service charges are calculated to recover the costs of providing communal services, such as cleaning, repairs, grounds maintenance and electricity. Not all leaseholders receive additional services and the amount that is charged will depend on the type of property a leaseholder lives in, and what services are provided.

Shared ownership Retirement Living leaseholders will be notified in writing how much service charges they will have to pay for the year, April to March. The notification will also tell them of any changes in their rent, where payable, for the coming year.

Right-to-Buy leaseholders are usually notified in April with an annual estimated charge and again within six months of the year end with the Final account figures.

Interest Receivable

Interest is received on HRA cash balances during the year. This is reducing partly due to lower interest rates forecast and reducing general reserve balances.

Other Income

Other Income includes income received from feed in tariffs on solar panels on council dwellings of approximately £0.075 million per annum.

Housing Revenue Account Budget and Forecast

Appendix 3 provides a summary HRA revenue budget and forecast for the period 2021-22 to 2025-26.

Risks to the HRA Budget and Forecast

The Council has adopted a corporate approach to risk management, and financial risk management is integrated into the Council’s overall management and decision-making processes.

A number of key high-level risks have been identified which could have a positive impact that could yield additional resources, but conversely some risks may have a negative impact and result in a reduction of resources. These key risks are action planned and continually reviewed as the MTFS develops.

The main areas they cover are:  

  • Future impact of the Covid-19 pandemic;
  • Risk of government announcements limiting the flexibilities and freedoms offered by the HRA Self -Financing regime;
  • Government changes to legislations such as retro-fitting sprinklers and uncertainty of rent policy after five-years (i.e. from 2025-26);
  • Economic shocks such as shortage of labour, building costs;
  • Changes to key assumptions within the MTFS e.g. inflation, interest rates etc;
  • Efficient delivery of housing repairs;
  • Ability to release further revenue resources for investment and improvements;
  • The impacts of the Welfare Reform Act; and
  • Financial and budget management issues.

HRA Capital Priorities

The Housing Revenue Account Capital Programme covers all aspects of capital expenditure relating to the Council’s landlord function. The Council’s approach to determining and funding its investment programmes is set out in the Council’s Capital Strategy, which explains the Council’s financial framework for capital investment in support of its strategic priorities. The Capital Strategy for the Housing Revenue Account capital programme reflects the self-financing housing regime.

The five-year Housing Revenue Account Capital Programme has been drawn up to ensure that the Council meets its legal obligations as a landlord. The Council has already invested significant resources over recent years to achieve the Decent Homes Standard.

The five-year housing programme comprises the following main areas of work:

  • Maintenance of the Decent Homes;
  • Health & Safety Requirements – covers the work to meet statutory requirements, and includes fire safety, communal lighting and asbestos removal; and
  • New Build and acquisition programme to deliver approximately 153 new council dwellings within the HRA.

A recent 100% stock condition survey was carried out on both the internal and external condition of our properties. The information from the survey is currently being reviewed alongside the delivery of the council’s future climate change aspirations. Once this piece of work is complete the 30-year Business Plan model will be updated and this will inform future capital programmes based on resources available.

Until then the Planned Maintenance Programme is limited to funding available in the MTFS and the New Build Programme in 2024-25 to 2025-26 limited to using retained Right-to-Buy receipts and borrowing for one for one replacement homes only.

Resources

The resources necessary to fund the Council’s HRA Capital Programme are fully identified in Appendix 4.

Major Repairs Reserve

The Major Repairs Reserve (‘’MRR’’) is the main source of capital funding and the mechanism by which timing differences between resources becoming available and being applied are managed. The MRR may be used to fund capital expenditure and to repay existing debt. Depreciation is a real charge on the HRA and is paid into the MRR from the Housing Revenue Account (see Appendix 3) to fund capital expenditure. The total support to the capital programme over the five-year MTFS period 2021-22 to 2025-26 through depreciation is £22.37 million.

Capital Receipts

Housing capital receipts fall within the Governments pooling regime. Under these arrangements capital receipts from Right-to-Buy (‘’RTB’’) sales are pooled until a pre-set limit for government share of the income generated has been achieved. Non-RTB sales primarily are excluded from the pooling arrangement and are now retained in full by the Council for use as the Council sees fit.

Once the target for the government share of the RTB receipts has been reached, the Council may retain 100% of the receipts from any additional RTB sales. These are subject to a formal retention agreement between the Council and the MHCLG and must be used for replacement of the council housing sold, within an agreed timeframe. The retained receipts can only fund up to 30% of the eligible new build expenditure.

New Build Shared ownership sales receipts are used towards funding the New Build shared ownership housing, as the cost of building shared ownership properties is not eligible for use of retained RTB receipts.

The New Build programme is primarily funded by retained RTB receipts, shared ownership receipts and borrowing. 

The proceeds of dwelling sales under the RTB scheme provide a regular source of capital receipts with the number of sales increasing in recent years. The MTFS assumes 12 sales per year from 2021-22 to 2025-26. However, this is a difficult area to predict accurately as it is affected by external factors, such as interest rates, property prices and Government initiatives aimed at further stimulating RTB sales.

Council Resources

The MTFS 2021-22 to 2025-26 includes £6.932 million of direct revenue contributions over the five year period. This includes funding for the development of the former Streatfield House site into 20 new homes, which is mainly being funded out of general HRA revenue reserves. Revenue funding is also used to support the planned maintenance programme over the MTFS period,

Borrowing

The Prudential Code allows the Council to take borrowing if it can demonstrate that such borrowing is affordable, sustainable and prudent in its Prudential Indicators (detailed in the Capital Strategy and Treasury Management Strategy). In October 2018, the government announced the removal of the HRA borrowing cap and issued local authorities determinations to confirm that the removal of the cap was to take immediate effect. Prior to the lifting of the debt cap, Wealden had reached its maximum borrowing it could undertake without eating into the margins of safety (the debt limit imposed was £71.679 million). The Council has now set its own prudential limit for the HRA of £95 million. As with all borrowing decisions, the council will still need to take into account the affordability of borrowing against available revenue streams.

The removal of the debt cap and high value council housing levy gives local housing authorities more certainty for future HRA Business Planning. In light of this, last year the Council agreed the use of £4.9 million of HRA balances to fund the HRA Capital New build investment programme. The HRA balances minimum recommended level is 5% of the budget, which is in the region of £0.9 million. The use of the HRA general balances over the MTFS period reduces the balances to between £1 million – £1.4 million, which is still above the recommended level.

The graph below shows the position of the budget proposals for borrowing for the HRA Capital Programme against the prudential borrowing limit of £95 million[1].

INSERT TABLE Pg 29.

Following the implementation of HRA self-financing on 1 April 2012 the Council has £46.6 million of external debt relating to housing stock which is being repaid over 30-years. In addition to this the Council has undertaken further internal borrowing of £23.8 million as at 2020-21. The provision to repay debt over the MTFS period is £10.5 million with further borrowing of £24.1 million to fund the HRA Capital Programme. This leaves borrowing headroom of £11 million.

HRA Capital Programme

Based on the spending requirements and resource assumptions, Appendix 4 provides a summary HRA capital programme, 2021-22 to 2025-26.

The revenue implications of all capital schemes, have been taken account of and included within the HRA budget (see Appendix 3).

Risks to the HRA Capital Programme

The Council has adopted a corporate approach to risk management and financial risk management is integrated into the Council’s overall management and decision-making processes.

A number of key high-level risks have been identified which could have a positive impact but conversely some risks may have a negative impact and result in a reduction of resources. These key risks are action planned and continually reviewed as the MTFS develops. The main areas they cover are:

  • Generation of sufficient revenue surpluses to resource required investment;
  • Achievement of capital receipts (including Right to Buy sales) targets;
  • Future building costs; and
  • Interest rate increases impacting on future borrowing costs.

The minimum prudent levels of reserves and balances that the Council should maintain are a matter of judgement. It is the Council’s safety net for unforeseen circumstances and must last the lifetime of the Council unless contributions are made from future years’ revenue budgets. CIPFA guidance does not set a statutory minimum level but it is up to local authorities themselves, taking into account all the relevant local circumstances, to make a professional judgement on what the appropriate level of reserves and balances should be.

Some reserves and balances are essential for the prudent management of the Council’s financial affairs. These will provide a working balance to cushion the impact of uneven cash flow, a contingency for the impact of unexpected events or emergencies and allow the creation of earmarked reserves to meet known liabilities. The consequences of not keeping a minimum level of reserves can be serious and is therefore one of the considerations taken into account when setting the MTFS.

The Council has a very proactive approach to managing risk and there are effective arrangements for financial control already in place. However, as a result of the changes to the core system of local government funding introduced in April 2013, which saw a move from an absolute funding level to one which is very sensitive to changes in the level of local business rates, the level of volatility and risk to the Council significantly increased. Given this uncertainty of funding that this poses to the Council’s financial position, the prudent minimum level of general reserves is now held at a level greater than previously.

The financial risks identified throughout this document, and an assessment of the estimated exposure, likelihood and possible mitigation of these has been made in the context of the Council’s overall approach to risk management and internal financial controls. This information has been used to determine the optimum level of reserve holdings needed to meet the requirements of a working balance and contingency. The conclusion of this risk assessment is that it is deemed prudent that General Fund reserves are maintained at around £2 million – £3 million, and that Housing Revenue Account reserves are maintained at around £0.9 million – £1 million, over the period of the MTFS.

The general reserves at the end of each year for 2021-22 to 2025-26 are summarised in the table below: 

 

2021-22

£(000)

2022-23

£(000)

2023-24

£000

2024-25

£(000)

2025-26

£(000)

General Fund (see Appendix 1)

7,254

6,214

5,377

4,747

3,909

HRA (see Appendix 3)

4,494

2,793

1,194

1,412

1,562

The overall levels of General Fund and Housing Revenue Account balances are in line with the prudently assessed minimum level of balances, and are believed to be sufficient to meet all of the Council’s obligations over the duration of the MTFS and have been based on a detailed risk assessment.

 

General Fund Summary

2021-22

2022-23

2023-24

2024-25

2025-26

 

Estimate

Estimate

Estimate

Estimate

Estimate

 

£(000)

£(000)

£(000)

£(000)

£(000)

 

Members

367

373

379

385

391

 

Chief Executive’s Directorate

5,252

5,081

5,088

5,091

5,099

 

District Council Elections

20

0

300

0

0

 

Customer & Community Services

9,031

8,969

9,029

9,229

9,423

 

Planning, Policy & Environmental Services

4,096

4,204

4,226

4,249

4,272

 

Central Costs

1,242

595

595

595

595

 

Total Cost of Services

20,008

19,222

19,617

19,549

19,780

 

Savings/Income to be Identified

0

(500)

(500)

(500)

(500)

 

Provision for Future Pay Awards & Increments

0

450

850

1,200

1,550

 

Drainage Levies

84

86

88

90

92

 

Interest from Investments/ Dividend from SWH

(400)

(458)

(708)

(750)

(750)

 

Interest Payable on External Loans

44

141

200

200

241

 

Charges to the Housing Revenue Account:

     

 

Support Services

(1,185)

(1,199)

(1,233)

(1,267)

(1,301)

 

Minimum Revenue Provision

637

305

199

206

213

 

Capital Expenditure Charged to Revenue

5,052

2,426

25

25

0

 

Net Cost of Services

24,240

20,473

18,538

18,753

19,325

 

 

 

 

 

 

 

 

Business Rates/Revenue Support Grant

 

 

 

 

 

 

East Sussex Business Rates Pool (includes BR (Surplus)/Deficit)

(4,500)

(3,100)

(3,100)

(3,300)

(3,300)

 

General Grants

 

 

 

 

 

 

Rural Services Delivery Grant/ New Homes Bonus Grant/ Flexible Homelessness Support Grant

(2,163)

(583)

(218)

(221)

(221)

 

   Lower Tier Services Grant/ Covid Grant

(797)

0

0

0

0

 

Other Financing

 

 

 

 

 

 

Council Tax (Surplus)/Deficit

0

0

0

0

0

 

Contributions to/(from) Earmarked Reserves

(3,493)

(2,242)

(458)

(235)

(152)

 

Contributions to/(from) General Fund Balance

(172)

(1,040)

(837)

(630)

(838)

 

Council Tax Requirement

13,115

13,508

13,925

14,367

14,814

 

 

 

 

 

 

 

 

Funded By

 

 

 

 

 

 

Council Tax Income Estimate – Demand on the Collection Fund

(13,115)

(13,508)

(13,925)

(14,367)

(14,814)

 

 

 

 

 

 

 

 

Council Tax Base:

 

 

 

 

 

 

Tax Base (Number of Properties) for Tax Setting Purposes

66,429.20

66,729.20

67,129.20

67,629.20

68,129.20

 

 

Council Tax

2021-22

2022-23

2023-24

2024-25

2025-26

Estimate

Estimate

Estimate

Estimate

Estimate

Band D Council Tax – previous year

£197.44

£197.44

£202.44

£207.44

£212.44

Increase in Band D (£)

£0.00

£5.00

£5.00

£5.00

£5.00

Increase in Band D (%)

0.00%

2.53%

2.47%

2.41%

2.35%

Band D Council Tax

£197.44

£202.44

£207.44

£212.44

£217.44

Council Tax Income Estimate – Demand on the Collection Fund

£13,115,781

£13,508,659

£13,925,281

£14,367,147

£14,814,013

General Fund Balance

2021-22

2022-23

2023-24

2024-25

2025-26

Estimate

Estimate

Estimate

Estimate

Estimate

£(000)

£(000)

£(000)

£(000)

£(000)

Opening Balance

7,426

7,254

6,214

5,377

4,747

Movement in Year

(172)

(1,040)

(837)

(630)

(838)

Closing Balance

7,254

6,214

5,377

4,747

3,909

General Fund

Earmarked Reserves Balance

2021-22

2022-23

2023-24

2024-25

2025-26

Estimate

Estimate

Estimate

Estimate

Estimate

£(000)

£(000)

£(000)

£(000)

£(000)

Opening Balance

18,335

14,842

12,600

12,142

11,907

Movement in Year

(3,493)

(2,242)

(458)

(235)

(152)

Closing Balance

14,842

12,600

12,142

11,907

11,755

 

2021-22 Estimate

2022-23 Estimate

2023-24 Estimate

2024-25

Estimate

2025-26 Estimate

£(000)

£(000)

£(000)

£(000)

£(000)

Housing (General Fund)

     

Disabled Facilities Grants

1,000

1,000

1,000

1,000

1,000

Housing Renewal Grants

10

10

10

10

10

Total Housing

1,010

1,010

1,010

1,010

1,010

Land and Buildings

     

Hailsham Aspires – Phase 1

3,750

3,300

   

Mayfield Community and Health Centre

600

2,205

   

Leisure Centres

95

25

25

25

25

Crowborough Teaching Pool

 

2,000

   

Vicarage Lane Office & Civic Community Hall

10

10

10

10

10

Jack Cade Memorial

  

15

  

Birling Gap Steps

   

150

 

Car Parks & Unadopted Roads

47

78

62

51

50

SANGS Crowborough

15

11

   

SANGS Uckfield

25

 

25

25

 

Cuckoo Trail

70

60

90

75

70

Public Conveniences

75

35

   

Knights Farm Development

 

400

   

Investment Property

10

    

Infrastructure Investment

2,000

    

Total Land and Buildings

6,697

8,124

227

336

155

Vehicles and Equipment

     

ICT Investment Programme

60

100

100

100

100

E-financials Upgrade

42

    

IT Visualisation Environment

250

    

Legal Case Management System

20

    

Refuse & Recycling Containers

200

200

200

200

200

Total Vehicles and Equipment

572

300

300

300

300

Other Capital Expenditure

     

Investment in Sussex Weald Homes Ltd

 

3,000

3,000

  

Community Grants to Voluntary Orgs.

50

50

50

50

50

Total Other Capital Expenditure

50

3,050

3,050

50

50

 

     

Total General Fund Capital Programme

8,329

12,484

4,587

1,696

1,515

      

Funded By

     

Borrowing

(1,500)

(4,300)

(3,000)

  

Capital Receipts

(747)

(926)

(552)

(586)

(505)

Government Grants – Better Care Fund DFG

(1,000)

(1,000)

(1,000)

(1,000)

(1,000)

Home Improvement Loans Repayments

(10)

(10)

(10)

(10)

(10)

Capital Grants Unapplied

(20)

    

External Contribution/Grant funding

 

(2,400)

   

Revenue – NHB/Reserves

(5,052)

(2,426)

(25)

(25)

 

Contribution from Mayfield Parish Council

 

(1,423)

   

Contribution from National Trust

   

(75)

 

Total GF Capital Programme Funding

(8,329)

(12,484)

(4,587)

(1,696)

(1,515)

 

Housing Revenue Account

2021-22

2022-23

2023-24

2024-25

2025-26

Estimate

Estimate

Estimate

Estimate

Estimate

£(000)

£(000)

£(000)

£(000)

£(000)

Dwelling Rents

(14,081)

(14,505)

(15,060)

(15,515)

(15,788)

Non-Dwelling Rents

(165)

(165)

(165)

(165)

(165)

Charges for Services & Facilities

(1,240)

(1,264)

(1,288)

(1,313)

(1,338)

Interest Income

(70)

(60)

(50)

(50)

(50)

Contribution to Amenities Shared by the Community

(70)

(70)

(70)

(70)

(70)

Other Income

(95)

(95)

(95)

(95)

(95)

Total Income

(15,721)

(16,159)

(16,728)

(17,208)

(17,506)

 

 

    

Supervision & Management

2,362

2,316

2,320

2,323

2,324

Repairs & Maintenance

2,953

2,987

3,025

3,235

3,292

Retirement Living Courts

1,119

1,092

1,092

1,092

1,093

Rents, Rates, Taxes & Other Charges

155

65

65

65

65

Depreciation

3,850

4,240

4,530

4,750

5,000

Debt Management Expenses

52

51

51

51

51

Loan Interest

1,835

1,976

2,244

2,307

2,324

Provision for Loan Repayments

2,282

2,282

1,800

2,100

2,100

Capital Expenditure Charged to Revenue

900

2,360

2,672

500

500

Write Offs and Debt Impairment Charges

170

170

170

170

170

Sub Total

15,678

17,539

17,969

16,593

16,919

Provision for Future Pay Awards & Increments

0

37

74

112

151

HRA Contribution to Corporate Costs

 293

 284

 284

 285

 286

Contributions to/(from) Earmarked Reserves

0

0

0

0

0

Total Expenditure

15,971

17,860

18,327

16,990

17,356

 

 

    

(Surplus)/Deficit for the Year

250

1,701

1,599

(218)

(150)

 

 

    

Housing Revenue Account Balance

2021-22

2022-23

2023-24

2024-25

2025-26

Estimate

Estimate

Estimate

Estimate

Estimate

£(000)

£(000)

£(000)

£(000)

£(000)

Opening Balance

4,744

4,494

2,793

1,194

1,412

Movement in Year

(250)

(1,701)

(1,599)

218

150

Closing Balance

4,494

2,793

1,194

1,412

1,562

 

Housing Revenue Account Earmarked Reserves Balance

2021-22

2022-23

2023-24

2024-25

2025-26

Estimate

Estimate

Estimate

Estimate

Estimate

£(000)

£(000)

£(000)

£(000)

£(000)

Opening Balance

4,413

4,413

4,413

4,413

4,413

Movement in Year

0

0

0

0

0

Closing Balance

4,413

4,413

4,413

4,413

4,413

 

 

2021-22

2022-23

2023-24

2024-25

2025-26

Estimate

Estimate

Estimate

Estimate

Estimate

£(000)

£(000)

£(000)

£(000)

£(000)

New Build Programme

7,221

13,583

5,979

3,000

3,000

Planned Maintenance

4,600

4,600

4,600

5,250

5,500

Shared Ownership Repurchases

500

500

500

500

500

Total HRA Capital Programme

12,321

18,683

11,079

8,750

9,000

      

Funded By

     

Loan

(5,252)

(8,384)

(2,034)

(2,160)

(2,117)

1-4-1 Right-to-Buy Receipts

(1,798)

(2,801)

(952)

(900)

(943)

Other Capital Receipts

(521)

(898)

(891)

(440)

(440)

Major Repairs Reserve

(3,850)

(4,240)

(4,530)

(4,750)

(5,000)

Capital Expenditure Charged to Revenue

(900)

(2,360)

(2,672)

(500)

(500)

Total HRA Capital Programme Funding

(12,321)

(18,683)

(11,079)

(8,750)

(9,000)

 

Authorised But Not Committed Capital Programme – New Build Programme

 

2021-22

2022-23

2023-24

Total

Estimate

Estimate

Estimate

Estimate

£(000)

£(000)

£(000)

£(000)

Authorised but not Committed

 

2,000

2,000

2,000

6,000

Total Authorised but not Committed Capital Programme

2,000

2,000

2,000

6,000

      

Funded By

     

Loan

 

(1,400)

(1,400)

(1,400)

(4,200)

1-4-1 Right to Buy Receipts

 

(600)

(600)

(600)

(1,800)

Total HRA Capital Programme Funding

 

(2,000)

(2,000)

(2,000)

(6,000)

Capital Strategy 

The Capital Strategy details how the Council deploys and will subsequently manage its capital resources thereby explaining the Council’s financial framework for capital investment in support of its strategic priorities. This strategy includes a number of prudential and local indicators and annual MRP statements.

2020-21

This report presents the Capital Strategy and Investment Strategy for 2020/21, including capital expenditure and financing, risk management, the prudential indicators and the annual minimum revenue provision statement.

Cabinet is recommended to recommend to Council:

  1. To approve the 2020/21 Capital Strategy and Investment Strategy;
  2. To approve the Prudential Indicators for 2020/21 as set out in this report; and
  3. Approve that for the 2020/21 financial year the Council makes Minimum Revenue Provision in accordance with the Asset Life (Equal Instalment) Method for new capital expenditure.

To comply with: the Local Government Act 2003 and supporting regulations, the Council’s Financial Procedure Rules, CIPFA’s Prudential Code for Capital Finance in Local Authorities 2017 Edition and MHCLG Statutory Guidance on Local Government Investments and Statutory Guidance on Minimum Revenue Provision.

  1. This capital strategy was a new requirement for 2019/20, giving a high-level overview of how capital expenditure, capital financing and treasury management activity contribute to the provision of local public services along with an overview of how associated risk is managed and the implications for future financial sustainability. The aim is to ensure this report is presented in an accessible style to enhance members’ understanding of these sometimes technical areas.
  2. The CIPFA Prudential Code plays a key role in capital finance in local authorities. Local authorities determine their own programmes for capital investment that are central to the delivery of quality public services. The Prudential Code was developed by CIPFA as a professional code of practice to support local authorities in taking their decisions. The Council is required by regulation to have regard to the Prudential Code when carrying out its duties under Part 1 of the Local Government Act 2003.
  3. This report combines the capital strategy, investment strategy and the Minimum Revenue Provision Statement for 2020/21. It is complemented by the Treasury Management Strategy 2020/21.

4. Capital expenditure is where the Council spends money on assets, such as property or equipment that will be used for more than one year. In local government this includes spending on assets owned by other bodies, and loans and grants to other bodies enabling them to buy assets. The Council has some limited discretion on what counts as capital expenditure, for example assets costing below £10k are not capitalised and are charged to revenue in year.

5. The Council’s capitalisation policy is contained in the Accounting Policies as approved annually in March by the Audit, Finance and Governance Committee and published in the annual statement of accounts – available at: http://www.wealden.gov.uk/Wealden/Council/Transparency_Spending_and_Performance/Spending/The_Councils_Finances/Finance_Statement_of_Accounts.aspx

6. The Council’s planned capital expenditure for 2020/21 is summarised below:

 

Table 1. Prudential Indicator: Estimates of Capital Expenditure

 

 

2018/19 Actual

2019/20 Forecast

2020/21 Estimate

2021/22 Estimate

2022/23 Estimate

 

£m

£m

£m

£m

£m

General Fund Services

7.9

5.8

2.5

1.7

1.4

Capital Investments

3.8

3.9

2.7

0.0

0.0

General Fund Total

11.7

9.7

5.2

1.7

1.4

HRA New Builds

8.2

3.2

7.5

11.4

7.3

HRA Other Capital Expenditure

4.0

5.8

5.1

5.2

5.3

HRA Total

12.2

9.0

12.6

16.6

12.6

Grand Total

23.9

18.7

17.8

18.3

14.0

 

7. The Council’s actual and planned capital expenditure on investments comprises investment in the Council’s wholly-owned company Sussex Weald Homes Limited. Further details on the Council’s capital investments are set out later in this report under the heading of ‘Investment Strategy’.

8. The Housing Revenue Account (HRA) is a ring-fenced account which ensures that council housing does not subsidise, or is itself subsidised, by other local services. HRA capital expenditure is therefore recorded separately, and includes the building of new homes across the district over the forecast period as well as capital investment to maintain existing housing stock.

Governance

9. Service managers bid to include projects in the Council’s capital programme. Bids are put forward and discussed with finance officers who calculate the financing cost (which can be nil if the project is fully financed) and develop the overall proposed programme which is reviewed and appraised by the Chief Finance Officer, and is informed by the meetings of the Asset Management Group and budget discussions between finance and service areas. There is a separate Capital Programme for the General Fund and for the HRA and these are both presented as part of the respective budget proposals to Cabinet and Council in February each year. They are also subject to public consultation in December and January.

All capital expenditure must be financed, either from external sources (e.g. government grants and other contributions), the Council’s own resources (revenue, reserves and capital receipts) or debt (borrowing and leasing). The planned financing of the General Fund and HRA capital programmes is as follows:

Table 2a. General Fund Capital Financing

   

 

2018/19 Actual

2019/20 Forecast

2020/21 Estimate

2021/22 Estimate

2022/23 Estimate

 

£m

£m

£m

£m

 

External Sources (Capital Grants)

3.2

1.9

0.5

0.5

0.6

Own Resources (revenue budget  contributions, plus New Homes Bonus)

4.8

3.9

1.5

0.7

0.4

Borrowing (internal)

3.7

3.9

3.2

0.5

0.4

General Fund Total

11.7

9.7

5.2

1.7

1.4

   Footnote:- all General Fund borrowing is based on internal borrowing only

Table 2b. HRA Capital Financing

    

 

2018/19 Actual

2019/20 Forecast

2020/21 Estimate

2021/22 Estimate

2022/23 Estimate

 

£m

£m

£m

£m

£m

Own Resources (capital receipts and reserves)

6.9

6.5

7.5

11.7

7.0

Borrowing (internal)

5.3

2.5

5.1

4.9

5.6

HRA Total

12.2

9.0

12.6

16.6

12.6

   Footnote:- all “new” (post subsidy debt) HRA borrowing is based on internal borrowing only

10. Debt is only a temporary source of finance, since loans and leases must be repaid, and this is therefore replaced over time by other financing, usually from revenue. For the General Fund this is known as minimum revenue provision (MRP) and for the HRA this is termed the voluntary provision for loan repayments. Planned loan repayments are shown as follows:

Table 3. Replacement of Debt Finance

   

 

2018/19 Actual

2019/20 Forecast

2020/21 Estimate

2021/22 Estimate

2022/23 Estimate

 

£m

£m

£m

£m

£m

GF: Minimum Revenue Provision

(0.6)

(0.8)

(0.8)

(0.7)

(0.7)

GF: Application of capital receipts

0.0

0.0

0.0

0.0

0.0

HRA: Voluntary Repayment Provision

(2.3)

(2.3)

(2.3)

(2.3)

(2.3)

Total

(2.9)

(3.1)

(3.1)

(3.0)

(3.0)

 

 

 

 

 

 

        

   Footnote:- HRA borrowing is repaid as a Voluntary Repayment Provision as per regulations

Minimum Revenue Provision

11. The Council applies the ‘Asset Life – Equal Instalment’ method for its calculation of MRP related to new capital expenditure. The Council’s full Minimum Revenue Provision statement is attached as Appendix A to this report.

Capital Financing Requirement

12. The Capital Financing Requirement (CFR) measures a vital component of the Council’s capital strategy; the amount of capital spending that has not yet been financed by capital receipts, capital grants or contributions from revenue income. It measures the underlying need to borrow for a capital purpose, although this borrowing may not necessarily take place externally. The Council may judge it prudent to make use of cash that it has already invested for long-term purposes. In doing this, the Council does not reduce the magnitude of the funds it is holding for these long-term purposes but simply adopts an efficient and effective treasury management strategy. This practice, known as ‘internal borrowing’, is common in local authorities and means there is no immediate link between the need to borrow to pay for capital spending and the level of external borrowing.

13. The Council’s CFR increases with new debt-financed capital expenditure and reduces with MRP / voluntary repayments and capital receipts used to replace debt. The CFR is expected to decrease by £2 million during 2020/21. Based on the above figures for expenditure and financing, the Council’s estimated CFR is as follows.

Table 4. Prudential Indicator: Capital Financing Requirement Projections

 

31/03/19 Actual

31/03/20 Forecast

31/03/21 Estimate

31/03/22 Estimate

31/03/23 Estimate

 

£m

£m

£m

£m

£m

General Fund CFR

10.9

14.0

16.4

16.2

15.9

HRA CFR

68.0

68.2

71.0

73.6

76.9

Total CFR (cumulative balance)

78.9

82.2

87.4

89.8

92.8

In-Year Movement

+6.1 

+3.3

+5.2

+2.4

+3.0

Footnote:- The CFR reflects the cumulative balance of borrowing needed to fund the capital programme after first allowing for the use of grants funding, revenue contributions and capital receipts – it reflects total new borrowing needed to fund capital less any minimum revenue or voluntary payments of debt.

Asset Management and Asset Disposals

14. To ensure that capital assets continue to be of long-term use, the Council has an asset management group comprising the Leader of the Council as Finance Portfolio Holder, senior officers including the Chief Finance Officer, and officers from Housing & Property Services. The Council has an Assets Policy which is updated every four years in line with the Council’s Corporate Plan.

15. When a capital asset is no longer needed, it may be sold so that the proceeds, known as capital receipts, can be spent on new assets or to repay debt. Repayments of capital grants, loans and investments also generate capital receipts.

16. HRA capital receipts are generated from ‘Right to Buy’ disposals of council dwellings and from sales of shared ownership leases.

17. Current legislation allows council tenants the Right to Buy (RTB) their council home with a discount of up to a maximum of £82,800. Prior to 2012, receipts from RTB disposals were pooled; 75% paid to Government and 25% retained by the Council. In 2012, the Government introduced a new RTB policy whereby Councils can retain all of the surplus RTB receipts as long as the receipts are used for one–for-one replacement of homes sold.

  1. The following table shows the actual and estimated capital receipts over the forecast period.

Table 5. Capital Receipts

    

 

2018/19 Actual

2019/20 Forecast

2020/21 Estimate

2021/22 Estimate

2022/23 Estimate

 

£m

£m

£m

£m

£m

General Fund Capital Receipts

0.0

0.0

0.0

0.0

0.0

HRA Capital Receipts

1.9

0.8

2.2 

2.4

 1.0

Total

1.9

0.8

2.2

2.4

1.0

19. Treasury management is concerned with keeping sufficient but not excessive cash available to meet the Council’s spending needs, while managing the risks involved. Surplus cash is invested until required, while a shortage of cash will be met by borrowing, to avoid excessive credit balances or overdrafts in the bank current account. The Council is typically cash rich in the short-term as revenue income is received before it is spent, but cash poor in the long-term as capital expenditure is incurred before being financed. The revenue cash surpluses are offset against capital cash shortfalls to reduce overall borrowing.

20. As at 31 December 2018, the Council held investments of £76.4 million at an average interest rate of 1.5% and £51.2 million external borrowing at an average interest rate of 3.35%. The balance held as investments is always higher than usual on this date due to it being just before precepts are paid out in early January.

Borrowing Strategy

21. The Council’s main objectives when borrowing are to achieve a low but certain cost of finance while retaining flexibility should plans change in future. These objectives are often conflicting, and the Council therefore seeks to strike a balance between cheap short-term loans (currently available at around 0.75%) and long-term fixed rate loans where the future cost is known but higher (currently 2.0 to 3.0%).

22. Projected levels of the Council’s total outstanding debt (which comprises only borrowing from PWLB currently) are shown below, compared with the capital financing requirement.

Table 6: Prudential Indicator: Gross Debt and CFR

  

 

31/03/19 Actual

31/03/20 Forecast

31/03/21 Estimate

31/03/22 Estimate

31/03/23 Estimate

 

£m

£m

£m

£m

£m

External Debt

51.2

48.9

46.6

44.3

42.0

Capital Financing Requirement

78.9

82.2

87.4

89.8

92.8

 

23. Statutory guidance is that debt should remain below the capital financing requirement, except in the short-term. As can be seen from table 6 above, the Council expects to comply with this in the medium term.

Affordable Borrowing Limit

24. The Council is legally obliged to set an affordable borrowing limit (also termed the authorised limit for external debt) each year and to keep it under review. In line with statutory guidance, a lower “operational boundary” is also set as a warning level should debt approach the limit. The limits are set out in the following table.

Table 8. Prudential Indicators: Authorised limit and operational boundary for external debt

 

2019/20 Limit

2020/21 Limit

2021/22 Limit

2022/23 Limit

 

£m

£m

£m

£m

Operational boundary

 

 

 

 

Borrowing

120.0

115.0

115.0

115.0

Leases

2.5

2.5

2.5

2.5

Total Operational Boundary

122.5

117.5

117.5

117.5

 

     

Authorised limit for external debt

    

Borrowing

145.0

140.0

140.0

140.0

Leases

4.0

4.0

4.0

4.0

Total Authorised Limit

149.0

144.0

144.0

144.0

      

Footnote :- The Operational and Boundary limits provide a limit for borrowing in a worst case or very upper limit for the Council in exceptional circumstances, hence their level.

25. Further details on the Council’s borrowing are contained in the Treasury Management Strategy 2020/21.

HRA Prudential Limit

26. In October 2018 the Government announced the removal of the HRA borrowing cap and issued local authorities with determinations to confirm that the removal of the cap was to take effect from 1 April 2018. Prior to the lifting of the debt cap, Wealden had reached the maximum level of borrowing it could undertake without eating into the margins of safety (the debt limit imposed was £71.679 million). The Council can now set its own prudential limit for the HRA and the limit now proposed is £95 million. This has been proposed after careful assessment of affordability and sustainability in line with the 30 year HRA Business Plan. As with all borrowing decisions, the Council will still need to take into account the affordability of borrowing against available revenue streams.

Treasury Investment Strategy

27. Treasury investments arise from receiving cash before it is paid out again. Investments made for service reasons or for pure financial gain are not generally considered to be part of treasury management.

28. The Council’s policy on treasury investments is to prioritise security and liquidity over yield; that is, to focus on minimising risk rather than maximising returns. Cash that is likely to be spent in the near term is invested securely, for example with the government, other local authorities or selected high-quality banks and money market funds, to minimise the risk of loss. Money that will be held for longer terms is invested more widely, including in diversified funds (which typically include investments in bonds, shares and property) to balance the risk of loss against the risk of receiving returns below inflation. Both near-term and longer-term investments may be held in pooled funds, where an external fund manager makes decisions on which particular investments to buy and the Council may request its money back at short notice.

29. The Council’s treasury investments are shown below. The balances shown as longer term investments relate to balances held in strategic pooled funds. The Council plans to hold these investments for a longer period than just one year but the terms of the funds mean that we are able to request the money back with one month’s notice at any time.

Table 9. Treasury Investments

    

 

31/03/19 Actual

31/03/20 Forecast

31/03/21 Estimate

31/03/22 Estimate

31/03/23 Estimate

 

£m

£m

£m

£m

£m

Near-term investments

28.5

19.2

14.8

8.7

7.1

Longer-term investments

10.0

10.0

10.0

10.0

10.0

Total

38.5

29.2

24.8

18.7

17.1

 

30. The contribution that these investments make to the objectives of the Council is to support effective treasury management activities.

31. Further details of treasury investments are contained in the Treasury Management Strategy which is presented to Audit, Finance and Governance Committee for scrutiny at their January meeting prior to being presented to Cabinet and Full Council for approval.

Governance

32. Decisions on treasury management investment and borrowing are made daily and are therefore delegated to the Chief Finance Officer and his team, who must act in line with the treasury management strategy approved by Full Council. Quarterly reports on treasury management activity are presented to Audit, Finance and Governance Committee and Cabinet. The Audit, Finance and Governance Committee is responsible for scrutinising treasury management decisions.

33. The Council also makes investments to meet public service objectives as well as to generate income.

34. The Council follows the requirements of the MHCLG Statutory Guidance on Local Government Investments in setting out the annual Investment Strategy for these types of investments.

Investments for Service Purposes

35. The Council’s non-treasury investments are made in accordance with the Commercial Strategy approved by Cabinet at its meeting on 13 December 2017.

36. The Commercial Strategy provides the framework for activities that will:

    • Form an essential part of the solution to the funding gap;
    • Potentially lead to the generation of revenue income, to provide additional resource to meet the council’s ambitions and statutory duties for Wealden as set out in other strategies and plans; and
    • Deliver functions, services and outputs that bring benefits to local people and in doing so helps meet Corporate Plan objectives

37. One of the current projects being delivered as part of the Commercial Strategy is the purchase of shares and the making of loans to the Council’s wholly owned company Sussex Weald Homes Limited.

38. In light of the public service objective associated with the investment in this project, the Council is willing to take more risk than with treasury investments if appropriate and subject to the Council’s risk management policy; however it still plans for such investments to generate a profit after all costs.

39. Decisions on such investments are made within the framework set out in the Commercial Strategy, quarterly reports are presented to the Audit, Finance and Governance Committee and, as they involve capital expenditure, are also approved as part of the capital programme.

Financial Investments

Sussex Weald Homes Limited:

40. The Council invests in and can make loans to its wholly owned company, Sussex Weald Homes Limited. The company was established with the following objectives:

    • Enable new homes to be built for sale that meets an unmet need;
    • Provide employment to aid the local economy;
    • Contribute to the regeneration of towns and villages;
    • Deliver the 35% affordable homes on each development, as required in the Wealden Plan, which are usually sold to the Housing Revenue Account; and
    • Provide a capital and revenue return to the Council to contribute to the General Fund to enable it to continue to run services to best meet the needs of the local community.

41. The Sussex Weald Homes Ltd Shareholder Agreement with Wealden District Council requires that the Council’s Audit, Finance and Governance Committee approves its Business Plan in the autumn of each year, and is presented with a quarterly update on its work.

42. At 31 December 2019, the Council has invested a total of £3.429 million in shares in Sussex Weald Homes Ltd. This comprises £0.100 million of working capital for the initial set-up of the company, £0.160 million development financing and the rest is part of the approved financing of the Jarvis Brook, Crowborough development to deliver 34 new homes, 12 of which will be affordable housing.

43. Upper limits on the sums invested in and loaned to the company have been set as follows.

Table 10. Limits on Equity & Loans to Sussex Weald Homes Ltd.

 

Equity

Loans

Total

 

£m

£m

£m

Working Capital

0.1

0.0

0.1

Development Financing

0.2

0.0

0.2

Jarvis Brook Development

3.1

4.8

7.9

Total

3.4

4.8

8.2

 

44. Accounting standards require the Council to set aside loss allowance for loans, reflecting the likelihood of non-payment. The figure for loans in the Council’s statement of accounts from 2019/20 onwards will be shown net of this loss allowance. However, we always make every reasonable effort to collect the full sum loaned and there are appropriate credit control arrangements in place to recover any overdue repayments.

Indicators

45. The Council has set the following quantitative indicators to allow elected members and the public to assess the Council’s total risk exposure as a result of its investment decisions. The first indicator shows the Council’s total exposure to potential investment losses.

 

31/03/19 Actual

31/03/20 Estimate

31/03/21 Estimate

£m

£m

£m

Treasury management investments

38.5

29.2

24.8

Service investments:

 

 

 

Shares in & Loans to Sussex Weald Homes Ltd

0.4

7.4

8.2

Total Exposure

38.9

36.6

33.0

 

46. Government guidance is that these indicators should include how investments are funded. Since the Council does not normally associate particular assets with particular liabilities, this guidance is difficult to comply with. However, it is estimated that part of the investment in Sussex Weald Homes will be funded by internal borrowing as shown in the following table. The remainder of the Council’s investments are funded by usable reserves and income received in advance of expenditure. None of these investments are currently funded by external borrowing.

Table 13. Investments Funded by Borrowing

 

31/03/19 Actual

31/03/20 Estimate

31/03/21 Estimate

£m

£m

£m

Service investments:

 

 

 

Shares in & Loans to Sussex Weald Homes Ltd

0.0

0.0

4.8

Total Funded by Internal Borrowing

0.0

0.0

4.8

47. In relation to capital expenditure, interest payable on loans, MRP and HRA voluntary loan repayments are charged to revenue, offset by any investment income receivable. The net annual charge is known as financing costs; this is compared to the net revenue stream i.e. the amount funded from Council Tax, business rates and general government grants for the General Fund and the amount funded from rental income for the HRA.

Table 14. Prudential Indicator: Proportion of Financing Costs to Net Revenue Stream

 

31/03/19 Actual

31/03/20 Forecast

31/03/21 Estimate

31/03/22 Estimate

31/03/23 Estimate

 

£m

£m

£m

£m

£m

GF Financing Costs

0.100

0.300

(0.100)

(0.100)

(0.100)

HRA Financing Costs

3.838

4.029

3.977

4.072

4.295

GF Proportion of Net Revenue Stream

0.52%

1.49%

-0.5%

-0.56%

-0.56%

HRA Proportion of Net Revenue Stream

26.36%

27.46%

26.05%

25.76%

26.09%

48. The Council employs professionally qualified and experienced staff in senior positions with responsibility for making capital expenditure, borrowing and investment decisions. For example, the Chief Finance Officer, Financial Services Manager and Principal Accountant are all qualified accountants, each with more than 10 years’ experience. The Council pays for junior staff to study towards relevant professional qualifications including CIPFA and AAT.

49. Where officers do not have specialist knowledge and skills required, use is made of external advisers and consultants that are specialists in their field. The Council currently employs Arlingclose Limited as treasury management advisers and makes use of different property consultants as required. This approach is more cost effective than employing such staff directly, and ensures that the Council has access to knowledge and skills commensurate with its risk appetite.

50. The needs of the Council’s treasury management staff for training in investment management are assessed every six months as part of the staff appraisal process, and additionally when the responsibilities of individual members of staff change. They also regularly attend training courses, seminars and conferences provided by Arlingclose and CIPFA.

51. The CIPFA Code requires the responsible officer to ensure that Members with responsibility for treasury management receive adequate training in treasury management. This especially applies to Members responsible for scrutiny. The Audit, Finance and Governance Committee receive training presentations on treasury management as needed, with the next training expected to be provided in 2020, provided by the Council’s treasury advisers Arlingclose. Further training will be arranged as required.

  1. Cabinet is recommended to recommend to Council:
    1. To approve the 2020/21 Capital Strategy and Investment Strategy;
    2. To approve the Prudential Indicators for 2020/21 as set out in this report; and
    3. To approve that for the 2020/21 financial year the Council makes Minimum Revenue Provision in accordance with the Asset Life (Equal Instalment) Method for new capital expenditure.

Implications

Financial:

The strategy proposed in this report is in line with the assumptions made when the 2020/21 revenue and capital budgets were prepared.

Legal:

The Local Government Act 2003 and supporting regulations requires the Council to ‘have regard to’ the CIPFA Prudential Code for Capital Finance in Local Authorities 2017 Edition and to set Prudential Indicators for the next three years to ensure that the Council’s capital investment plans are affordable, prudent and sustainable.  This report meets these requirements

Human Resources:

None arising directly from this report.

Other:

The Capital Strategy has been formulated to minimise risk. Risk management is embedded in treasury and investment operations through the adoption of the CIPFA Treasury Management Code and compliance with the CIPFA Prudential Code. 

 

Contacts/ References:

Director

Trevor Scott, Chief Executive

Head of Service

Brian Thompson, Interim Chief Finance Officer

Report Author

Jennie Barnes, Financial Services Manager

Contact Details

01323 443231, jennie.barnes@wealden.gov.uk

Appendices

Appendix A – Minimum Revenue Provision Statement 2020/21      

 

Background Papers

None.

Published Reference documents

None.

Key Decision

YES

Exempt / Not for Publication

NO

  1. Where the Council finances capital expenditure by debt, it must put aside resources to repay that debt in later years. The amount charged to the revenue budget for the repayment of debt is known as Minimum Revenue Provision (MRP), although there has been no statutory minimum since 2008. The Local Government Act 2003 requires the Council to have regard to the Ministry for Housing, Communities and Local Government’s (MHCLG) Statutory Guidance on Minimum Revenue Provision, the most recent edition of which was issued in 2018 to take effect from 1 April 2019.
  2. The Council is legally obliged to “have regard” to the guidance, which offers four main options under which MRP could be made, with an overriding recommendation that the Council should make prudent provision to redeem its debt liability over a period which is reasonably commensurate with that over which the capital expenditure is estimated to provide benefits. The requirement to ‘have regard’ to the guidance therefore means that:
    • Although four main options are recommended in the guidance, there is no intention to be prescriptive by making these the only methods of charge under which a local authority may consider its MRP to be prudent; and
    • It is the responsibility of each authority to decide upon the most appropriate method of making a prudent provision, after having had regard to the guidance.
  3. There is no requirement to charge MRP where the Capital Financing Requirement (CFR) is nil or negative at the end of the preceding financial year. There is no requirement on the Housing Revenue Account to make an MRP charge but there is a requirement for a charge for depreciation to be made.

Option 1: Regulatory Method

  1. Under the previous MRP regulations, MRP was set at a uniform rate of 4% of the adjusted CFR (i.e. adjusted for “Adjustment A” in relation to the Housing Revenue Account to ensure consistency with previous Regulations) on a reducing balance method (which in effect meant that MRP charges would stretch into infinity). This historic approach must continue for all capital expenditure incurred in years before the start of this new approach.  It may also be used for new capital expenditure up to the amount which is deemed to be supported through the Supported Capital Expenditure annual allocation.

Option 2: Capital Financing Requirement Method

  1. This is a variation on option 1 which is based upon a charge of 4% of the aggregate CFR without any adjustment for Adjustment A, or certain other factors which were brought into account under the previous statutory MRP calculation. The CFR is the measure of an authority’s outstanding debt liability as depicted by their balance sheet.

Option 3: Asset Life Method

  1. This method may be applied to most new capital expenditure, including where desired that which may alternatively continue to be treated under options 1 or 2.
  2. Under this option, it is intended that MRP should be spread over the estimated useful life of either an asset created, or other purpose of the expenditure. There are two useful advantages of this option:
  3. Longer life assets e.g. freehold land can be charged over a longer period than would arise under options 1 and 2; and
  4. No MRP charges need to be made until the financial year after that in which an item of capital expenditure is fully incurred and, in the case of a new asset, comes into service use (this is often referred to as being an ‘MRP holiday’).  This is not available under options 1 and 2.
  5. There are two methods of calculating charges under option 3:
    • equal instalment method – equal annual instalments; or
    • annuity method – annual payments gradually increase during the life of the asset.

Option 4: Depreciation Method

  1. Under this option, MRP charges are to be linked to the useful life of each type of asset using the standard accounting rules for depreciation (but with some exceptions) i.e. this is a more complex approach than option 3. The same conditions apply regarding the date of completion of the new expenditure as apply under option 3.

Annual Minimum Revenue Provision Statement 2020/21

  1. For capital expenditure incurred before 1 April 2008, the MRP policy will be to follow the existing practice outlined in former regulations (Option 1). This provides for an approximate 4% reduction in the borrowing need (CFR) each year.
  2. The Council has evaluated the options for MRP policy in respect of capital expenditure incurred from 1 April 2008 and considers that the Asset Life – Equal Instalment Method is the most appropriate for it to use. This provides for a reduction in the borrowing need over approximately the useful life of the asset.
  3. Estimated life periods will be determined by the Chief Finance Officer. To the extent that expenditure is not on the creation of an asset and is of a type that is subject to estimated life periods that are referred to in the guidance, these periods will generally be adopted by the Council. However, the Council reserves the right to determine useful life periods and prudent MRP in exceptional circumstances where the recommendations of the guidance would not be appropriate.
  4. As some types of capital expenditure incurred by the Council are not capable of being related to an individual asset, asset lives will be assessed on a basis which most reasonably reflects the anticipated period of benefit that arises from the expenditure. Also, whatever type of expenditure is involved, it will be grouped together in a manner which reflects the nature of the main component of expenditure and will only be divided up in cases where there are two or more major components with substantially different useful economic lives.
  5. Repayments included in finance leases are applied as MRP.
  6. No MRP will be charged in respect of assets held within the Housing Revenue Account.

2019-20

Capital Strategy 2019/20 including Investment Strategy and Minimum Revenue Provision Statement

Summary:

This report presents the Capital Strategy and Investment Strategy for 2019/20, including capital expenditure and financing, risk management, the prudential indicators and the annual minimum revenue provision statement.

Portfolio Holder: Cllr Robert Standley, Leader of the Council

Recommendation

Full Council is recommended to:

  1. Approve the 2019/20 Capital Strategy and Investment Strategy;
  2. Approve the Prudential Indicators for 2019/20 as set out in this report; and

Approve that for the 2019/20 financial year the Council makes Minimum Revenue Provision in accordance with the Asset Life (Equal Instalment) Method for new capital expenditure.

To comply with: the Local Government Act 2003 and supporting regulations, the Council’s Financial Procedure Rules, CIPFA’s Prudential Code for Capital Finance in Local Authorities 2017 Edition and MHCLG Statutory Guidance on Local Government Investments and Statutory Guidance on Minimum Revenue Provision.

  1. This capital strategy is a new report for 2019/20, giving a high-level overview of how capital expenditure, capital financing and treasury management activity contribute to the provision of local public services along with an overview of how associated risk is managed and the implications for future financial sustainability. The aim is to ensure this report is presented in an accessible style to enhance members’ understanding of these sometimes technical areas.

2. The CIPFA Prudential Code plays a key role in capital finance in local authorities. Local authorities determine their own programmes for capital investment that are central to the delivery of quality public services. The Prudential Code was developed by CIPFA as a professional code of practice to support local authorities in taking their decisions. The Council is required by regulation to have regard to the Prudential Code when carrying out its duties under Part 1 of the Local Government Act 2003.

3. This report combines the capital strategy, investment strategy and the Minimum Revenue Provision Statement for 2019/20. It is complemented by the Treasury Management Strategy 2019/20, also presented to Full Council for approval.

4. Capital expenditure is where the Council spends money on assets, such as property or equipment that will be used for more than one year. In local government this includes spending on assets owned by other bodies, and loans and grants to other bodies enabling them to buy assets. The Council has some limited discretion on what counts as capital expenditure, for example assets costing below £10k are not capitalised and are charged to revenue in year.

5. The Council’s capitalisation policy is contained in the Accounting Policies as approved annually in March by the Audit and Finance Committee and published in the annual statement of accounts – available at: http://www.wealden.gov.uk/Wealden/Council/Transparency_Spending_and_Performance/Spending/The_Councils_Finances/Finance_Statement_of_Accounts.aspx

6. The Council’s planned capital expenditure for 2019/20 is summarised below:

Table 1. Prudential Indicator: Estimates of Capital Expenditure

 

 

2017/18 Actual

2018/19 Forecast

2019/20 Estimate

2020/21 Estimate

2021/22 Estimate

 

£m

£m

£m

£m

£m

General Fund Services

17.1

8.3

2.5

1.2

1.1

Capital Investments

0.4

4.8

4.0

1.1

0.7

General Fund Total

17.5

13.1

6.5

2.3

1.8

HRA New Builds

5.7

9.2

3.3

5.1

7.7

HRA Other Capital Expenditure

5.0

4.0

6.0

5.0

5.0

HRA Total

10.7

13.2

9.3

10.1

12.7

Total

28.2

26.3

15.8

12.3

14.4

 

7. The main General Fund capital projects include the Crematorium (Total of £6.4 million in 2017/18 and 2018/19), the development of SANGS sites in Crowborough and Uckfield (Total of £3.0 million from 2017/18 to 2019/20), and the provision of Disabled Facilities Grants funded by grant from the Better Care Fund (Total £3.9 million from 2017/18 to 2021/22). This line also includes the £12.9 million costs from the purchase of Vicarage Field that took place in 2017/18.

8. The Council’s actual and planned capital expenditure on investments comprises investment in the Council’s wholly-owned company Sussex Weald Homes Limited and infrastructure investment funded by New Homes Bonus. Further details on the Council’s capital investments are set out later in this report under the heading of ‘Investment Strategy’.

9. The Housing Revenue Account (HRA) is a ring-fenced account which ensures that council housing does not subsidise, or is itself subsidised, by other local services. HRA capital expenditure is therefore recorded separately, and includes the building of new homes across the district over the forecast period as well as capital investment to maintain existing housing stock.

Governance

10. Service managers bid to include projects in the Council’s capital programme. Bids are put forward and discussed with finance officers who calculate the financing cost (which can be nil if the project is fully financed) and develop the overall proposed programme which is reviewed and appraised by the Chief Finance Officer, and is informed by the meetings of the Asset Management Group and budget discussions between finance and service areas. There is a separate Capital Programme for the General Fund and for the HRA and these are both presented as part of the respective budget proposals to Cabinet in January and to Council in February each year. They are also subject to public consultation in December and January.

All capital expenditure must be financed, either from external sources (e.g. government grants and other contributions), the Council’s own resources (revenue, reserves and capital receipts) or debt (borrowing and leasing). The planned financing of the General Fund and HRA capital programmes is as follows:

Table 2a. General Fund Capital Financing

   

 

2017/18 Actual

2018/19 Forecast

2019/20 Estimate

2020/21 Estimate

2021/22 Estimate

 

£m

£m

£m

£m

£m

External Sources

0.7

0.6

1.1

0.5

0.5

Own Resources

7.7

7.7

3.0

1.2

0.8

Borrowing

9.0

4.8

2.4

0.6

0.5

General Fund Total

17.5

13.2

6.5

2.3

1.8

 

Table 2b. HRA Capital Financing

    

 

2017/18 Actual

2018/19 Forecast

2019/20 Estimate

2020/21 Estimate

2021/22 Estimate

 

£m

£m

£m

£m

£m

External Sources

0.0

0.0

0.0

0.0

0.0

Own Resources

6.5

8.0

6.2

9.5

7.2

Borrowing

4.2

5.2

3.1

0.6

5.5

HRA Total

10.7

13.2

9.3

10.1

12.7

 

11. Debt is only a temporary source of finance, since loans and leases must be repaid, and this is therefore replaced over time by other financing, usually from revenue. For the General Fund this is known as minimum revenue provision (MRP) and in the HRA this is the voluntary provision for loan repayments. Alternatively, proceeds from selling capital assets (known as capital receipts) may be used to replace debt finance. Planned MRP and voluntary provision for loan repayments and any use of capital receipts are as follows:

 

Table 3. Replacement of Debt Finance

   

 

2017/18 Actual

2018/19 Forecast

2019/20 Estimate

2020/21 Estimate

2021/22 Estimate

 

£m

£m

£m

£m

£m

GF: Minimum Revenue Provision

-0.5

-0.4

-0.6

-0.6

-0.6

GF: Application of capital receipts

0.0

-2.7

0.0

0.0

0.0

HRA: Voluntary Repayment Provision

-2.2

-2.3

-2.3

-2.3

-2.3

Total

-2.7

-5.4

-2.9

-2.9

-2.9

        

Minimum Revenue Provision

12. The Council applies the ‘Asset Life – Equal Instalment’ method for its calculation of MRP related to new capital expenditure. The Council’s full Minimum Revenue Provision statement is attached as Appendix A to this report.

Capital Financing Requirement

13. The Capital Financing Requirement (CFR) measures a vital component of the Council’s capital strategy; the amount of capital spending that has not yet been financed by capital receipts, capital grants or contributions from revenue income. It measures the underlying need to borrow for a capital purpose, although this borrowing may not necessarily take place externally. The Council may judge it prudent to make use of cash that it has already invested for long-term purposes. In doing this, the Council does not reduce the magnitude of the funds it is holding for these long-term purposes but simply adopts an efficient and effective treasury management strategy. This practice, known as ‘internal borrowing’, is common in local authorities and means there is no immediate link between the need to borrow to pay for capital spending and the level of external borrowing.

14. The Council’s CFR increases with new debt-financed capital expenditure and reduces with MRP / voluntary repayments and capital receipts used to replace debt. The CFR is expected to increase by £2.6 million during 2019/20. Based on the above figures for expenditure and financing, the Council’s estimated CFR is as follows.

Table 4. Prudential Indicator: Capital Financing Requirement Projections

 

31/03/18 Actual

31/03/19 Forecast

31/03/20 Estimate

31/03/21 Estimate

31/03/22 Estimate

 

£m

£m

£m

£m

£m

General Fund CFR

10.6

12.2

14.0

13.9

13.8

HRA CFR

64.2

67.4

68.2

66.4

69.6

Total CFR

74.8

79.6

82.2

80.3

83.4

In-Year Movement

+10.5

+4.8

+2.6

-1.9

+3.1

 

Asset Management and Asset Disposals

15. To ensure that capital assets continue to be of long-term use, the Council has an asset management group comprising the Leader of the Council as Finance Portfolio Holder, senior officers including the Chief Finance Officer, and officers from Housing & Property Services. The Council has an Assets Policy which is updated every four years in line with the Council’s Corporate Plan. The updated Assets Policy will be prepared and published on the Council’s website in 2019.

16. When a capital asset is no longer needed, it may be sold so that the proceeds, known as capital receipts, can be spent on new assets or to repay debt. Repayments of capital grants, loans and investments also generate capital receipts.

17. HRA capital receipts are generated from ‘Right to Buy’ disposals of council dwellings and from sales of shared ownership leases.

18. Current legislation allows council tenants the Right to Buy (RTB) their council home with a discount of up to a maximum of £80,900. Prior to 2012, receipts from RTB disposals were pooled; 75% paid to Government and 25% retained by the Council. In 2012, the Government introduced a new RTB policy whereby Councils can retain all of the surplus RTB receipts as long as the receipts are used for one–for-one replacement of homes sold. The retained surplus RTB receipt will vary dependant on the type/size of the property sold, however on average the retained surplus receipts at Wealden equate to approximately 60% of the gross RTB receipts. The current one-for-one replacement rules restrict the amount that councils can use from surplus RTB receipts to 30% of the development cost.

19. The following table shows the actual and estimated capital receipts over the forecast period.

Table 5. Capital Receipts

    

 

2017/18 Actual

2018/19 Forecast

2019/20 Estimate

2020/21 Estimate

2021/22 Estimate

 

£m

£m

£m

£m

£m

General Fund Capital Receipts

0.0

3.6

0.0

0.0

0.0

HRA Capital Receipts

2.6

 2.3

2.2 

2.2 

 2.2

Total

2.6

5.9

2.2

2.2

2.2

20. Treasury management is concerned with keeping sufficient but not excessive cash available to meet the Council’s spending needs, while managing the risks involved. Surplus cash is invested until required, while a shortage of cash will be met by borrowing, to avoid excessive credit balances or overdrafts in the bank current account. The Council is typically cash rich in the short-term as revenue income is received before it is spent, but cash poor in the long-term as capital expenditure is incurred before being financed. The revenue cash surpluses are offset against capital cash shortfalls to reduce overall borrowing.

21. As at 31 December 2018, the Council held investments of £65.8 million at an average interest rate of 1.13% and £53.4 million external borrowing at an average interest rate of 3.18%. The balance held as investments is always higher than usual on this date due to it being just before precepts are paid out in early January.

Borrowing Strategy

22. The Council’s main objectives when borrowing are to achieve a low but certain cost of finance while retaining flexibility should plans change in future. These objectives are often conflicting, and the Council therefore seeks to strike a balance between cheap short-term loans (currently available at around 0.75%) and long-term fixed rate loans where the future cost is known but higher (currently 2.0 to 3.0%).

23. Projected levels of the Council’s total outstanding debt (which comprises only borrowing from PWLB currently) are shown below, compared with the capital financing requirement.

Table 6. Prudential Indicator: Gross Debt and CFR

  

 

31/03/18 Actual

31/03/19 Forecast

31/03/20 Estimate

31/03/21 Estimate

31/03/22 Estimate

 

£m

£m

£m

£m

£m

External Debt

53.5

51.2

48.9

46.6

44.3

Capital Financing Requirement

74.8

79.6

82.2

80.3

83.4

 

24. Statutory guidance is that debt should remain below the capital financing requirement, except in the short-term. As can be seen from table 6 above, the Council expects to comply with this in the medium term.

Liability Benchmark

25. To compare the Council’s actual borrowing against an alternative strategy, a liability benchmark has been calculated showing the lowest risk level of borrowing. This assumes that cash and investment balances are kept to a minimum level of £10 million at each year-end. This benchmark is currently forecast to be £33.6 million at 31/03/2019 and it is estimated this will rise to £42.2 million over the next three years.

Table 7. Borrowing and the Liability Benchmark

  

 

31/03/18 Actual

31/03/19 Forecast

31/03/20 Estimate

31/03/21 Estimate

31/03/22 Estimate

 

£m

£m

£m

£m

£m

External Debt

53.5

51.2

48.9

46.6

44.3

Liability Benchmark

28.5

33.6

36.4

38.4

42.2

 

26. The table shows that the Council expects to remain borrowed above its liability benchmark. This is due to the fact that the majority of the Council’s debt relates to the amount (£47.9 million) that the Council was required to take out in 2012 to finance the purchase of its housing stock as part of the implementation of the HRA self-financing regime for Council Housing. The borrowing was compulsory to end the housing subsidy system. The interest and repayment costs were comparable with the negative housing subsidy payable by the Council at the time but are now cheaper than if the old negative HRA subsidy had been indexed. The repayments of this debt were profiled over a period of 30 years in order to protect against re-financing risk.

Affordable Borrowing Limit

27. The Council is legally obliged to set an affordable borrowing limit (also termed the authorised limit for external debt) each year and to keep it under review. In line with statutory guidance, a lower “operational boundary” is also set as a warning level should debt approach the limit. The limits are set out in the following table.

Table 8. Prudential Indicators: Authorised limit and operational boundary for external debt

 

2018/19 Limit

2019/20 Limit

2020/21 Limit

2021/22 Limit

 

£m

£m

£m

£m

Operational boundary

 

 

 

 

Borrowing

117.5

112.5

112.5

112.5

Leases

2.5

2.5

2.5

2.5

Total Operational Boundary

120.0

115.0

115.0

115.0

 

     

Authorised limit for external debt

    

Borrowing

141.0

136.0

136.0

136.0

Leases

4.0

4.0

4.0

4.0

Total Authorised Limit

145.0

140.0

140.0

140.0

      

 

28. Further details on the Council’s borrowing are contained in the Treasury Management Strategy 2019/20 which is also presented to Cabinet at their January meeting.

HRA Prudential Limit

29. In October 2018 the Government announced the removal of the HRA borrowing cap and issued local authorities with determinations to confirm that the removal of the cap was to take effect from 1 April 2018. Prior to the lifting of the debt cap, Wealden had reached the maximum level of borrowing it could undertake without eating into the margins of safety (the debt limit imposed was £71.679 million). The Council can now set its own prudential limit for the HRA and the limit now proposed is £95 million. This has been proposed after careful assessment of affordability and sustainability in line with the 30 year HRA Business Plan. As with all borrowing decisions, the Council will still need to take into account the affordability of borrowing against available revenue streams.

Treasury Investment Strategy

30. Treasury investments arise from receiving cash before it is paid out again. Investments made for service reasons or for pure financial gain are not generally considered to be part of treasury management.

31. The Council’s policy on treasury investments is to prioritise security and liquidity over yield; that is, to focus on minimising risk rather than maximising returns. Cash that is likely to be spent in the near term is invested securely, for example with the government, other local authorities or selected high-quality banks and money market funds, to minimise the risk of loss. Money that will be held for longer terms is invested more widely, including in diversified funds (which typically include investments in bonds, shares and property) to balance the risk of loss against the risk of receiving returns below inflation. Both near-term and longer-term investments may be held in pooled funds, where an external fund manager makes decisions on which particular investments to buy and the Council may request its money back at short notice.

32. The Council’s treasury investments are shown below. The balances shown as longer term investments relate to balances held in strategic pooled funds. The Council plans to hold these investments for a longer period than just one year but the terms of the funds mean that we are able to request the money back with one month’s notice at any time.

Table 9. Treasury Investments

    

 

31/03/18 Actual

31/03/19 Forecast

31/03/20 Estimate

31/03/21 Estimate

31/03/22 Estimate

 

£m

£m

£m

£m

£m

Near-term investments

30.4

17.6

12.5

8.2

2.1

Longer-term investments

4.5

10.0

10.0

10.0

10.0

Total

34.9

27.6

22.5

18.2

12.1

33. The contribution that these investments make to the objectives of the Council is to support effective treasury management activities.

34. Further details of treasury investments are contained in the Treasury Management Strategy 2019/20 which is presented to Audit & Finance Committee for scrutiny prior to being presented to Cabinet and Full Council for approval.

Governance

35. Decisions on treasury management investment and borrowing are made daily and are therefore delegated to the Chief Finance Officer and his team, who must act in line with the treasury management strategy approved by Full Council. Quarterly reports on treasury management activity are presented to Audit and Finance Committee and Cabinet. The Audit & Finance Committee is responsible for scrutinising treasury management decisions.

36. The Council also makes investments to meet public service objectives as well as to generate income.

37. The Council follows the requirements of the MHCLG Statutory Guidance on Local Government Investments in setting out the annual Investment Strategy for these types of investments.

Investments for Service Purposes

38. The Council’s non-treasury investments are made in accordance with the Commercial Strategy approved by Cabinet at its meeting on 13 December 2017.

39. The Commercial Strategy provides the framework for activities that will:

    • Form an essential part of the solution to the funding gap;
    • Potentially lead to the generation of revenue income, to provide additional resource to meet the council’s ambitions and statutory duties for Wealden as set out in other strategies and plans; and
    • Deliver functions, services and outputs that bring benefits to local people and in doing so helps meet Corporate Plan objectives

40. One of the current projects being delivered as part of the Commercial Strategy is the purchase of shares and the making of loans to the Council’s wholly owned company Sussex Weald Homes Limited.

41. In light of the public service objective associated with the investment in this project, the Council is willing to take more risk than with treasury investments if appropriate and subject to the Council’s risk management policy; however it still plans for such investments to generate a profit after all costs.

42. Decisions on such investments are made within the framework set out in the Commercial Strategy; quarterly reports are presented to the Audit and Finance Committee and, as they involve capital expenditure, are also approved as part of the capital programme.

Financial Investments

Sussex Weald Homes Limited

43. The Council invests in and can make loans to its wholly owned company, Sussex Weald Homes Limited. The company was established with the following objectives:

    • Enable new homes to be built for sale that meets an unmet need;
    • Provide employment to aid the local economy;
    • Contribute to the regeneration of towns and villages;
    • Deliver the 35% affordable homes on each development, as required in the Wealden Plan, which are usually sold to the Housing Revenue Account; and
    • Provide a capital and revenue return to the Council to contribute to the General Fund to enable it to continue to run services to best meet the needs of the local community.

44. The GF capital programme and MTFS was amended and approved in July 2017 in order to approve a funding facility for ‘Commercial, Housing and Infrastructure’ investment within which the investment in Sussex Weald Homes Ltd is classified.

45. The programme provided for a total of up to £15 million in 2017/18 and then £10 million a year from 2018/19 to 2020/21 for commercial, housing and infrastructure investment to be funded partially by loan and partially by New Homes Bonus and the Capital Fund Reserve. Loans to Sussex Weald Homes Limited must be at a commercial rate and will be repaid in full by sales, meaning there is at least a net zero revenue implication on the General Fund.  The commercial, housing and infrastructure investment is subject to business case and due diligence processes before formal decision to proceed.  This also applies to any opportunities the Council may wish to take independently of the company.

46. The Sussex Weald Homes Ltd Shareholder Agreement with Wealden District Council requires that the Council’s Audit and Finance Committee approves its Business Plan in the autumn of each year, and is presented with a quarterly update on its work.

47. At 31 December 2018, the Council has invested a total of £3.429 million in shares in Sussex Weald Homes Ltd. This comprises £0.100 million of working capital for the initial set-up of the company, £0.160 million development financing and the rest is part of the approved financing of the Jarvis Brook, Crowborough development to deliver 34 new homes, 12 of which will be affordable housing.

48. Upper limits on the sums invested in and loaned to the company have been set as follows.

Table 10. Limits on Equity & Loans to Sussex Weald Homes Ltd.

 

Equity

Loans

Total

 

£m

£m

£m

Working Capital

0.1

0.0

0.1

Development Financing

0.2

0.0

0.2

Jarvis Brook Development

3.1

4.8

7.9

Total

3.4

4.8

8.2

 

49. Accounting standards require the Council to set aside loss allowance for loans, reflecting the likelihood of non-payment. The figure for loans in the Council’s statement of accounts from 2018/19 onwards will be shown net of this loss allowance. However, we always make every reasonable effort to collect the full sum loaned and there are appropriate credit control arrangements in place to recover any overdue repayments.

Indicators

50. The Council has set the following quantitative indicators to allow elected members and the public to assess the Council’s total risk exposure as a result of its investment decisions. The first indicator shows the Council’s total exposure to potential investment losses.

Table 11. Total Investments Exposure

 

31/03/18 Actual

31/03/19 Estimate

31/03/20 Estimate

£m

£m

£m

Treasury management investments

35.0

27.6

22.5

Service investments:

 

 

 

Shares in & Loans to Sussex Weald Homes Ltd

0.4

5.3

8.1

Total Exposure

35.4

32.9

30.6

 

51. Government guidance is that these indicators should include how investments are funded. Since the Council does not normally associate particular assets with particular liabilities, this guidance is difficult to comply with. However, it is estimated that part of the investment in Sussex Weald Homes will be funded by internal borrowing as shown in the following table. The remainder of the Council’s investments are funded by usable reserves and income received in advance of expenditure. None of these investments are currently funded by external borrowing.

Table 12. Investments Funded by Borrowing

 

31/03/18 Actual

31/03/19 Estimate

31/03/20 Estimate

£m

£m

£m

Service investments:

 

 

 

Shares in & Loans to Sussex Weald Homes Ltd

0.0

0.0

4.8

Total Funded by Internal Borrowing

0.0

0.0

4.8

52. In relation to capital expenditure, interest payable on loans, MRP and HRA voluntary loan repayments are charged to revenue, offset by any investment income receivable. The net annual charge is known as financing costs; this is compared to the net revenue stream i.e. the amount funded from Council Tax, business rates and general government grants for the General Fund and the amount funded from rental income for the HRA.

Table 13. Prudential Indicator: Proportion of Financing Costs to Net Revenue Stream

 

31/03/18 Actual

31/03/19 Forecast

31/03/20 Estimate

31/03/21 Estimate

31/03/22 Estimate

 

£m

£m

£m

£m

£m

GF Financing Costs

0.125

0.125

0.400

0.400

0.400

HRA Financing Costs

3.881

3.838

4.029

4.090

4.126

GF Proportion of Net Revenue Stream

0.65%

0.65%

2.03%

2.28%

2.33%

HRA Proportion of Net Revenue Stream

26.47%

26.36%

27.46%

27.44%

27.05%

53. The Council employs professionally qualified and experienced staff in senior positions with responsibility for making capital expenditure, borrowing and investment decisions. For example, the Chief Finance Officer, Financial Services Manager and Principal Accountant are all qualified accountants, each with more than 10 years’ experience. The Council pays for junior staff to study towards relevant professional qualifications including CIPFA and AAT.

54. Where officers do not have specialist knowledge and skills required, use is made of external advisers and consultants that are specialists in their field. The Council currently employs Arlingclose Limited as treasury management advisers and makes use of different property consultants as required. This approach is more cost effective than employing such staff directly, and ensures that the Council has access to knowledge and skills commensurate with its risk appetite.

55. The needs of the Council’s treasury management staff for training in investment management are assessed every six months as part of the staff appraisal process, and additionally when the responsibilities of individual members of staff change. They also regularly attend training courses, seminars and conferences provided by Arlingclose and CIPFA.

56. The CIPFA Code requires the responsible officer to ensure that Members with responsibility for treasury management receive adequate training in treasury management. This especially applies to Members responsible for scrutiny. The Audit and Finance Committee receive training presentations on treasury management as needed, the most recent of which was on 15th March 2017 provided by the Council’s treasury advisers Arlingclose. Further training will be arranged as required.

57. Cabinet is recommended to recommend to Council to :

    • Approve the 2019/20 Capital Strategy and Investment Strategy;
    • Approve the Prudential Indicators for 2019/20 as set out in this report; and
    • Approve that for the 2019/20 financial year the Council makes Minimum Revenue Provision in accordance with the Asset Life (Equal Instalment) Method for new capital expenditure.

Financial Implications

58. The strategy proposed in this report is in line with the assumptions made when the 2019/20 revenue and capital budgets were prepared.

Legal Implications

59. The Local Government Act 2003 and supporting regulations requires the Council to ‘have regard to’ the CIPFA Prudential Code for Capital Finance in Local Authorities 2017 Edition and to set Prudential Indicators for the next three years to ensure that the Council’s capital investment plans are affordable, prudent and sustainable. This report meets these requirements.

Human Resources Implications

60. None arising directly from this report.

Other Implications

61. The Capital Strategy has been formulated to minimise risk. Risk management is embedded in treasury and investment operations through the adoption of the CIPFA Treasury Management Code and compliance with the CIPFA Prudential Code.

 

Other Implications

Applies?

Other Implications

Applies?

Human Rights

No

Equalities and Diversity

No

Crime and Disorder

No

Consultation

No

Environmental

No

Access to Information

No

Sustainability

No

Exempt from publication

No

Risk Management

Yes

 

 

 

Director:

Trevor Scott, Chief Executive

Proper Officer:

Steven Linnett, Chief Finance Officer

Report Contact Officer:

Gillian Taberner, Financial Services Manager

Telephone Number:

01323 443231

e-mail address:

gillian.taberner@wealden.gov.uk

Appendices:

A Minimum Revenue Provision Statement 2019/20

Background Papers:

None

Minimum Revenue Provision Statement 2019/20

  1. Where the Council finances capital expenditure by debt, it must put aside resources to repay that debt in later years. The amount charged to the revenue budget for the repayment of debt is known as Minimum Revenue Provision (MRP), although there has been no statutory minimum since 2008. The Local Government Act 2003 requires the Council to have regard to the Ministry for Housing, Communities and Local Government’s (MHCLG) Statutory Guidance on Minimum Revenue Provision, the most recent edition of which was issued in 2018 to take effect from 1 April 2019.
  2. The Council is legally obliged to “have regard” to the guidance, which offers four main options under which MRP could be made, with an overriding recommendation that the Council should make prudent provision to redeem its debt liability over a period which is reasonably commensurate with that over which the capital expenditure is estimated to provide benefits. The requirement to ‘have regard’ to the guidance therefore means that:
    • Although four main options are recommended in the guidance, there is no intention to be prescriptive by making these the only methods of charge under which a local authority may consider its MRP to be prudent; and
    • It is the responsibility of each authority to decide upon the most appropriate method of making a prudent provision, after having had regard to the guidance.
  3. There is no requirement to charge MRP where the Capital Financing Requirement (CFR) is nil or negative at the end of the preceding financial year. There is no requirement on the Housing Revenue Account to make an MRP charge but there is a requirement for a charge for depreciation to be made.

Option 1: Regulatory Method

  1. Under the previous MRP regulations, MRP was set at a uniform rate of 4% of the adjusted CFR (i.e. adjusted for “Adjustment A” in relation to the Housing Revenue Account to ensure consistency with previous Regulations) on a reducing balance method (which in effect meant that MRP charges would stretch into infinity). This historic approach must continue for all capital expenditure incurred in years before the start of this new approach.  It may also be used for new capital expenditure up to the amount which is deemed to be supported through the Supported Capital Expenditure annual allocation.

Option 2: Capital Financing Requirement Method

  1. This is a variation on option 1 which is based upon a charge of 4% of the aggregate CFR without any adjustment for Adjustment A, or certain other factors which were brought into account under the previous statutory MRP calculation. The CFR is the measure of an authority’s outstanding debt liability as depicted by their balance sheet.

Option 3: Asset Life Method

  1. This method may be applied to most new capital expenditure, including where desired that which may alternatively continue to be treated under options 1 or 2.
  2. Under this option, it is intended that MRP should be spread over the estimated useful life of either an asset created, or other purpose of the expenditure. There are two useful advantages of this option:
  3. Longer life assets e.g. freehold land can be charged over a longer period than would arise under options 1 and 2; and
  4. No MRP charges need to be made until the financial year after that in which an item of capital expenditure is fully incurred and, in the case of a new asset, comes into service use (this is often referred to as being an ‘MRP holiday’).  This is not available under options 1 and 2.
  5. There are two methods of calculating charges under option 3:
    • equal instalment method – equal annual instalments; or
    • annuity method – annual payments gradually increase during the life of the asset.

Option 4: Depreciation Method

  1. Under this option, MRP charges are to be linked to the useful life of each type of asset using the standard accounting rules for depreciation (but with some exceptions) i.e. this is a more complex approach than option 3. The same conditions apply regarding the date of completion of the new expenditure as apply under option 3.

Annual Minimum Revenue Provision Statement 2019/20

  1. For capital expenditure incurred before 1 April 2008, the MRP policy will be to follow the existing practice outlined in former regulations (Option 1). This provides for an approximate 4% reduction in the borrowing need (CFR) each year.
  2. The Council has evaluated the options for MRP policy in respect of capital expenditure incurred from 1 April 2008 and considers that the Asset Life – Equal Instalment Method is the most appropriate for it to use. This provides for a reduction in the borrowing need over approximately the useful life of the asset.
  3. Estimated life periods will be determined by the Chief Finance Officer. To the extent that expenditure is not on the creation of an asset and is of a type that is subject to estimated life periods that are referred to in the guidance, these periods will generally be adopted by the Council. However, the Council reserves the right to determine useful life periods and prudent MRP in exceptional circumstances where the recommendations of the guidance would not be appropriate.
  4. As some types of capital expenditure incurred by the Council are not capable of being related to an individual asset, asset lives will be assessed on a basis which most reasonably reflects the anticipated period of benefit that arises from the expenditure. Also, whatever type of expenditure is involved, it will be grouped together in a manner which reflects the nature of the main component of expenditure and will only be divided up in cases where there are two or more major components with substantially different useful economic lives.
  5. Repayments included in finance leases are applied as MRP.
  6. No MRP will be charged in respect of assets held within the Housing Revenue Account.

Treasury Management 

The Treasury Management Strategy sets out how the Council manages cash flows, borrowing, investments, and the associated risks. This strategy includes a number of prudential (treasury management) and local indicators. 

2020-21

This report presents the Treasury Management Strategy for 2020/21, including risk management, prudential indicators, and the borrowing requirement.  Background information on the economic situation and the likely interest rate movements are included in the report, which informs the recommendations made.

Cabinet is recommended to recommend to Full Council:

a.         To approve the 2020/21 Treasury Management, and

b.         To approve the Treasury Indicators for 2020/21 as set out in this report.

To comply with: the Local Government Act 2003 and supporting regulations, the Council’s Financial Procedure Rules, CIPFA’s Treasury Management in the Public Services: Code of Practice 2017 Edition, and Prudential Code for Capital Finance in Local Authorities 2017 Edition and the Ministry for Housing, Communities and Local Government’s (MHCLG) Statutory Guidance on Local Government Investments 3rd Edition (2018). 

  1. Treasury management is the management of the Council’s cash flows, borrowing and investments, and the associated risks. The Council has borrowed and invested substantial sums of money and is therefore exposed to financial risks including the loss of invested funds and the revenue effect of changing interest rates. The successful identification, monitoring and control of financial risks are therefore central to the Council’s prudent financial management.
  2. Treasury risk management is conducted within the framework of the Chartered Institute of Public Finance and Accountancy’s Treasury Management in the Public Services: Code of Practice 2017 Edition (the CIPFA Code) which requires the Council to approve a treasury management strategy before the start of each financial year. This report fulfils the Council’s legal obligation under the Local Government Act 2003 to have regard to the CIPFA Code.
  3. Investments held for service purposes or for commercial profit are considered in a different report, the Capital and Investment Strategy which is presented to Audit, Finance and Governance Committee for scrutiny prior to being presented to Cabinet and Full Council for approval in February.

Economic Background

4. The Councils Treasury Management adviser, Arlingclose, has provided the following commentary.

5. The UK’s progress negotiating its exit from the European Union, together with its future trading arrangements, will continue to be a major influence on the Authority’s treasury management strategy for 2020/21. The General Election has removed some uncertainty within the market, the Withdrawal Bill has now been published as the European Union (Withdrawal Agreement) Act 2020, however uncertainties around the future trading relationship with the EU remain.

6. GDP growth rose by 0.4% in the third quarter of 2019 from -0.2% in the previous three months with the annual rate falling further below its trend rate to 1.1% from 1.2%. Services, construction and production added positively to growth, by 0.5%, 1.2% and 0.1% respectively, while agriculture recorded a fall of 0.1%. Looking ahead, the Bank of England’s Monetary Policy Report (formerly the Quarterly Inflation Report) forecasts economic growth to pick up during 2020 as Brexit-related uncertainties dissipate and provide a boost to business investment helping GDP reach 1.6% in Q4 2020, 1.8% in Q4 2021 and 2.1% in Q4 2022.

7. The headline rate of UK Consumer Price Inflation remained the same in November 2019 at 1.5% year-on-year, the same as October 2019, however continuing to fall from highs of 2.1% in July and April 2019 as accommodation services and transport continued to contribute to a level of inflation below the BOE target of 2%. Labour market data continues to be positive. The ILO unemployment rate continues to hold at historic lows at 3.8%, its lowest level since 1975. The 3-month average annual growth rate for pay excluding bonuses rose to 3.5% in November 2019 providing some evidence that a shortage of labour is supporting wages. However, adjusting for inflation this means real wages were only up by 0.9% in October 2019 and only likely to have a moderate impact on household spending.

8. Domestic inflationary pressures have abated, as domestic gas and electricity price freezes have taken effect until 2020. The price of oil has fallen through the year, despite a rise in prices in December 2019. The limited inflationary pressure from real wages will likely keep inflation below the Bank of England target of 2%. The Bank of England maintained Bank Rate to 0.75% in November following a 7-2 vote by the Monetary Policy Committee. Despite keeping rates on hold, MPC members did confirm that if Brexit uncertainty drags on or global growth fails to recover, they are prepared to cut interest rates as required. Moreover, the downward revisions to some of the growth projections in the Monetary Policy Report suggest the Committee may now be less convinced of the need to increase rates even if there is a Brexit deal.

9. The US economy has continued to perform relatively well compared to other developed nations; however, the Federal Reserve has started to unwind its monetary tightening through 2019. The Federal Reserve has cut rates three times to 1.5% – 1.75%, to stimulate growth as GDP growth has started to fall (to 2.1%).

10. The fallout from the US-China trade war continues which, risks contributing to a slowdown in global economic activity in 2019. Recent suggestions have been an initial compromise and potential unwinding of tariffs; however, this can change quickly. Slow growth in Europe, combined with changes in leadership at the ECB and IMF has led to a change of stance in 2019. Quantitative easing has continued and been extended.

11. The recent Bank of England stress tests assessed all seven UK banking groups. The tests scenarios include deep simultaneous recessions in the UK and global economies that are more severe overall than the global financial crisis, combined with large falls in asset prices and a separate stress of misconduct costs. All seven banks passed the test on both a CET1 ratio and a leverage ratio basis. Major banks have steadily increased their capital for many years now. However, there are a number of shortcomings in the Bank’s approach; timeliness as the results are over 11 months of out date when they are published, being based on end-2018 balance sheets; ringfencing, as the tests ignore the restrictions on transferring capital between ringfenced “retail” banks and non-ringfenced “investment” banks within the larger groups and; coverage – the tests should be expanded to cover a wider range of UK banks and building societies.

12. The Bank of England will seek to address some of these issues in 2020, when Virgin Money/Clydesdale will be added to the testing group and separate tests will be included of ringfenced banks.

13. Challenger banks hit the news headlines in 2019 with Metro Bank and TSB Bank both suffering adverse publicity and falling customer numbers.

14. Looking forward, the potential for a “no-deal” Brexit and/or a global recession remain the major risks facing banks and building societies in 2020/21 and a cautious approach to bank deposits remains advisable.

Interest Rate Forecast

15. The Authority’s treasury management adviser Arlingclose is forecasting that Bank Rate will remain at 0.75% until the end of 2022. The risks to this forecast are deemed to be significantly weighted to the downside, particularly given the upcoming general election, the need for greater clarity on Brexit and the continuing global economic slowdown.  The Bank of England, having previously indicated interest rates may need to rise if a Brexit agreement was reached, stated in its November Monetary Policy Report and its Bank Rate decision (7-2 vote to hold rates) that the MPC now believe this is less likely even in the event of a deal.

16. Gilt yields have risen but remain at low levels and only some very modest upward movement from current levels are expected based on Arlingclose’s interest rate projections. The central case is for 10-year and 20-year gilt yields to rise to around 1.00% and 1.40% respectively over the time horizon, with broadly balanced risks to both the upside and downside.  However, short-term volatility arising from both economic and political events over the period is a near certainty.

17. A more detailed economic and interest rate forecast provided by Arlingclose is attached at Appendix A.

18. For the purpose of setting the budget, it has been assumed that new treasury management investments will be made at an average rate of 0.8%, and that new long-term loans will be borrowed at an average rate of 2.6%.

19. On 31st December 2019, the Council held £51.2m of borrowing and £76.4m of investments. The balance held as investments is always higher than average on this date due to it being just before precepts are paid out in early January. Further detail of the investment and borrowing portfolio is set out in Appendix B.

20. Forecast changes in these sums are shown in the balance sheet analysis in the table below.

 

Balance Sheet Summary and Forecast

31/03/2019 Actual

31/03/2020 Forecast

31/03/2021 Estimate

31/03/2022 Estimate

31/03/2023 Estimate

£m

£m

£m

£m

£m

General Fund CFR

10.9

14.0

16.4

16.2

15.9

HRA CFR

68.0

68.2

71.0

73.6

76.9

Total CFR

78.9

82.2

87.4

89.8

92.8

Less: External borrowing (PWLB)

-51.2

-48.9

-46.6

-44.3

-42.0

Internal borrowing

27.7

33.3

40.8

45.5

50.8

Less: Usable reserves

-52.3

-48.0

-44.0

-43.3

-44.3

Less: Working capital

-13.9

-14.5

-21.6

-20.9

-23.6

Investments

38.5

29.2

24.8

 18.7

17.1

 

21. The underlying need to borrow for capital purposes is measured by the Capital Financing Requirement (CFR), while usable reserves and working capital are the underlying resources available for investment. The Council’s current strategy is to maintain borrowing and investments below their underlying levels, sometimes known as internal borrowing, i.e. the use of cash balances held for other purposes to delay the need to borrow from external sources.

22. The Council has an increasing CFR due to the Capital Programme. There are plans to use reserves and capital receipts for financing of some capital expenditure.

23. CIPFA’s Prudential Code for Capital Finance in Local Authorities recommends that the Council’s total external debt should be lower than its highest forecast CFR over the next three years. The table above shows that we expect to comply with this recommendation during 2020/21.

24. The Council currently holds £51.2 million of PWLB loans, a decrease of £2.3 million on the previous year, as part of its strategy for funding previous years’ HRA capital programmes. The balance sheet forecast in the table above shows that no new external borrowing is expected in 2020/21. The Council may borrow however to externalise current internal borrowing to take advantage of rates and thus free up internal borrowing capacity to meet future years’ spending at more advantageous rates, providing this does not exceed the authorised limit for borrowing of £115 million.

25. The Council’s primary objective when borrowing money is to strike an appropriately low risk balance between securing low interest costs and achieving certainty of those costs over the period for which funds are required. The flexibility to renegotiate loans should our long-term plans change is a secondary objective; especially given the punitive early repayment rates imposed by the PWLB.

26. Given the significant reductions in local government funding, the Council’s borrowing strategy continues to address the key issue of affordability without compromising the longer-term stability of the debt portfolio. With short-term interest rates currently much lower than long-term rates, it is likely to be more cost effective in the short-term to either use internal resources, or to borrow short-term loans instead.

27. By doing so, the Council is able to reduce net borrowing costs (despite foregone investment income) and reduce overall treasury risk. The benefits of internal borrowing will be monitored regularly against the potential for incurring additional costs by deferring borrowing into future years when long-term borrowing rates are forecast to rise modestly. Arlingclose will assist us with this ‘cost of carry’ and breakeven analysis. Its output may determine whether the Council borrows additional sums at long-term fixed rates in 2020/21 with a view to keeping future interest costs low, even if this causes additional cost in the short-term.

28. The Authority has previously raised all of its long-term borrowing from the PWLB but the government increased PWLB rates by 1% in October 2019 making it now a relatively expensive option. The Authority will now look to borrow any long-term loans from other sources including banks, pensions and local authorities, and will investigate the possibility of issuing bonds and similar instruments, in order to lower interest costs and reduce over-reliance on one source of funding in line with the CIPFA Code.

29. Alternatively, the Council may arrange forward starting loans during 2020/21, where the interest rate is fixed in advance, but the cash is received in later years. This would enable certainty of cost to be achieved without suffering a cost of carry in the intervening period.

30. In addition, the Council may borrow short-term loans to cover unplanned cash flow shortages.

Sources of Borrowing

The approved sources of long-term and short-term borrowing are as follows:

  1. Public Works Loan Board (PWLB) and any successor body;
  2. any institution approved for investments (see below);
  3. any other bank or building society authorised to operate in the UK;
  4. any other UK Public Sector Body; and
  5. UK Municipal Bonds Agency Plc.

Other Sources of Debt Finance

31. In addition, capital finance may be raised by the following methods that are not borrowing, but may be classed as other debt liabilities:

    1. Operating and Finance Leases;
    2. Hire Purchase; and
    3. Sale and Leaseback

Municipal Bonds Agency

32. UK Municipal Bonds Agency plc was established in 2014 by the Local Government Association as an alternative to the PWLB. It plans to issue bonds on the capital markets and lend the proceeds to local authorities.  This will be a more complicated source of finance than the PWLB for two reasons: borrowing authorities will be required to provide bond investors with a guarantee to refund their investment in the event that the agency is unable to for any reason; and there will be a lead time of several months between committing to borrow and knowing the interest rate payable. Any decision to borrow from the Agency will therefore be the subject of a separate report to Full Council.

Debt Rescheduling

33. The PWLB allows authorities to repay loans before maturity and either pay a premium or receive a discount according to a set formula based on current interest rates. Other lenders may also be prepared to negotiate premature redemption terms. The Council may take advantage of this and replace some loans with new loans, or repay loans without replacement, where this is expected to lead to an overall cost saving or a reduction in risk.

34. Any rescheduling will be discussed with the Portfolio Holder for Finance and reported to the Cabinet, at the earliest meeting following its action.

35. The Council holds significant invested funds, representing income received in advance of expenditure plus balances and reserves held. In the past 12 months, the Council’s investment balances have ranged between £30m and £76.4 million and are expected to remain at similar levels in the forthcoming year.

36. The CIPFA Code requires the Council to invest its funds prudently, and to have regard to the security and liquidity of its investments before seeking the highest rate of return, or yield.

37. The Council’s objective when investing money is to strike an appropriate balance between risk and return, minimising the risk of incurring losses from defaults and the risk of receiving unsuitably low investment income. Where balances are expected to be invested for more than one year, the Council will aim to achieve a total return that is equal or higher than the prevailing rate of inflation, in order to maintain the spending power of the sum invested.

38. The Council receives investment advice from Arlingclose and where possible invests in Green and carbon neutral investments. Some investments within the Council’s pooled and money market investments will be in this category and the Council is constantly considering investments of this nature.

39. Negative interest rates: If the UK enters into a recession in 2020/21, there is a small chance that the Bank of England could set its Bank Rate at or below zero, which is likely to feed through to negative interest rates on all low risk, short-term investment options. This situation already exists in many other European countries. In this event, security will be measured as receiving the contractually agreed amount at maturity, even though this may be less than the amount originally invested.

40. Given the increasing risk and very low returns from short-term unsecured bank investments, the Council aims to maintain the current strategy of diversification into more secure and/or higher yielding asset classes during 2020/21. This is especially the case for the estimated £10 million that is available for longer-term investment. A proportion of the Council’s surplus cash remains invested in money market funds.  This diversification represents a continuation of the strategy adopted in 2018/19.

41. Under the new IFRS 9 Financial Instruments standard, the accounting for certain investments depends on the Council’s “business model” for managing them. The Council aims to achieve value from its internally managed treasury investments by a business model of collecting the contractual cash flows and therefore, where other criteria are also met, these investments will continue to be accounted for at amortised cost.

Approved counterparties

42. The Council may invest its surplus funds with any of the counterparty types in the table below, subject to the cash limits (per counterparty) and the time limits shown.

Credit rating

Banks unsecured

Banks Secured

Government

Registered Providers

Wholly owned companies

UK Government

n/a

n/a

£ Unlimited

n/a

n/a

50 years

AAA and AA+

£3m

£5m

£7m

£3m

 

5 years

10 years

25 years

5 years

 

AA and AA-

£3m

£5m

£7m

£3m

 

3 years

4 years

10 years

3 years

 

A+

£3m

£5m

£7m

£3m

n/a

2 years

3 years

5 years

2 years

 

A

£3m

£5m

£7m

£3m

 

13 months

2 years

5 years

13 months

 

A-

£3m

£5m

£7m

£3m

 

 6 months

13 months

 5 years

 6 months

 

None

n/a

n/a

£7m

n/a

£20m

25 years

5 years

Pooled funds

 

£10m per fund

Current Account of the Council’s banker

 

£20m maximum but seek to keep overnight balances in a range of £1m to £15m in line with managing risk and maximising yield.

 

43. The above table must be read in conjunction with the notes below.

44. Credit rating: Investment limits are set by reference to the lowest published long-term credit rating from a selection of external rating agencies. Where available, the credit rating relevant to the specific investment or class of investment is used, otherwise the counterparty credit rating is used. However, investment decisions are never made solely based on credit ratings, and all other relevant factors including external advice will be taken into account.

45. Banks unsecured: Accounts, deposits, certificates of deposit and senior unsecured bonds with banks and building societies, other than multilateral development banks. These investments are subject to the risk of credit loss via a bail-in should the regulator determine that the bank is failing or likely to fail. See below for arrangements relating to operational bank accounts.

46. Banks secured: Covered bonds, reverse repurchase agreements and other collateralised arrangements with banks and building societies. These investments are secured on the bank’s assets, which limits the potential losses in the unlikely event of insolvency, and means that they are exempt from bail-in. Where there is no investment specific credit rating, but the collateral upon which the investment is secured has a credit rating, the higher of the collateral credit rating and the counterparty credit rating will be used to determine cash and time limits. The combined secured and unsecured investments in any one bank will not exceed the cash limit for secured investments.

47. Government: Loans, bonds and bills issued or guaranteed by national governments, regional and local authorities and multilateral development banks. These investments are not subject to bail-in, and there is generally a lower risk of insolvency, although they are not zero risk. Investments with the UK Central Government (i.e. DMADF – Debt Management Account Deposit Facility) may be made in unlimited amounts for up to 50 years.

48. Registered Providers: Loans and bonds issued by, guaranteed by or secured on the assets of registered providers of social housing and registered social landlords, formerly known as housing associations. These bodies are tightly regulated by the Regulator of Social Housing (in England), the Scottish Housing Regulator, the Welsh Government and the Department for Communities (in Northern Ireland). As providers of public services, they retain the likelihood of receiving government support if needed.

49. Wholly-owned companies: Loans and share capital in companies wholly owned by the Council.

50. Pooled funds: Shares or units in diversified investment vehicles consisting of any of the above investment types, plus equity shares and property. These funds have the advantage of providing wide diversification of investment risks, coupled with the services of a professional fund manager in return for a fee. Short-term Money Market Funds that offer same-day liquidity and very low or no volatility will be used as an alternative to instant access bank accounts, while pooled funds whose value changes with market prices and/or have a notice period will be used for longer investment periods.

51. Bond, equity and property funds offer enhanced returns over the longer term, but are more volatile in the short term. These allow the Council to diversify into asset classes other than cash without the need to own and manage the underlying investments. Because these funds have no defined maturity date, but are available for withdrawal after a notice period, their performance and continued suitability in meeting the Council’s investment objectives will be monitored regularly.

52. Operational bank accounts: The Council may incur operational exposures, for example though current accounts, collection accounts and merchant acquiring services, to any UK bank with credit ratings no lower than BBB- and with assets greater than £25 billion. These are not classed as investments, but are still subject to the risk of a bank bail-in. Therefore the balance in the Council’s current account will be kept to the minimum required for operational purposes. Generally this will be around £1m to £3m, rising to an overnight maximum of £15m on monthly precept dates. The Bank of England has stated that in the event of failure, banks with assets greater than £25 billion are more likely to be bailed-in than made insolvent, increasing the chance of the Council maintaining operational continuity.

53. Risk assessment and credit ratings: Credit ratings are obtained and monitored by the Council’s treasury advisers, who will notify changes in ratings as they occur. Where an entity has its credit rating downgraded so that it fails to meet the approved investment criteria then:

    1. no new investments will be made;
    2. any existing investments that can be recalled or sold at no cost will be; and
    3. full consideration will be given to the recall or sale of all other existing investments with the affected counterparty.

54. Where a credit rating agency announces that a credit rating is on review for possible downgrade (also known as “rating watch negative” or “credit watch negative”) so that it may fall below the approved rating criteria, then only investments that can be withdrawn on the next working day will be made with that organisation until the outcome of the review is announced. This policy will not apply to negative outlooks, which indicate a long-term direction of travel rather than an imminent change of rating.

55. Other information on the security of investments: The Council understands that credit ratings are good, but not perfect, predictors of investment default. Full regard will therefore be given to other available information on the credit quality of the organisations in which it invests, including credit default swap prices, financial statements, information on potential government support, reports in the quality financial press and analysis and advice from the Council’s treasury management adviser.  No investments will be made with an organisation if there are substantive doubts about its credit quality, even though it may otherwise meet the above investment criteria.

56. When deteriorating financial market conditions affect the creditworthiness of all organisations, as happened in 2008 and 2011, this is not generally reflected in credit ratings, but can be seen in other market measures. In these circumstances, the Council will restrict its investments to those organisations of higher credit quality and reduce the maximum duration of its investments to maintain the required level of security.  The extent of these restrictions will be in line with prevailing financial market conditions. If these restrictions mean that insufficient commercial organisations of high credit quality are available to invest the Council’s cash balances, then the surplus will be deposited with the UK Government, via the Debt Management Office or invested in government treasury bills for example, or with other local authorities.  This will cause a reduction in the level of investment income earned, but will protect the principal sum invested.

Investment Limits

57. The Council’s revenue reserves available to cover any investment losses are forecast to be £29 million on 31st March 2020. In order that no more than 20% of available reserves will be put at risk in the case of a single default, the maximum that will be lent to any one organisation (other than the UK Government) will be £5 million.  A group of banks under the same ownership will be treated as a single organisation for limit purposes.  Limits will also be placed on fund managers, investments in brokers’ nominee accounts, foreign countries and industry sectors as below. Investments in pooled funds and multilateral development banks do not count against the limit for any single foreign country, since the risk is diversified over many countries.

24.      Investment Limits

Cash limit

25.      Any single organisation, except the UK Central Government

£5m each

26.      UK Central Government

Unlimited

27.      UK Local Government

£7m per local authority

28.      Any group of organisations under the same ownership

£5m per group

29.      Any group of pooled funds under the same management

£10m per fund manager

30.      Negotiable instruments held in a broker’s nominee account

£5m per broker

31.      Foreign countries

£3m per country

32.      Registered providers

£3m in total

33.      Unsecured investments with building societies

£7m in total

34.      Loans to unrated corporates –

35.      Wealden District Council Owned Companies only

£20m in total

36.      Money market funds

£10m per fund

 

  1. Liquidity management: The Council uses detailed cash flow forecasting analysis to determine the maximum period for which funds may prudently be committed. The forecast is compiled on a prudent basis to minimise the risk of the Council being forced to borrow on unfavourable terms to meet its financial commitments. Limits on long-term investments are set by reference to the Council’s medium term financial plan and cash flow forecast.

61. The Council measures and manages its exposures to treasury management risks using the following indicators.

Security

62. The Council has adopted a voluntary measure of its exposure to credit risk by monitoring the value-weighted average credit rating of its investment portfolio. This is calculated by applying a score to each investment (AAA=1, AA+=2, etc.) and taking the arithmetic average, weighted by the size of each investment. Unrated investments are assigned a score based on their perceived risk.

Credit Risk Indicator

Target

Portfolio average credit rating

A

Liquidity

63. The Council has adopted a voluntary measure of its exposure to liquidity risk by monitoring the amount of cash available to meet unexpected payments within a rolling three month period, without additional borrowing.

Liquidity Risk Indicator

Target

Total cash available within 3 months

£10m

Interest Rate Exposure

64. CIPFA defines interest rate risk as “the risk that fluctuations in the levels of interest rates create an unexpected or unbudgeted burden on the organisation’s finances, against which the organisation has failed to protect itself adequately.” In local authorities this risk is therefore commonly considered in the context of the impact of changes in interest rates on the revenue accounts.

65. In adopting a suitable indicator to measure this risk, the Council has taken advice from our treasury management advisers to use the same measure as required in the Statement of Accounts financial instruments disclosure; namely the impact over one year of a 1% change in interest rates. The disclosure in the accounts shows the actual result of this measure. For this Treasury Management Strategy, an upper limit is set in order to provide protection to the General Fund and the HRA from unexpected falls in interest rates causing a loss of investment income, and from unexpected rises in interest rates causing an increase in interest payable.

66. All of the Council’s borrowings are at fixed rates from the PWLB and therefore the risk of an increase in interest payable over a year caused by an increase in interest rates is effectively minimised.

67. The impact of a change in interest rates is calculated on the assumption that maturing loans and investments will be replaced at current rates.

Interest Rate Risk Indicator

Upper Limit

One year revenue impact of a 1% change in interest rates

£0.6m

Maturity Structure of Borrowing

68. This indicator is set to control the Council’s exposure to refinancing risk. The upper and lower limits on the maturity structure of borrowing will be as shown in the following table.

Refinancing Rate Risk Indicator

Upper Limit

Lower Limit

 
 

Under 12 months

25%

0%

 

12 months to 2 years

50%

0%

 

2 years to 5 years

75%

0%

 

5 years to 10 years

100%

0%

 

10 years to 20 years

100%

0%

 

20 years to 30 years

100%

0%

 

30 years and above

100%

0%

 

69. Time periods start on the first day of each financial year. The maturity date of borrowing is the earliest date on which the lender can demand repayment.

Principal Sums Invested for Periods Longer Than One Year

70. The purpose of this indicator is to control the Council’s exposure to the risk of incurring losses by seeking early repayment of its investments. The limits on the long-term principal sum invested to final maturities beyond the period end will be as set out in the following table.

Price Risk Indicator

2019/20

2020/21

2021/22

Limit on principal invested beyond year end

£8m

£6m

£6m

Related Matters

71. The Council is required by the CIPFA Code to include the following in its Treasury Management Strategy.

Financial Derivatives

72. Local authorities have previously made use of financial derivatives embedded into loans and investments both to reduce interest rate risk (e.g. interest rate collars and forward deals) and to reduce costs or increase income at the expense of greater risk (e.g. LOBO loans and callable deposits). The general power of competence in Section 1 of the Localism Act 2011 removes much of the uncertainty over local authorities’ use of standalone financial derivatives (i.e. those that are not embedded into a loan or investment).

73. The Council’s policy is that it will only use standalone financial derivatives (such as swaps, forwards, futures and options) where they can be clearly demonstrated to reduce the overall level of the financial risks that the Council is exposed to. Additional risks presented, such as credit exposure to derivative counterparties, will be taken into account when determining the overall level of risk. Embedded derivatives, including those present in pooled funds and forward starting transactions, will not be subject to this policy, although the risks they present will be managed in line with the overall treasury risk management strategy.

74. Financial derivative transactions may be arranged with any organisation that meets the approved investment criteria. The current value of any amount due from a derivative counterparty will count against the counterparty credit limit and the relevant foreign country limit. In line with the CIPFA Code, the Council will seek external advice and will consider that advice before entering into financial derivatives to ensure that it fully understands the implications.

Policy on Apportioning Interest to the HRA

75. All of the Council’s existing long-term external borrowing relates to the HRA. In the future, new long-term loans borrowed will be assigned in their entirety to either the General Fund or the HRA as relevant. This means the Council will manage external borrowing as two pools effectively – HRA and General Fund. Interest payable and other costs / income arising from long-term loans (e.g. premiums and discounts on early redemption) will be charged / credited to the respective revenue account. Differences between the value of the HRA loans pool and the HRA’s underlying need to borrow (adjusted for HRA balance sheet resources available for investment) will result in a notional cash balance which may be positive or negative. This balance will be measured and interest transferred between the General Fund and HRA annually at the Council’s average interest rate on investments, adjusted for credit risk.

Markets in Financial Instruments Directive (MiFID)

76. The Council has opted up to professional client status with its providers of financial services, including advisers, banks, brokers and fund managers, allowing it access to a greater range of services but without the greater regulatory protections afforded to individuals and small companies. Given the size and range of the Council’s treasury management activities, the Chief Financial Officer believes this to be the most appropriate status. As one of the criteria for retaining this status is a minimum investment balance of £10 million, the Council’s strategy includes keeping this amount invested for the longer term.

Cabinet is recommended to recommend Council:

    • To approve the 2020/21Treasury Management Strategy; and
    • To approve the Treasury Indicators for 2020/21 as set out in this report.

Implications

Financial:

78. The strategy proposed in this report, together with the interest rates forecast, is in line with the assumptions made when the 2020/21 budget was prepared.  The costs of treasury operations, debt management expenses and investment income are included in the 2020/21 budget.

Legal:

79.     The Local Government Act 2003 and supporting regulations requires the Council to ‘have regard to’ the CIPFA Prudential Code for Capital Finance in Local Authorities 2017 Edition and to set Prudential Indicators for the next three years to ensure that the Council’s capital investment plans are affordable, prudent and sustainable.  The Council also has to ‘have regard’ to the MHCLG’s Guidance on Local Government Investments 3rd Edition effective for financial periods commencing on or after 1st April 2018, and to CIPFA’s Treasury Management in the Public Services: Code of Practice 2017 Edition and Guidance Notes for Local Authorities 2018 Edition.

Human Resources:

80.      None rising from this report.

Other:

81.     The Treasury Strategy has been formulated to minimise risk. Risk management is embedded in treasury management operations through the adoption of the CIPFA Treasury Management Code.  Credit ratings and other market intelligence are used and counterparty limits also assist to assess and mitigate risk.

Contacts/ References:

Director

Trevor Scott, Chief Executive

Head of Service

Brian Thompson, Interim Chief Finance Officer

Report Author

Jennie Barnes

Contact Details

01323 443231, jennie.barnes@wealden.gov.uk

Appendices

Appendix A – Arlingclose Interest Rate Forecast      

Appendix B – Investment and Borrowing Portfolio at 31/12/2019

Background Papers

None.

Published Reference documents

None.

Key Decision

YES 

Exempt / Not for Publication

NO

Underlying assumptions:

  1. The global economy is entering a period of slower growth in response to political issues, primarily the trade policy stance of the US. The UK economy has displayed a marked slowdown in growth due to both Brexit uncertainty and the downturn in global activity. In response, global and UK interest rate expectations have eased.
  2. Some positivity on the trade negotiations between China and the US has prompted worst-case economic scenarios to be pared back. However, information is limited, and upbeat expectations have been wrong before.
  3. Brexit has been delayed until 31 January 2020. While the General Election has maintained economic and political uncertainty, the opinion polls suggest the Conservative position in parliament may be strengthened, which reduces the chance of Brexit being further frustrated. A key concern is the limited transitionary period following a January 2020 exit date, which will maintain and create additional uncertainty over the next few years.
  4. UK economic growth has stalled despite Q3 2019 GDP of 0.3%. Monthly figures indicate growth waned as the quarter progressed and survey data suggest falling household and business confidence. Both main political parties have promised substantial fiscal easing, which should help support growth.
  5. While the potential for divergent paths for UK monetary policy remain in the event of the General Election result, the weaker external environment severely limits potential upside movement in Bank Rate, while the slowing UK economy will place pressure on the MPC to loosen monetary policy. Indeed, two MPC members voted for an immediate cut in November 2019.
  6. Inflation is running below target at 1.7%. While the tight labour market risks medium-term domestically-driven inflationary pressure, slower global growth should reduce the prospect of externally driven pressure, although political turmoil could push up oil prices.
  7. Central bank actions and geopolitical risks will continue to produce significant volatility in financial markets, including bond markets.

Forecast:

8. Although we have maintained our Bank Rate forecast at 0.75% for the foreseeable future, there are substantial risks to this forecast, dependant on General Election outcomes and the evolution of the global economy.

9. Arlingclose judges that the risks are weighted to the downside.

10. Gilt yields have risen but remain low due to the soft UK and global economic outlooks. US monetary policy and UK government spending will be key influences alongside UK monetary policy.

11. We expect gilt yields to remain at relatively low levels for the foreseeable future and judge the risks to be broadly balanced. 

Treasury Portfolio

31/12/2019

Actual Portfolio

Average Rate

£m

%

External borrowing

  

Public Works Loan Board

51.16

3.35%

Total external borrowing

51.16

3.35%

Total other long-term liabilities

0.00

Total gross external debt

51.16

3.35%

   

Treasury investments:

  

Banks & building societies (unsecured)

(9.41)

0.65%

Covered bonds (secured)

(2.00)

1.07%*

Government (incl. local authorities)

(42.00)

0.84%

Money Market Funds

(13.00)

0.72%*

Pooled Diversified Income Funds

(10.00)

4.22%*

Total treasury investments

(76.41)

1.50%

Net debt

(25.25)

 

*Rate is as at September 2019, December 2019 figures expected early February.

2019-20

This report presents the Treasury Management Strategy for 2019/20, including risk management, prudential indicators, and the borrowing requirement.  Background information on the economic situation and the likely interest rate movements are included in the report, which informs the recommendations made.

Cabinet is recommended to recommend to Council to:

A. Approve the 2019/20 Treasury Management Strategy; and

B. Approve the Treasury Indicators for 2019/20 as set out in this report.

To comply with: the Local Government Act 2003 and supporting regulations, the Council’s Financial Procedure Rules, CIPFA’s Treasury Management in the Public Services: Code of Practice 2017 Edition, and Prudential Code for Capital Finance in Local Authorities 2017 Edition and the Ministry for Housing, Communities and Local Government’s (MHCLG) Statutory Guidance on Local Government Investments 3rd Edition (2018).

 

  1. Treasury management is the management of the Council’s cash flows, borrowing and investments, and the associated risks. The Council has borrowed and invested substantial sums of money and is therefore exposed to financial risks including the loss of invested funds and the revenue effect of changing interest rates. The successful identification, monitoring and control of financial risks are therefore central to the Council’s prudent financial management.

2. Treasury risk management is conducted within the framework of the Chartered Institute of Public Finance and Accountancy’s Treasury Management in the Public Services: Code of Practice 2017 Edition (the CIPFA Code) which requires the Council to approve a treasury management strategy before the start of each financial year. This report fulfils the Council’s legal obligation under the Local Government Act 2003 to have regard to the CIPFA Code.

3. Investments held for service purposes or for commercial profit are considered in a different report, the Capital and Investment Strategy which is presented to Audit & Finance Committee for scrutiny prior to being presented to Cabinet in January and Full Council for approval in February.

Economic Background

4. The Council’s treasury management adviser, Arlingclose, has provided the following commentary.

5. The UK’s progress negotiating its exit from the European Union, together with its future trading arrangements, will continue to be a major influence on the Council’s treasury management strategy for 2019/20.

6. UK Consumer Price Inflation (CPI) for October was up 2.4% year/year, slightly below the consensus forecast and broadly in line with the Bank of England’s November Inflation Report. The most recent labour market data for October 2018 showed the unemployment rate edged up slightly to 4.1% while the employment rate of 75.7% was the joint highest on record. The 3-month average annual growth rate for pay excluding bonuses was 3.3% as wages continue to rise steadily and provide some pull on general inflation.  Adjusted for inflation, real wages grew by 1.0%, a level still likely to have little effect on consumer spending.

7. The rise in quarterly GDP growth to 0.6% in Q3 from 0.4% in the previous quarter was due to weather-related factors boosting overall household consumption and construction activity over the summer following the weather-related weakness in Q1. At 1.5%, annual GDP growth continues to remain below trend.  Looking ahead, the Bank of England (BoE), in its November Inflation Report, expects GDP growth to average around 1.75% over the forecast horizon, providing the UK’s exit from the EU is relatively smooth.

8. Following the BoE’s decision to increase Bank Rate to 0.75% in August, no changes to monetary policy have been made since. However, the Bank expects that should the economy continue to evolve in line with its November forecast, further increases in Bank Rate will be required to return inflation to the 2% target.  The Monetary Policy Committee continues to reiterate that any further increases will be at a gradual pace and limited in extent.

9. While US growth has slowed over 2018, the economy continues to perform robustly. The US Federal Reserve continued its tightening bias throughout 2018, pushing rates to the current 2%-2.25% in September.  Markets continue to expect one more rate rise in December, but expectations are fading that the further hikes previously expected in 2019 will materialise as concerns over trade wars drag on economic activity.

Credit Outlook

10. The big four UK banking groups have now divided their retail and investment banking divisions into separate legal entities under ringfencing legislation. Bank of Scotland, Barclays Bank UK, HSBC UK Bank, Lloyds Bank, National Westminster Bank, Royal Bank of Scotland and Ulster Bank are the ringfenced banks that now only conduct lower risk retail banking activities. Barclays Bank, HSBC Bank, Lloyds Bank Corporate Markets and NatWest Markets are the investment banks. Credit rating agencies have adjusted the ratings of some of these banks with the ringfenced banks generally being better rated than their non-ringfenced counterparts.

11. The BoE released its latest report on bank stress testing, illustrating that all entities included in the analysis were deemed to have passed the test once the levels of capital and potential mitigating actions presumed to be taken by management were factored in. The BoE did not require any bank to raise additional capital.

12. European banks are considering their approach to Brexit, with some looking to create new UK subsidiaries to ensure they can continue trading here. The credit strength of these new banks remains unknown, although the chance of parental support is assumed to be very high if ever needed. The uncertainty caused by protracted negotiations between the UK and EU is weighing on the creditworthiness of both UK and European banks with substantial operations in both jurisdictions.

Interest Rate Forecast

13. Following the increase in Bank Rate to 0.75% in August 2018, the Council’s treasury management adviser Arlingclose is forecasting two more 0.25% increases during 2019 to take official UK interest rates to 1.25%. The Bank of England’s Monetary Policy Committee (MPC) has maintained expectations for slow and steady rate rises over the forecast horizon. The MPC continues to have a bias towards tighter monetary policy but is reluctant to push interest rate expectations too strongly. Arlingclose believes that MPC members consider both that ultra-low interest rates result in other economic problems, and that higher Bank Rate will be a more effective policy weapon should downside Brexit risks crystallise when rate cuts will be required.

14. The UK economic environment remains relatively soft, despite seemingly strong labour market data. Arlingclose’s view is that the economy still faces a challenging outlook as it exits the European Union and Eurozone growth softens. While assumptions are that a Brexit deal is struck and some agreement reached on transition and future trading arrangements before the UK leaves the EU, the possibility of a “no deal” Brexit still hangs over economic activity (at the time of writing this commentary in mid-December). As such, the risks to the interest rate forecast are considered firmly to the downside.

15. Gilt yields and hence long-term borrowing rates have remained at low levels but some upward movement from current levels is expected based on Arlingclose’s interest rate projections, due to the strength of the US economy and the ECB’s forward guidance on higher rates. 10-year and 20-year gilt yields are forecast to remain around 1.7% and 2.2% respectively over the interest rate forecast horizon, however volatility arising from both economic and political events are likely to continue to offer borrowing opportunities.

16. A more detailed economic and interest rate forecast provided by Arlingclose is attached at Appendix A.

17. For the purpose of setting the budget, it has been assumed that new investments will be made at an average rate of 0.90%.

18. On 31st December 2018, the Council held £53.4m of borrowing and £65.80m of investments. The balance held as investments is always higher than average on this date due to it being just before precepts are paid out in early January. Further detail of the investment and borrowing portfolio is set out in Appendix B.

19. Forecast changes in these sums are shown in the balance sheet analysis in the table below.

Balance Sheet Summary and Forecast

31/03/2018 Actual

31/03/2019 Forecast

31/03/2020 Estimate

31/03/2021 Estimate

31/03/2022 Estimate

£m

£m

£m

£m

£m

General Fund CFR

10.5

12.2

15.5

15.4

15.2

HRA CFR

64.2

67.3

68.2

66.4

69.6

Total CFR

74.7

79.5

83.7

81.8

84.8

Less: External borrowing (PWLB)

-53.5

-51.2

-48.9

-46.6

-44.3

Internal borrowing

21.2

28.3

34.8

35.2

40.5

Less: Usable reserves

-41.5

-41.4

-41.3

-37.4

-36.7

Less: Working capital

-14.7

-14.5

-14.5

-14.5

-14.5

Investments

35.0

27.6

21.0

16.7

10.7

 

20. The underlying need to borrow for capital purposes is measured by the Capital Financing Requirement (CFR), while usable reserves and working capital are the underlying resources available for investment. The Council’s current strategy is to maintain borrowing and investments below their underlying levels, sometimes known as internal borrowing, i.e. the use of cash balances held for other purposes to delay the need to borrow from external sources.

21. The Council has an increasing CFR due to the Capital Programme. There are plans to use reserves and capital receipts for financing of some capital expenditure.

22. CIPFA’s Prudential Code for Capital Finance in Local Authorities (2017 Edition) recommends that the Council’s total external debt should be lower than its highest forecast CFR over the next three years. The table above shows that we expect to comply with this recommendation during 2019/20.

23. The Council currently holds £53.4 million of PWLB loans, a decrease of £0.1 million on the previous year, as part of its strategy for funding previous years’ HRA capital programmes. The balance sheet forecast in the table above shows that no new external borrowing is expected in 2019/20. The Council may borrow however to externalise current internal borrowing to take advantage of rates and thus free up internal borrowing capacity to meet future years’ spending at more advantageous rates, providing this does not exceed the authorised limit for borrowing of £116 million.

24. The Council’s primary objective when borrowing money is to strike an appropriately low risk balance between securing low interest costs and achieving certainty of those costs over the period for which funds are required. The flexibility to renegotiate loans should our long-term plans change is a secondary objective; especially given the punitive early repayment rates imposed by the PWLB.

25. Given the significant reductions in local government funding, the Council’s borrowing strategy continues to address the key issue of affordability without compromising the longer-term stability of the debt portfolio. With short-term interest rates currently much lower than long-term rates, it is likely to be more cost effective in the short-term to either use internal resources, or to borrow short-term loans instead.

26. By doing so, the Council is able to reduce net borrowing costs (despite foregone investment income) and reduce overall treasury risk. The benefits of internal borrowing will be monitored regularly against the potential for incurring additional costs by deferring borrowing into future years when long-term borrowing rates are forecast to rise modestly. Arlingclose will assist us with this ‘cost of carry’ and breakeven analysis. Its output may determine whether the Council borrows additional sums at long-term fixed rates in 2019/20 with a view to keeping future interest costs low, even if this causes additional cost in the short-term.

27. Alternatively, the Council may arrange forward starting loans during 2019/20, where the interest rate is fixed in advance, but the cash is received in later years. This would enable certainty of cost to be achieved without suffering a cost of carry in the intervening period.

28. In addition, the Council may borrow short-term loans to cover unplanned cash flow shortages.

Sources of Borrowing

29. The approved sources of long-term and short-term borrowing are as follows:

    • Public Works Loan Board (PWLB) and any successor body;
    • any institution approved for investments (see below);
    • any other bank or building society authorised to operate in the UK;
    • any other UK Public Sector Body; and
    • UK Municipal Bonds Agency Plc.

Other Sources of Debt Finance

30. In addition, capital finance may be raised by the following methods that are not borrowing, but may be classed as other debt liabilities:

    • Operating and Finance Leases;
    • Hire Purchase; and
    • Sale and Leaseback

31. The Council has previously raised all of its long term borrowing from the PWLB but it continues to investigate other sources of finance, such as local authority loans, local government pension funds and bank loans that may be available at more favourable rates.

32. Municipal Bonds Agency: UK Municipal Bonds Agency plc was established in 2014 by the Local Government Association as an alternative to the PWLB. It plans to issue bonds on the capital markets and lend the proceeds to local authorities.  This will be a more complicated source of finance than the PWLB for two reasons: borrowing authorities will be required to provide bond investors with a joint and several guarantee to refund their investment in the event that the agency is unable to for any reason; and there will be a lead time of several months between committing to borrow and knowing the interest rate payable. Any decision to borrow from the Agency will therefore be the subject of a separate report to Full Council.

Debt Rescheduling

33. The PWLB allows authorities to repay loans before maturity and either pay a premium or receive a discount according to a set formula based on current interest rates. Other lenders may also be prepared to negotiate premature redemption terms. The Council may take advantage of this and replace some loans with new loans, or repay loans without replacement, where this is expected to lead to an overall cost saving or a reduction in risk.

34. Any rescheduling will be discussed with the Portfolio Holder for Finance and reported to the Cabinet, at the earliest meeting following its action.

35. The Council holds significant invested funds, representing income received in advance of expenditure plus balances and reserves held. In the past 12 months, the Council’s investment balances have ranged between £30m and £65 million and are expected to remain at similar levels in the forthcoming year.

36. The CIPFA Code requires the Council to invest its funds prudently, and to have regard to the security and liquidity of its investments before seeking the highest rate of return, or yield.

37. The Council’s objective when investing money is to strike an appropriate balance between risk and return, minimising the risk of incurring losses from defaults and the risk of receiving unsuitably low investment income. Where balances are expected to be invested for more than one year, the Council will aim to achieve a total return that is equal or higher than the prevailing rate of inflation, in order to maintain the spending power of the sum invested.

38. Negative interest rates: If the UK enters into a recession in 2019/20, there is a small chance that the Bank of England could set its Bank Rate at or below zero, which is likely to feed through to negative interest rates on all low risk, short-term investment options. This situation already exists in many other European countries. In this event, security will be measured as receiving the contractually agreed amount at maturity, even though this may be less than the amount originally invested.

39. Given the increasing risk and very low returns from short-term unsecured bank investments, the Council aims to maintain the current strategy of diversification into more secure and/or higher yielding asset classes during 2019/20. This is especially the case for the estimated £10 million that is available for longer-term investment. A proportion of the Council’s surplus cash remains invested in money market funds.  This diversification represents a continuation of the strategy adopted in 2018/19.

40. Under the new IFRS 9 Financial Instruments standard, the accounting for certain investments depends on the Council’s “business model” for managing them. The Council aims to achieve value from its internally managed treasury investments by a business model of collecting the contractual cash flows and therefore, where other criteria are also met, these investments will continue to be accounted for at amortised cost.

Approved counterparties

41. The Council may invest its surplus funds with any of the counterparty types in the table below, subject to the cash limits (per counterparty) and the time limits shown.

Credit rating

Banks unsecured

Banks Secured

Government

Registered Providers

Wholly owned companies

UK Government

n/a

n/a

£ Unlimited

n/a

n/a

50 years

AAA and AA+

£3m

£5m

£7m

£3m

 

5 years

10 years

25 years

5 years

 

AA and AA-

£3m

£5m

£7m

£3m

 

3 years

4 years

10 years

3 years

 

A+

£3m

£5m

£7m

£3m

n/a

2 years

3 years

5 years

2 years

 

A

£3m

£5m

£7m

£3m

 

13 months

2 years

5 years

13 months

 

A-

£3m

£5m

£7m

£3m

 

 6 months

13 months

 5 years

 6 months

 

None

n/a

n/a

£7m

n/a

£20m

25 years

5 years

Pooled funds

 

£10m per fund

Current Account of the Council’s banker

 

£20m maximum but seek to keep overnight balances in a range of £1m to £15m in line with managing risk and maximising yield.

 

42. The above table must be read in conjunction with the notes below.

43. Credit rating: Investment limits are set by reference to the lowest published long-term credit rating from a selection of external rating agencies. Where available, the credit rating relevant to the specific investment or class of investment is used, otherwise the counterparty credit rating is used. However, investment decisions are never made solely based on credit ratings, and all other relevant factors including external advice will be taken into account.

44. Banks unsecured: Accounts, deposits, certificates of deposit and senior unsecured bonds with banks and building societies, other than multilateral development banks. These investments are subject to the risk of credit loss via a bail-in should the regulator determine that the bank is failing or likely to fail. See below for arrangements relating to operational bank accounts.

45. Banks secured: Covered bonds, reverse repurchase agreements and other collateralised arrangements with banks and building societies. These investments are secured on the bank’s assets, which limits the potential losses in the unlikely event of insolvency, and means that they are exempt from bail-in. Where there is no investment specific credit rating, but the collateral upon which the investment is secured has a credit rating, the higher of the collateral credit rating and the counterparty credit rating will be used to determine cash and time limits. The combined secured and unsecured investments in any one bank will not exceed the cash limit for secured investments.

46. Government: Loans, bonds and bills issued or guaranteed by national governments, regional and local authorities and multilateral development banks. These investments are not subject to bail-in, and there is generally a lower risk of insolvency, although they are not zero risk. Investments with the UK Central Government (i.e. DMADF – Debt Management Account Deposit Facility) may be made in unlimited amounts for up to 50 years.

47. Registered Providers: Loans and bonds issued by, guaranteed by or secured on the assets of registered providers of social housing and registered social landlords, formerly known as housing associations. These bodies are tightly regulated by the Regulator of Social Housing (in England), the Scottish Housing Regulator, the Welsh Government and the Department for Communities (in Northern Ireland). As providers of public services, they retain the likelihood of receiving government support if needed.

48. Wholly-owned companies: Loans and share capital in companies wholly owned by the Council.

49. Pooled funds: Shares or units in diversified investment vehicles consisting of any of the above investment types, plus equity shares and property. These funds have the advantage of providing wide diversification of investment risks, coupled with the services of a professional fund manager in return for a fee. Short-term Money Market Funds that offer same-day liquidity and very low or no volatility will be used as an alternative to instant access bank accounts, while pooled funds whose value changes with market prices and/or have a notice period will be used for longer investment periods.

50. Bond, equity and property funds offer enhanced returns over the longer term, but are more volatile in the short term. These allow the Council to diversify into asset classes other than cash without the need to own and manage the underlying investments. Because these funds have no defined maturity date, but are available for withdrawal after a notice period, their performance and continued suitability in meeting the Council’s investment objectives will be monitored regularly.

51. Operational bank accounts: The Council may incur operational exposures, for example though current accounts, collection accounts and merchant acquiring services, to any UK bank with credit ratings no lower than BBB- and with assets greater than £25 billion. These are not classed as investments, but are still subject to the risk of a bank bail-in. Therefore the balance in the Council’s current account will be kept to the minimum required for operational purposes. Generally this will be around £1m to £3m, rising to an overnight maximum of £15m on monthly precept dates. The Bank of England has stated that in the event of failure, banks with assets greater than £25 billion are more likely to be bailed-in than made insolvent, increasing the chance of the Council maintaining operational continuity.

52. Risk assessment and credit ratings: Credit ratings are obtained and monitored by the Council’s treasury advisers, who will notify changes in ratings as they occur. Where an entity has its credit rating downgraded so that it fails to meet the approved investment criteria then:

    • no new investments will be made;
    • any existing investments that can be recalled or sold at no cost will be; and
    • full consideration will be given to the recall or sale of all other existing investments with the affected counterparty.

53. Where a credit rating agency announces that a credit rating is on review for possible downgrade (also known as “rating watch negative” or “credit watch negative”) so that it may fall below the approved rating criteria, then only investments that can be withdrawn on the next working day will be made with that organisation until the outcome of the review is announced. This policy will not apply to negative outlooks, which indicate a long-term direction of travel rather than an imminent change of rating.

54. Other information on the security of investments: The Council understands that credit ratings are good, but not perfect, predictors of investment default. Full regard will therefore be given to other available information on the credit quality of the organisations in which it invests, including credit default swap prices, financial statements, information on potential government support, reports in the quality financial press and analysis and advice from the Council’s treasury management adviser.  No investments will be made with an organisation if there are substantive doubts about its credit quality, even though it may otherwise meet the above investment criteria.

55. When deteriorating financial market conditions affect the creditworthiness of all organisations, as happened in 2008 and 2011, this is not generally reflected in credit ratings, but can be seen in other market measures. In these circumstances, the Council will restrict its investments to those organisations of higher credit quality and reduce the maximum duration of its investments to maintain the required level of security.  The extent of these restrictions will be in line with prevailing financial market conditions. If these restrictions mean that insufficient commercial organisations of high credit quality are available to invest the Council’s cash balances, then the surplus will be deposited with the UK Government, via the Debt Management Office or invested in government treasury bills for example, or with other local authorities.  This will cause a reduction in the level of investment income earned, but will protect the principal sum invested.

Investment Limits

56. The Council’s revenue reserves available to cover any investment losses are forecast to be £25 million on 31st March 2019. In order that no more than 20% of available reserves will be put at risk in the case of a single default, the maximum that will be lent to any one organisation (other than the UK Government) will be £5 million.  A group of banks under the same ownership will be treated as a single organisation for limit purposes.  Limits will also be placed on fund managers, investments in brokers’ nominee accounts, foreign countries and industry sectors as below. Investments in pooled funds and multilateral development banks do not count against the limit for any single foreign country, since the risk is diversified over many countries.

Investment Limits

Cash limit

Any single organisation, except the UK Central Government

£5m each

UK Central Government

Unlimited

UK Local Government

£7m per local authority

Any group of organisations under the same ownership

£5m per group

Any group of pooled funds under the same management

£10m per fund manager

Negotiable instruments held in a broker’s nominee account

£5m per broker

Foreign countries

£3m per country

Registered providers

£3m in total

Unsecured investments with building societies

£7m in total

Loans to unrated corporates –

Wealden District Council Owned Companies only

£20m in total

Money market funds

£10m per fund

 

57. Liquidity management: The Council uses detailed cash flow forecasting analysis to determine the maximum period for which funds may prudently be committed. The forecast is compiled on a prudent basis to minimise the risk of the Council being forced to borrow on unfavourable terms to meet its financial commitments. Limits on long-term investments are set by reference to the Council’s medium term financial plan and cash flow forecast.

58. The Council measures and manages its exposures to treasury management risks using the following indicators.

Security

59. The Council has adopted a voluntary measure of its exposure to credit risk by monitoring the value-weighted average credit rating of its investment portfolio. This is calculated by applying a score to each investment (AAA=1, AA+=2, etc.) and taking the arithmetic average, weighted by the size of each investment. Unrated investments are assigned a score based on their perceived risk.

Credit Risk Indicator

Target

Portfolio average credit rating

A

Liquidity

60. The Council has adopted a voluntary measure of its exposure to liquidity risk by monitoring the amount of cash available to meet unexpected payments within a rolling three month period, without additional borrowing.

Liquidity Risk Indicator

Target

Total cash available within 3 months

£10m

Interest Rate Exposure

61. CIPFA defines interest rate risk as “the risk that fluctuations in the levels of interest rates create an unexpected or unbudgeted burden on the organisation’s finances, against which the organisation has failed to protect itself adequately.” In local authorities this risk is therefore commonly considered in the context of the impact of changes in interest rates on the revenue accounts.

62. In adopting a suitable indicator to measure this risk, the Council has taken advice from our treasury management advisers to use the same measure as required in the Statement of Accounts financial instruments disclosure; namely the impact over one year of a 1% change in interest rates. The disclosure in the accounts shows the actual result of this measure. For this Treasury Management Strategy, an upper limit is set in order to provide protection to the General Fund and the HRA from unexpected falls in interest rates causing a loss of investment income, and from unexpected rises in interest rates causing an increase in interest payable.

63. All of the Council’s borrowings are at fixed rates from the PWLB and therefore the risk of an increase in interest payable over a year caused by an increase in interest rates is effectively minimised.

64. The impact of a change in interest rates is calculated on the assumption that maturing loans and investments will be replaced at current rates.

 

Interest Rate Risk Indicator

Upper Limit

One year revenue impact of a 1% change in interest rates

£0.6m

 

Maturity Structure of Borrowing

65. This indicator is set to control the Council’s exposure to refinancing risk. The upper and lower limits on the maturity structure of borrowing will be as shown in the following table.

Refinancing Rate Risk Indicator

Upper Limit

Lower Limit

 
 

Under 12 months

25%

0%

 

12 months to 2 years

50%

0%

 

2 years to 5 years

75%

0%

 

5 years to 10 years

100%

0%

 

10 years to 20 years

100%

0%

 

20 years to 30 years

100%

0%

 

30 years and above

100%

0%

 

66. Time periods start on the first day of each financial year. The maturity date of borrowing is the earliest date on which the lender can demand repayment.

Principal Sums Invested for Periods Longer Than One Year

67. The purpose of this indicator is to control the Council’s exposure to the risk of incurring losses by seeking early repayment of its investments. The limits on the long-term principal sum invested to final maturities beyond the period end will be as set out in the following table.

Price Risk Indicator

2019/20

2020/21

2021/22

Limit on principal invested beyond year end

£8m

£6m

£6m

Related Matters

68. The Council is required by the CIPFA Code to include the following in its Treasury Management Strategy.

Financial Derivatives

69. Local authorities have previously made use of financial derivatives embedded into loans and investments both to reduce interest rate risk (e.g. interest rate collars and forward deals) and to reduce costs or increase income at the expense of greater risk (e.g. LOBO loans and callable deposits). The general power of competence in Section 1 of the Localism Act 2011 removes much of the uncertainty over local authorities’ use of standalone financial derivatives (i.e. those that are not embedded into a loan or investment).

70. The Council’s policy is that it will only use standalone financial derivatives (such as swaps, forwards, futures and options) where they can be clearly demonstrated to reduce the overall level of the financial risks that the Council is exposed to. Additional risks presented, such as credit exposure to derivative counterparties, will be taken into account when determining the overall level of risk. Embedded derivatives, including those present in pooled funds and forward starting transactions, will not be subject to this policy, although the risks they present will be managed in line with the overall treasury risk management strategy.

71. Financial derivative transactions may be arranged with any organisation that meets the approved investment criteria. The current value of any amount due from a derivative counterparty will count against the counterparty credit limit and the relevant foreign country limit.

Policy on Apportioning Interest to the HRA

72. All of the Council’s existing long-term external borrowing relates to the HRA. In the future, new long-term loans borrowed will be assigned in their entirety to either the General Fund or the HRA as relevant. This means the Council will manage external borrowing as two pools effectively – HRA and General Fund. Interest payable and other costs / income arising from long-term loans (e.g. premiums and discounts on early redemption) will be charged / credited to the respective revenue account. Differences between the value of the HRA loans pool and the HRA’s underlying need to borrow (adjusted for HRA balance sheet resources available for investment) will result in a notional cash balance which may be positive or negative. This balance will be measured and interest transferred between the General Fund and HRA annually at the Council’s average interest rate on investments, adjusted for credit risk.

Markets in Financial Instruments Directive (MiFID)

73. The Council has opted up to professional client status with its providers of financial services, including advisers, banks, brokers and fund managers, allowing it access to a greater range of services but without the greater regulatory protections afforded to individuals and small companies. Given the size and range of the Council’s treasury management activities, the Chief Financial Officer believes this to be the most appropriate status. As one of the criteria for retaining this status is a minimum investment balance of £10 million, the Council’s strategy includes keeping this amount invested for the longer term.

74. Cabinet is recommended to recommend to Council to:

A. Approve the 2019/20 Treasury Management Strategy; and

B. Approve the Treasury Indicators for 2019/20 as set out in this report.

Financial Implications

75. The strategy proposed in this report, together with the interest rates forecast, is in line with the assumptions made when the 2019/20 budget was prepared. The costs of treasury operations, debt management expenses and investment income are included in the 2019/20 budget.

Legal Implications

76. The Local Government Act 2003 and supporting regulations requires the Council to ‘have regard to’ the CIPFA Prudential Code for Capital Finance in Local Authorities 2017 Edition and to set Prudential Indicators for the next three years to ensure that the Council’s capital investment plans are affordable, prudent and sustainable. The Council also has to ‘have regard’ to the MHCLG’s Guidance on Local Government Investments 3rd Edition effective for financial periods commencing on or after 1st April 2018, and to CIPFA’s Treasury Management in the Public Services: Code of Practice 2017 Edition and Guidance Notes for Local Authorities 2018 Edition.

Human Resources Implications

77. None arising directly from this report.

Other Implications

78. The Treasury Strategy has been formulated to minimise risk. Risk management is embedded in treasury management operations through the adoption of the CIPFA Treasury Management Code. Credit ratings and other market intelligence are used and counterparty limits also assist to assess and mitigate risk.

 

Other Implications

Applies?

Other Implications

Applies?

Human Rights

No

Equalities and Diversity

No

Crime and Disorder

No

Consultation

No

Environmental

No

Access to Information

No

Sustainability

No

Exempt from publication

No

Risk Management

Yes

 

 

 

Director:

Trevor Scott, Chief Executive

Proper Officer:

Steven Linnett, Chief Finance Officer

Report Contact Officer:

Gillian Taberner, Financial Services Manager

Telephone Number:

01323 443231

e-mail address:

gillian.taberner@wealden.gov.uk

Appendices:

A          Arlingclose Interest Rate Forecast

B          Investment and Borrowing Portfolio at 31/12/2018

Background Papers:

None

Underlying Assumptions

  1. The central interest rate forecasts are predicated on there being a transitionary period following the UK’s official exit from the EU.
  2. The MPC has a bias towards tighter monetary policy but is reluctant to push interest rate expectations too strongly. Arlingclose believe that MPC members consider that: 1) tight labour markets will prompt inflationary pressure in the future, 2) ultra-low interest rates result in other economic problems, and 3) higher Bank Rate will be a more effective policy weapon if downside risks to growth crystallise.
  3. Both the projected outlook and the increase in the magnitude of political and economic risks facing the UK economy means Arlingclose maintain the significant downside risks to their forecasts, despite the potential for slightly stronger growth next year as business investment rebounds should the EU Withdrawal Agreement be approved. The potential for severe economic outcomes has increased following MPs’ poor reception to the Withdrawal Agreement. Arlingclose expect the Bank of England to hold at or reduce interest rates from current levels if Brexit risks materialise.
  4. The UK economic environment is relatively soft, despite seemingly strong labour market data. GDP growth recovered somewhat in the middle quarters of 2018, but more recent data suggests the economy slowed markedly in Q4. The Arlingclose view is that the UK economy still faces a challenging outlook as the country exits the European Union and Eurozone economic growth softens.
  5. Cost pressures are easing but inflation is forecast to remain above the Bank’s 2% target through most of the forecast period. Lower oil prices have reduced inflationary pressure, but the tight labour market and decline in the value of sterling means inflation may remain above target for longer than expected.
  6. Global economic growth is slowing. Despite slower growth, the European Central Bank is conditioning markets for the end of QE, the timing of the first rate hike (2019) and their path thereafter. More recent US data has placed pressure on the Federal Reserve to reduce the pace of monetary tightening – previous hikes and heightened expectations will, however, slow economic growth.
  7. Central bank actions and geopolitical risks have and will continue to produce significant volatility in financial markets, including bond markets.

Forecast

  1. The MPC has maintained expectations of a slow rise in interest rates over the forecast horizon, but recent events around Brexit have dampened interest rate expectations. Arlingclose’s central case is for Bank Rate to rise twice in 2019, after the UK exits the EU. The risks are weighted to the downside.
  2. Gilt yields have remained at low levels. Arlingclose expect some upward movement from current levels based on their central case that the UK will enter a transitionary period following its EU exit in March 2019. However, their projected weak economic outlook and volatility arising from both economic and political events will continue to offer borrowing opportunities.

Treasury Portfolio

31/12/2018

Actual Portfolio

Average Rate

£m

%

External borrowing

  

Public Works Loan Board

53.44

3.18%

Total external borrowing

53.44

3.18%

Total other long-term liabilities

0.00

Total gross external debt

53.44

3.18%

   

Treasury investments:

  

Banks & building societies (unsecured)

(4.35)

0.65%

Covered bonds (secured)

(2.01)

1.29%

Government (incl. local authorities)

(34.50)

0.77%

Money Market Funds

(15.00)

0.76%

Pooled Diversified Income Funds

(10.00)

3.45%

Total treasury investments

(65.86)

1.13%

Net debt

(12.42)

 

2018-19

This report presents the Treasury Management Strategy, Annual Investment Strategy and Minimum Revenue Provision Statement for 2018/19, including risk management, prudential indicators, and the borrowing requirement.  Background information on the economic situation and the likely interest rate movements are included in the report, which informs the recommendations made.

Audit and Finance Committee is recommended to:

  1. Scrutinise the 2018/19 Treasury Management Strategy and Annual Investment Strategy;
  2. Note the Prudential and Treasury Indicators for 2018/19 as set out in Appendix C to this report; and

Note that for the 2018/19 financial year the Council makes Minimum Revenue Provision in accordance with the Asset Life (Equal Instalment) Method for new capital expenditure.

To comply with: the Local Government Act 2003 and supporting regulations, the Council’s Financial Procedure Rules, the CIPFA Treasury Management Code of Practice, the CIPFA Prudential Code for Capital Finance in Local Authorities and the Department for Communities and Local Government (DCLG) Guidance on Investments 2010.

  1. In February 2012, the Council adopted the Chartered Institute of Public Finance and Accountancy’s Treasury Management in the Public Services: Code of Practice 2011 Edition (the CIPFA Code) which requires the Council to approve a treasury management strategy before the start of each financial year. CIPFA consulted on changes to the Code in 2017, but the revised Code was not published until late December 2017. Updated sector specific guidance notes have yet to be published. Due to the delay in publication, CIPFA have advised that the revised requirements may be implemented for the 2019/20 year. In light of this, and on the advice of our treasury management advisers, Arlingclose, this report has been prepared under the requirements of the 2011 Code.
  2. In addition, the Department for Communities and Local Government (DCLG) issued Guidance on Local Authority Investments in March 2010 that requires the Council to approve an investment strategy before the start of each financial year. This report fulfils the Council’s legal obligation under the Local Government Act 2003 to have regard to both the CIPFA Code and the DCLG Guidance.
  3. The Council has borrowed and invested substantial sums of money and is therefore exposed to financial risks including the loss of invested funds and the revenue effect of changing interest rates. The successful identification, monitoring and control of risk are therefore central to the Council’s treasury management strategy.

Economic Background

4. The Council’s treasury management adviser, Arlingclose, has provided the following commentary

5. The major external influence on the Council’s treasury management strategy for 2018/19 will be the UK’s progress in negotiating its exit from the European Union and agreeing future trading arrangements. The domestic economy has remained relatively robust since the outcome of the 2016 referendum, but there are indications that uncertainty over the future is now weighing on growth. Transitional arrangements may prevent a cliff-edge, but will also extend the period of uncertainty for several years. Economic growth is therefore forecast to remain sluggish throughout 2018/19.

6. Consumer price inflation reached 3.0% in September 2017 as the post-referendum devaluation of sterling continued to feed through to imports. Unemployment continued to fall and the Bank of England’s Monetary Policy Committee judged that the extent of spare capacity in the economy seemed limited and the pace at which the economy can grow without generating inflationary pressure had fallen over recent years. With its inflation-control mandate in mind, the Bank of England’s Monetary Policy Committee raised official interest rates to 0.5% in November 2017.

7. In contrast, the US economy is performing well and the Federal Reserve is raising interest rates in regular steps to remove some of the emergency monetary stimulus it has provided for the past decade. The European Central Bank is yet to raise rates, but has started to taper its quantitative easing programme, signalling some confidence in the Eurozone economy.

Credit Outlook

8. High profile bank failures in Italy and Portugal have reinforced concerns over the health of the European banking sector. Sluggish economies and fines for pre-crisis behaviour continue to weigh on bank profits, and any future economic slowdown will exacerbate concerns in this regard.

9. Bail-in legislation, which ensures that large investors including local authorities will rescue failing banks instead of taxpayers in the future, has now been fully implemented in the European Union, Switzerland and USA, while Australia and Canada are progressing with their own plans. In addition, the largest UK banks will ring-fence their retail banking functions into separate legal entities during 2018. There remains some uncertainty over how these changes will impact upon the credit strength of the residual legal entities.

10. The credit risk associated with making unsecured bank deposits has therefore increased relative to the risk of other investment options available to the Council; returns from cash deposits however remain very low.

Interest Rate Forecast

11. The Council’s treasury adviser Arlingclose’s central case is for UK Bank Rate to remain at 0.50% during 2018/19, following the rise from the historic low of 0.25%. The Monetary Policy Committee re-emphasised that any prospective increases in Bank Rate would be expected to be at a gradual pace and to a limited extent.

12. Future expectations for higher short term interest rates are subdued and on-going decisions remain data dependent. The risks to Arlingclose’s forecast are broadly balanced on both sides. The Arlingclose central case is for gilt yields to remain broadly stable across the medium term. Upward movement will be limited, although the UK government’s seemingly deteriorating fiscal stance is an upside risk.

13. A more detailed economic and interest rate forecast provided by Arlingclose is attached at Appendix A.

14. For the purpose of setting the budget, it has been assumed that new investments will be made at an average rate of 0.5% and that new long-term loans will be borrowed at an average rate of 2.5%. 

15. On 31st December 2017, the Council held £53.45m of borrowing and £52.70m of investments. The balance held as investments is always higher than average on this date due to it being just before precepts are paid out in early January. Further detail of the investment and borrowing portfolio is set out in Appendix B. Forecast changes in these sums are shown in the balance sheet analysis in the table below.

Balance Sheet Summary and Forecast

31/03/2017 Actual

31/03/2018 Estimate

31/03/2019 Forecast

31/03/2020 Forecast

31/03/2021 Forecast

£m

£m

£m

£m

£m

General Fund CFR

2.1

6.0

11.7

17.9

23.8

HRA CFR

62.2

65.3

67.2

68.9

69.1

Total CFR

64.3

71.3

78.9

86.8

92.9

Less: External borrowing (PWLB)

-53.5

-53.5

-51.2

-48.9

-51.6

Internal borrowing

10.8

17.8

27.7

37.9

41.3

Less: Usable reserves

-37.3

-33.4

-33.0

-32.8

-32.5

Less: Working capital

-9.9

-9.9

-9.9

-9.9

-9.9

Investments

36.4

25.5

15.2

4.8

1.1

16. The underlying need to borrow for capital purposes is measured by the Capital Financing Requirement (CFR), while usable reserves and working capital are the underlying resources available for investment. The Council’s current strategy is to maintain borrowing and investments below their underlying levels, sometimes known as internal borrowing.

17. The Council has an increasing CFR due to the Capital Programme. There are plans to use reserves and capital receipts for financing of some capital expenditure.

18. The Prudential Indicators set out in Appendix C show the gross actual external debt position at 31 March 2017 and the actual net debt position at 31 March 2017 with forward projections of both.

19. Within the prudential indicators there are a number of key indicators to ensure the Council operates its activities within well-defined limits. One of these is to ensure that the Council’s gross debt does not, except in the short term, exceed the total of the Capital Financing Requirement (CFR) in the preceding year plus the estimates of any additional CFR for 2018/19 and the following two financial years. This allows some flexibility for limited early borrowing for future years but ensures that borrowing is not undertaken for revenue purposes.

20. The Chief Finance Officer reports that the Council complied with this prudential indicator in the current year and does not envisage difficulties for the future. This view takes into account current commitments, existing plans and the proposals in the current budget cycle.

21. The Council’s borrowing strategy continues to address the key issue of affordability without compromising the longer-term stability of the debt portfolio. With short-term interest rates currently much lower than long-term rates, it is likely to be more cost effective in the short-term to either use internal resources, or to borrow short-term loans instead.

22. By doing so, the Council is able to reduce net borrowing costs (despite foregone investment income) and reduce overall treasury risk. The benefits of internal borrowing will be monitored regularly against the potential for incurring additional costs by deferring borrowing into future years when long-term borrowing rates are forecast to rise modestly. Arlingclose will assist the Council with this ‘cost of carry’ and breakeven analysis.

23. In addition, the Council may borrow short-term loans to cover unplanned cash flow shortages.

Sources of Borrowing

24. The approved sources of long-term and short-term borrowing are as follows:

    • Public Works Loan Board (PWLB) and any successor body;
    • any institution approved for investments (see below); and
    • any other bank or building society authorised to operate in the UK

Other Sources of Debt Finance

25. In addition, capital finance may be raised by the following methods that are not borrowing, but may be classed as other debt liabilities:

    • Operating and Finance Leases;
    • Hire Purchase; and
    • Sale and Leaseback

26. The Council has previously raised all of its long term borrowing from the PWLB but, if appropriate, it will investigate other sources of finance such as local authority loans and bank loans that may be available at more favourable rates.

Debt Rescheduling

27. The PWLB allows authorities to repay loans before maturity and either pay a premium or receive a discount according to a set formula based on current interest rates. Other lenders may also be prepared to negotiate premature redemption terms. The Council may take advantage of this and replace some loans with new loans, or repay loans without replacement, where this is expected to lead to an overall cost saving or a reduction in risk.

28. Any rescheduling will be discussed with the Portfolio Holder for Finance and reported to the Cabinet, at the earliest meeting following its action.

29. The Council holds significant invested funds, representing income received in advance of expenditure plus balances and reserves held. In the past 12 months, the Council’s investment balance has ranged between £30m and £57 million. Following increased use of cash balances during the last twelve months for capital expenditure, investment balances in the forthcoming year are expected to be in the range of £8m to £38m.

30. The Council will have regard to the DCLG’s Guidance on Local Government Investments (“the Guidance”) and the 2011 revised CIPFA Treasury Management in Public Services Code of Practice and Cross Sectoral Guidance Notes (“the CIPFA TM Code”). The Council’s investment priorities are, in order of importance:

the security of capital; and

the liquidity of its investments.

31. The Council will also aim to achieve the optimum return on its investments commensurate with proper levels of security and liquidity. The risk appetite of this Council is low in order to give priority to security of its investments.

32. The borrowing of monies purely to invest or on lend and make a return is unlawful and this Council will not engage in such activity.

33. Where balances are expected to be invested for more than one year, the Council will aim to achieve a total return that is equal or higher than the prevailing rate of inflation, in order to maintain the spending power of the sum invested.

34. Negative interest rates: If the UK enters into a recession in 2018/19, there is a small chance that the Bank of England could set its Bank Rate at or below zero, which is likely to feed through to negative interest rates on all low risk, short-term investment options. This situation already exists in many other European countries. In this event, security will be measured as receiving the contractually agreed amount at maturity, even though this may be less than the amount originally invested.

35. Given the increasing risk and very low returns from short-term unsecured bank investments, the Council aims to continue to diversify into more secure and/or higher yielding asset classes during 2018/19. The majority of the Council’s surplus cash remains invested in short-term deposits and money market funds.  During the 2017/18 year, following the advice of Arlingclose, the investment strategy has diversified into use of secured deposits in the form of Covered Bonds, a move away from unsecured deposits with banks / building societies, and a greater use of Money Market Funds to diversify and mitigate risk. The strategy outlined for 2018/19 will represent a continuation of this approach.

Approved counterparties

36. The Council may invest its surplus funds with any of the counterparty types in the table below, subject to the cash limits (per counterparty) and the time limits shown.

Credit rating

Banks unsecured

Banks Secured

Government

Wholly owned companies

UK Govt

n/a

n/a

£ Unlimited

n/a

50 years

AAA and AA+

£3m

£5m

£7m

 

5 years

10 years

25 years

 

AA and AA-

£3m

£5m

£7m

 

3 years

4 years

10 years

 

A+

£3m

£5m

£7m

n/a

2 years

3 years

5 years

 

A

£3m

£5m

£7m

 

13 months

2 years

5 years

 

A-

£3m

£5m

£7m

 

 6 months

13 months

 5 years

 

None

n/a

n/a

£7m

£20m

25 years

5 years

Pooled funds

£5m per fund

Current Account of the Council’s banker

£20m maximum but seek to keep overnight balances in a range of £1m to £15m in line with managing risk and maximising yield.

37. The table must be read in conjunction with the notes below.

38. Credit rating: Investment limits are set by reference to the lowest published long-term credit rating from Fitch, Moody’s or Standard & Poor’s. Where available, the credit rating relevant to the specific investment or class of investment is used, otherwise the counterparty credit rating is used. However, investment decisions are never made solely based on credit ratings, and all other relevant factors including external advice will be taken into account.

39. Banks unsecured: Accounts, deposits, certificates of deposit and senior unsecured bonds with banks and building societies, other than multilateral development banks. These investments are subject to the risk of credit loss via a bail-in should the regulator determine that the bank is failing or likely to fail. See below for arrangements relating to operational bank accounts.

40. Banks secured: Covered bonds, reverse repurchase agreements and other collateralised arrangements with banks and building societies. These investments are secured on the bank’s assets, which limits the potential losses in the unlikely event of insolvency, and means that they are exempt from bail-in. Where there is no investment specific credit rating, but the collateral upon which the investment is secured has a credit rating, the higher of the collateral credit rating and the counterparty credit rating will be used to determine cash and time limits. The combined secured and unsecured investments in any one bank will not exceed the cash limit for secured investments.

41. Government: Loans, bonds and bills issued or guaranteed by national governments, regional and local authorities and multilateral development banks. These investments are not subject to bail-in, and there is an insignificant risk of insolvency. Investments with the UK Central Government may be made in unlimited amounts for up to 50 years.

42. Wholly-owned companies: Loans and share capital in companies wholly owned by the Council.

43. Pooled funds: Shares in diversified investment vehicles consisting of any of the above investment types, plus equity shares and property. These funds have the advantage of providing wide diversification of investment risks, coupled with the services of a professional fund manager in return for a fee. Short-term Money Market Funds that offer same-day liquidity and very low or no volatility will be used as an alternative to instant access bank accounts, while pooled funds whose value changes with market prices and/or have a notice period will be used for longer investment periods.

44. Bond, equity and property funds offer enhanced returns over the longer term, but are more volatile in the short term. These allow the Council to diversify into asset classes other than cash without the need to own and manage the underlying investments. Because these funds have no defined maturity date, but are available for withdrawal after a notice period, their performance and continued suitability in meeting the Council’s investment objectives will be monitored regularly.

45. Operational bank accounts: The Council may incur operational exposures, for example though current accounts, collection accounts and merchant acquiring services, to any UK bank with credit ratings no lower than BBB- and with assets greater than £25 billion. These are not classed as investments, but are still subject to the risk of a bank bail-in. Therefore the balance in the Council’s current account will be kept to the minimum required for operational purposes. Generally this will be around £1m to £3m, rising to an overnight maximum of £15m on monthly precept dates. The Bank of England has stated that in the event of failure, banks with assets greater than £25 billion are more likely to be bailed-in than made insolvent, increasing the chance of the Council maintaining operational continuity.

46. Risk assessment and credit ratings: Credit ratings are obtained and monitored by the Council’s treasury advisers, who will notify changes in ratings as they occur. Where an entity has its credit rating downgraded so that it fails to meet the approved investment criteria then:

    • no new investments will be made;
    • any existing investments that can be recalled or sold at no cost will be; and
    • full consideration will be given to the recall or sale of all other existing investments with the affected counterparty.

47. Where a credit rating agency announces that a credit rating is on review for possible downgrade (also known as “rating watch negative” or “credit watch negative”) so that it may fall below the approved rating criteria, then only investments that can be withdrawn on the next working day will be made with that organisation until the outcome of the review is announced. This policy will not apply to negative outlooks, which indicate a long-term direction of travel rather than an imminent change of rating.

48. Other information on the security of investments: The Council understands that credit ratings are good, but not perfect, predictors of investment default. Full regard will therefore be given to other available information on the credit quality of the organisations in which it invests, including credit default swap prices, financial statements, information on potential government support and reports in the quality financial press.  No investments will be made with an organisation if there are substantive doubts about its credit quality, even though it may meet the credit rating criteria.

49. When deteriorating financial market conditions affect the creditworthiness of all organisations, as happened in 2008 and 2011, this is not generally reflected in credit ratings, but can be seen in other market measures. In these circumstances, the Council will restrict its investments to those organisations of higher credit quality and reduce the maximum duration of its investments to maintain the required level of security.  The extent of these restrictions will be in line with prevailing financial market conditions. If these restrictions mean that insufficient commercial organisations of high credit quality are available to invest the Council’s cash balances, then the surplus will be deposited with the UK Government, via the Debt Management Office or invested in government treasury bills for example, or with other local authorities.  This will cause a reduction in the level of investment income earned, but will protect the principal sum invested.

Specified investments

50. The DCLG Guidance defines specified investments as those which are:

    • denominated in pound sterling;
    • due to be repaid within 12 months of arrangement;
    • not defined as capital expenditure by legislation; and
    • invested with one of:
      1. the UK Government;
      2. a UK local Council, parish council or community council; or
  • a body or investment scheme of “high credit quality”.

51. The Council defines “high credit quality” organisations and securities as those having a credit rating of A- or higher that are domiciled in the UK or in a foreign country with a sovereign rating of AA+ or higher. For money market funds and other pooled funds “high credit quality” is defined as those having a credit rating of A- or higher.

Non-specified investments

52. Any investment not meeting the definition of a specified investment is classed as non-specified. The Council does not intend to make any investments denominated in foreign currencies. Non-specified investments will therefore be limited to long-term investments, i.e. those that are due to mature 12 months or longer from the date of arrangement, and those that are defined as capital expenditure by legislation in respect of shares in wholly owned companies only.  Limits on non-specified investments are shown in the table below.

Non-Specified Investment Limits

Cash limit

Total long-term investments

£10m

Total investments in companies wholly owned by the Council

£20m

Total non-specified investments

£30m

 

53. Liquidity management: The Council uses detailed cash flow forecasting analysis to determine the maximum period for which funds may prudently be committed. The forecast is compiled on a prudent basis to minimise the risk of the Council being forced to borrow on unfavourable terms to meet its financial commitments. Limits on long-term investments are set by reference to the Council’s medium term financial plan and cash flow forecast.

Non-Treasury Investments

54. Although not classed as treasury management activities and therefore not covered by the CIPFA Code or the DCLG Guidance, the Council may also purchase property for investment purposes and may also make loans and investments for service purposes, for example in shared ownership housing or as equity investments and loans to the Council’s subsidiaries.

55. Such loans and investments will be subject to the Council’s normal approval processes for revenue and capital expenditure and need not comply with this treasury management strategy.

56. The Local Government Act 2003 requires the Council to have regard to the CIPFA Prudential Code for Capital Finance in Local Authorities (the Prudential Code) when determining how much money it can afford to borrow. The objectives of the Prudential Code are to ensure, within a clear framework, that the capital investment plans of local authorities are affordable, prudent and sustainable, and that treasury management decisions are taken in accordance with good professional practice. To demonstrate that the Council has fulfilled these objectives, the Prudential Code sets out the indicators that must be set and monitored each year. The Council’s prudential indicators for 2018/19 are set out in Appendix C to this report.

57. The Council measures and manages its exposures to treasury management risks using a set of indicators as recommended in the CIPFA Treasury Management Code. The indicators for 2018/19 are set out in Appendix C to this report.

Other Items

58. There are a number of additional items that the Council is obliged by CIPFA or DCLG to include in its Treasury Management Strategy.

Policy on Apportioning Interest to the HRA

59. All of the Council’s existing long-term external borrowing relates to the HRA. In the future, new long-term loans borrowed will be assigned in their entirety to either the General Fund or the HRA as relevant. Interest payable and other costs / income arising from long-term loans (e.g. premiums and discounts on early redemption) will be charged / credited to the respective revenue account. Differences between the value of the HRA loans pool and the HRA’s underlying need to borrow (adjusted for HRA balance sheet resources available for investment) will result in a notional cash balance which may be positive or negative. This balance will be measured and interest transferred between the General Fund and HRA annually at the Council’s average interest rate on investments, adjusted for credit risk.

Investment Training

60. The CIPFA Code requires the responsible officer to ensure that members with responsibility for treasury management receive adequate training in treasury management. This especially applies to members responsible for scrutiny. The Audit and Finance Committee receive regular training presentations, the most recent of which was on 15th March 2017 provided by the Council’s treasury advisers Arlingclose. Further training will be arranged as required.

61. The needs of the Council’s treasury management staff for training in investment management are assessed every six months as part of the staff appraisal process, and additionally when the responsibilities of individual members of staff change.

62. Staff regularly attend training courses, seminars and conferences provided by Arlingclose and CIPFA.

Policy on the use of external service providers / treasury management consultants

63. The Council undertook a procurement exercise in November 2016 and appointed Arlingclose Limited as its external treasury management advisers.

64. The Council recognises that responsibility for treasury management decisions remains with the organisation at all times and will ensure that undue reliance is not placed upon our external service providers. Council officers are clear between what constitutes information and what constitutes advice.

65. The Council also recognises that there is value in employing external providers of treasury management services in order to acquire access to specialist skills and resources. The Council will ensure that the terms of their appointment and the methods by which their value will be assessed are properly agreed and documented, and subjected to regular review.

Policy on borrowing in advance of need

66.The Council will not borrow more than or in advance of its needs purely in order to profit from the investment of the extra sums borrowed. Any decision to borrow in advance will be within forward approved Capital Financing Requirement estimates, and will be considered carefully to ensure value for money can be demonstrated and that the Council can ensure the security of such funds.

67. Risks associated with any borrowing in advance activity will be subject to prior appraisal and subsequent reporting through the in-year or annual reporting mechanism. The maximum period between borrowing and expenditure is expected to be two years, although the Council is not required to link particular loans with particular items of expenditure.

Scheme of Delegation

68. The Council has approved a Scheme of Delegation. This is set out in Appendix D.

Role of the Section 151 Officer

69. The Council has approved the role of the Section 151 Officer (Chief Finance Officer) in relation to treasury management. This is shown in Appendix D.

70. Where the Council finances capital expenditure by debt, it must put aside resources to repay that debt in later years. The amount charged to the revenue budget for the repayment of debt is known as Minimum Revenue Provision (MRP), although there has been no statutory minimum since 2008. The Local Government Act 2003 requires the Council to have regard to the Department for Communities and Local Government’s (DCLG) Guidance on Minimum Revenue Provision, the most recent edition of which was issued in 2012. DCLG consulted on changes to its guidance in December 2017 but has yet to publish the revised guidance.

71. The Council is legally obliged to “have regard” to the guidance, which is intended to enable a more flexible approach to assessing the amount of annual provision than was required under the previous statutory requirements. The guidance offers four main options under which MRP could be made, with an overriding recommendation that the Council should make prudent provision to redeem its debt liability over a period which is reasonably commensurate with that over which the capital expenditure is estimated to provide benefits.   The requirement to ‘have regard’ to the guidance therefore means that:

    • Although four main options are recommended in the guidance, there is no intention to be prescriptive by making these the only methods of charge under which a local authority may consider its MRP to be prudent; and
    • It is the responsibility of each authority to decide upon the most appropriate method of making a prudent provision, after having had regard to the guidance.

72. There is no requirement to charge MRP where the Capital Financing Requirement (CFR) is nil or negative at the end of the preceding financial year. There is no requirement on the Housing Revenue Account to make an MRP charge but there is a requirement for a charge for depreciation to be made.

73. The Council implemented the new Minimum Revenue Provision (MRP) guidance in 2008/09, and will assess MRP for 2018/19 in accordance with the main recommendations contained within the guidance issued by the Secretary of State under section 21(1A) of the Local Government Act 2003.

Option 1: Regulatory Method

74. Under the previous MRP regulations, MRP was set at a uniform rate of 4% of the adjusted CFR (i.e. adjusted for “Adjustment A” in relation to the Housing Revenue Account to ensure consistency with previous Regulations) on a reducing balance method (which in effect meant that MRP charges would stretch into infinity). This historic approach must continue for all capital expenditure incurred in years before the start of this new approach.  It may also be used for new capital expenditure up to the amount which is deemed to be supported through the Supported Capital Expenditure annual allocation.

Option 2: Capital Financing Requirement Method

75. This is a variation on option 1 which is based upon a charge of 4% of the aggregate CFR without any adjustment for Adjustment A, or certain other factors which were brought into account under the previous statutory MRP calculation. The CFR is the measure of an authority’s outstanding debt liability as depicted by their balance sheet.

Option 3: Asset Life Method

76. This method may be applied to most new capital expenditure, including where desired that which may alternatively continue to be treated under options 1 or 2.

77. Under this option, it is intended that MRP should be spread over the estimated useful life of either an asset created, or other purpose of the expenditure. There are two useful advantages of this option:

78. Longer life assets e.g. freehold land can be charged over a longer period than would arise under options 1 and 2; and

79. No MRP charges need to be made until the financial year after that in which an item of capital expenditure is fully incurred and, in the case of a new asset, comes into service use (this is often referred to as being an ‘MRP holiday’).  This is not available under options 1 and 2.

80. There are two methods of calculating charges under option 3:

    • equal instalment method – equal annual instalments; or
    • annuity method – annual payments gradually increase during the life of the asset.

Option 4: Depreciation Method

81. Under this option, MRP charges are to be linked to the useful life of each type of asset using the standard accounting rules for depreciation (but with some exceptions) i.e. this is a more complex approach than option 3. The same conditions apply regarding the date of completion of the new expenditure as apply under option 3.

Annual Minimum Revenue Provision Statement 2018/19

82. For capital expenditure incurred before 1 April 2008, the MRP policy will be to follow the existing practice outlined in former regulations (Option 1). This provides for an approximate 4% reduction in the borrowing need (CFR) each year.

83. The Council has evaluated the options for MRP policy in respect of capital expenditure incurred from 1 April 2008 and considers that the Asset Life – Equal Instalment Method is the most appropriate for it to use. This provides for a reduction in the borrowing need over approximately the useful life of the asset.

84. Estimated life periods will be determined by the Chief Finance Officer. To the extent that expenditure is not on the creation of an asset and is of a type that is subject to estimated life periods that are referred to in the guidance, these periods will generally be adopted by the Council. However, the Council reserves the right to determine useful life periods and prudent MRP in exceptional circumstances where the recommendations of the guidance would not be appropriate.

85. As some types of capital expenditure incurred by the Council are not capable of being related to an individual asset, asset lives will be assessed on a basis which most reasonably reflects the anticipated period of benefit that arises from the expenditure. Also, whatever type of expenditure is involved, it will be grouped together in a manner which reflects the nature of the main component of expenditure and will only be divided up in cases where there are two or more major components with substantially different useful economic lives.

86. Repayments included in finance leases are applied as MRP.

87. No MRP will be charged in respect of assets held within the Housing Revenue Account.

88. Audit and Finance Committee is recommended to:

    • Scrutinise the 2018/19 Treasury Management Strategy and Annual Investment Strategy;
    • Note the Prudential and Treasury Indicators for 2018/19 as set out in Appendix C to this report; and
    • Note that for the 2018/19 financial year the Council makes Minimum Revenue Provision in accordance with the Asset Life (Equal Instalment) Method for new capital expenditure.

Financial Implications

89. The strategy proposed in this report, together with the interest rates forecast, are in line with the assumptions made when the 2018/19 budget was prepared. The costs of treasury operations, debt management expenses and investment income are included in the 2018/19 budget.

Legal Implications

90. The Local Government Act 2003 and supporting regulations requires the Council to ‘have regard to’ the Prudential Code and to set Prudential Indicators for the next three years to ensure that the Council’s capital investment plans are affordable, prudent and sustainable. The Council also has to ‘have regard’ to the DCLG’s Guidance on Local Government Investments (“the Guidance”) issued in April 2010 and CIPFA’s Revised Treasury Management in Public Services Code of Practice 2011 and Cross Sectoral Guidance Notes (“the CIPFA TM Code”).

Human Resources Implications

91. None arising directly from this report.

Other Implications

92. The Treasury Strategy has been formulated to minimise risk. Risk management is embedded in treasury management operations through the adoption of the CIPFA TM Code. Credit ratings and other market intelligence are used and counterparty limits also assist to assess and mitigate risk.

Other Implications

Applies?

Other Implications

Applies?

Human Rights

No

Equalities and Diversity

No

Crime and Disorder

No

Consultation

No

Environmental

No

Access to Information

No

Sustainability

No

Exempt from publication

No

Risk Management

Yes

 

 

 

Director:

Trevor Scott, Director of Governance and Corporate Services

Proper Officer:

Steven Linnett, Chief Finance Officer

Report Contact Officer:

Gillian Taberner, Financial Services Manager

Telephone Number:

01323 443231

e-mail address:

gillian.taberner@wealden.gov.uk

Appendices:

A          Arlingclose Interest Rate Forecast

B          Investment and Borrowing Portfolio at 31/12/2017

C          Prudential and Treasury Management Indicators

D          Treasury Management Scheme of Delegation & Role of
            the Section 151 Officer

Background Papers:

None

1. The interest rate forecast provided by Arlingclose in November 2017, is based
on the following underlying assumptions.
2. In a 7-2 vote, the MPC increased Bank Rate in line with market expectations
to 0.5%. Dovish accompanying rhetoric prompted investors to lower the
expected future path for interest rates. The minutes re-emphasised that any
prospective increases in Bank Rate would be expected to be at a gradual
pace and to a limited extent.
3. Further potential movement in Bank Rate is reliant on economic data and the
likely outcome of the EU negotiations. Policymakers have downwardly
assessed the supply capacity of the UK economy, suggesting inflationary
growth is more likely. However, the MPC will be wary of raising rates much
further amid low business and household confidence.
4. The UK economy faces a challenging outlook as the minority government
continues to negotiate the country’s exit from the European Union. While
recent economic data has improved, it has done so from a low base: UK Q3
2017 GDP growth was 0.4%, after a 0.3% expansion in Q2.
5. Household consumption growth, the driver of recent UK GDP growth, has
softened following a contraction in real wages, despite both saving rates and
consumer credit volumes indicating that some households continue to spend
in the absence of wage growth. Policymakers have expressed concern about
the continued expansion of consumer credit; any action taken will further
dampen household spending.
6. Some data has held up better than expected, with unemployment continuing
to decline and house prices remaining relatively resilient. However, both of
these factors can also be seen in a negative light, displaying the structural
lack of investment in the UK economy post financial crisis. Weaker long term
growth may prompt deterioration in the UK’s fiscal position.
7. The depreciation in sterling may assist the economy to rebalance away from
spending. Export volumes will increase, helped by a stronger Eurozone
economic expansion.
8. Near-term global growth prospects have continued to improve and broaden,
and expectations of inflation are subdued. Central banks are moving to
reduce the level of monetary stimulus.
9. Geo-political risks remains elevated and helps to anchor safe-haven flows into
the UK government bond (gilt) market.
10. The MPC has increased Bank Rate, largely to meet expectations they
themselves created. Future expectations for higher short term interest rates
are subdued. On-going decisions remain data dependant and negotiations on
exiting the EU cast a shadow over monetary policy decisions.
11. The Arlingclose central case for Bank Rate is 0.5% over the medium term.
The risks to the forecast are broadly balanced on both sides.

Borrowing Portfolio as at 31 December 2017

Borrowing Position as at 31/12/2017

Loan Type

Maturity Date

Principal £

Interest Rate

%

445809 PWLB Fixed Rate Annuity Loan

28/02/2019

9,685

12.50%

500896 PWLB Fixed Rate Maturity Loan

28/03/2019

2,282,000

1.76%

500883 PWLB Fixed Rate Maturity Loan

28/03/2020

2,282,000

1.99%

500889 PWLB Fixed Rate Maturity Loan

28/03/2021

2,282,000

2.21%

500888 PWLB Fixed Rate Maturity Loan

28/03/2022

2,282,000

2.40%

482173 PWLB Fixed Rate Maturity Loan

04/08/2024

1,000,000

4.63%

483257 PWLB Fixed Rate Maturity Loan

04/08/2025

1,000,000

4.75%

500891 PWLB Fixed Rate Maturity Loan

28/03/2027

2,282,000

3.01%

489925 PWLB Fixed Rate Maturity Loan

18/05/2027

500,000

4.50%

500884 PWLB Fixed Rate Maturity Loan

28/03/2028

2,282,000

3.08%

500899 PWLB Fixed Rate Maturity Loan

28/03/2029

2,282,000

3.15%

500892 PWLB Fixed Rate Maturity Loan

28/03/2030

2,282,000

3.21%

500893 PWLB Fixed Rate Maturity Loan

28/03/2031

2,282,000

3.26%

500900 PWLB Fixed Rate Maturity Loan

28/03/2032

2,282,000

3.30%

500886 PWLB Fixed Rate Maturity Loan

28/03/2033

2,282,000

3.34%

500881 PWLB Fixed Rate Maturity Loan

28/03/2034

2,282,000

3.37%

500898 PWLB Fixed Rate Maturity Loan

28/03/2035

2,282,000

3.40%

500897 PWLB Fixed Rate Maturity Loan

28/03/2036

2,282,000

3.42%

500882 PWLB Fixed Rate Maturity Loan

28/03/2037

2,282,000

3.44%

500895 PWLB Fixed Rate Maturity Loan

28/03/2038

2,282,000

3.46%

500901 PWLB Fixed Rate Maturity Loan

28/03/2039

2,282,000

3.47%

500885 PWLB Fixed Rate Maturity Loan

28/03/2040

2,282,000

3.48%

500894 PWLB Fixed Rate Maturity Loan

28/03/2041

2,282,000

3.49%

500887 PWLB Fixed Rate Maturity Loan

28/03/2042

2,282,000

3.50%

504348 PWLB Fixed Rate Maturity Loan

01/09/2050

2,650,000

3.33%

504349 PWLB Fixed Rate Maturity Loan

01/09/2055

2,650,000

3.28%

 

 

53,449,685

3.18%

 

Investment Portfolio as at 31 December 2017

Investment Portfolio at 31 December 2017

 

Investment
£

Maturity Date

Investment Period: Days

Rate of Return

Benchmark Return

Term Deposits – UK Banks and Building Societies

 

 

 

 

Lloyds Bank Plc

1,000,000

23/02/2018

365

0.900%

0.480%

Nationwide Building Society

2,000,000

16/01/2018

365

0.620%

0.480%

Secured Deposits

Covered Bonds – UK Banks and Building Societies

 

 

 

Yorkshire Building Society

1,355,055

12/04/2018

217

0.311%

0.480%

Nationwide Building Society

2,013,924

25/04/2019

539

Variable

Term Deposits – Other Local Authorities

 

 

 

North Lincolnshire Council

2,000,000

16/01/2018

175

0.250%

0.480%

Fife Council

2,000,000

19/01/2018

184

0.300%

0.480%

Hull City Council

2,000,000

25/01/2018

92

0.250%

0.480%

Lancashire County Council

3,000,000

02/02/2018

276

0.500%

0.480%

London Borough of Newham

3,000,000

29/03/2018

134

0.290%

0.480%

Hull City Council

2,000,000

16/04/2018

152

0.300%

0.480%

Lancashire County Council

3,000,000

14/05/2018

182

0.450%

0.480%

North East Lincolnshire Council

2,500,000

29/05/2018

273

0.350%

0.480%

Worthing Borough Council

3,000,000

21/06/2018

364

0.450%

0.480%

Thurrock Council

1,000,000

29/06/2018

273

0.370%

0.480%

West Dunbartonshire Council

3,000,000

03/08/2018

289

0.370%

0.480%

Salford City Council

3,000,000

06/08/2018

321

0.380%

0.480%

Thurrock Council

3,000,000

19/09/2018

364

0.450%

0.480%

Property Funds

 

 

 

 

 

Local Authority Property Fund

5,000,000

1 month notice

4.600%

3.480%

Money Market Funds

 

 

 

 

 

Amundi

5,000,000

Call

0.440%

0.480%

Business Reserve Accounts

 

 

 

 

 

Lloyds Bank Plc
Interest Bearing Current Account

3,835,000

n/a

0.400%

0.480%

Overall

52,703,978

 

 

0.630%

0.640%

Prudential and Treasury Indicators

PRUDENTIAL INDICATORS

2016/17

2017/18

2018/19

2019/20

2020/21

 

Actual

Estimated outturn

Estimate

Estimate

Estimate

 

£000

£000

£000

£000

£000

Capital Expenditure

    

 

Non-HRA

3,164

16,533

17,457

11,610

11,145

HRA

9,872

12,902

10,548

10,640

8,500

Total:

13,036

29,435

28,005

22,250

19,645

Capital Financing Requirement as at 31 March

    

 

Non-HRA

2,071

5,978

11,713

17,908

23,828

HRA

62,200

65,299

67,175

68,894

69,104

Total:

64,271

71,277

78,888

86,802

92,932

Maximum HRA Capital Financing Requirement

71,679

71,679

71,679

71,679

71,679

 

 

 

 

 

 

Annual change in Capital Financing Requirement

    

 

Non-HRA

-1,246

3,907

5,735

6,195

5,920

HRA

928

3,099

1,876

1,719

210

Total:

-318

7,006

7,611

7,914

6,130

 

    

 

Net Debt Position at 31 March

    

 

Non-HRA

36,775

30,000

30,000

30,000

30,000

HRA

-53,453

-53,447

-51,158

-48,876

-51,594

Total:

-16,678

-23,447

-21,158

-18,876

-21,594

 

 

 

 

 

 

Ratio of financing costs to net revenue stream

 

 

 

 

 

Non-HRA

-0.8%

-0.8%

-0.7%

0.4%

2.0%

HRA

46.6%

50.3%

53.1%

55.1%

55.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PRUDENTIAL INDICATORS

2016/17

2017/18

2018/19

2019/20

2020/21

 

Actual

Estimated outturn

Estimate

Estimate

Estimate

 

£000

£000

£000

£000

£000

Operational boundary for external debt

    

 

Borrowing

95,000

102,500

107,500

97,500

97,500

Other long term liabilities (e.g. finance leases)

5,000

2,500

2,500

2,500

2,500

TOTAL

100,000

105,000

110,000

100,000

100,000

 

    

 

Authorised limit for external debt

    

 

Borrowing

110,000

122,000

128,000

116,000

116,000

Other long term liabilities (e.g finance leases)

10,000

4,000

4,000

4,000

4,000

TOTAL

120,000

126,000

132,000

120,000

120,000

 

    

 

Actual external debt

53,453

53,447

51,158

48,876

51,594

 

 

 

 

 

 

 

 

TREASURY MANAGEMENT INDICATORS

 

2017/18

2018/19

2019/20

2020/21

 

 

Limit

Limit

Limit

Limit

Upper limit for fixed interest rate exposure

    

 

Net principal re fixed rate borrowing / investments

 

100%

100%

100%

100%

Upper limit for variable rate exposure

    

 

Net principal re variable rate borrowing / investments

 

50%

50%

50%

50%

Upper limit for total principal sums invested for over 364 days

    

 

Per maturity date (£000)

 

8,000

8,000

8,000

8,000

 

Maturity structure of fixed rate borrowing

Upper limit

Lower limit

Under 12 months

25%

0%

12 months and within 24 months

50%

0%

24 months and within 5 years

75%

0%

5 years and within 10 years

100%

0%

10 years and above

100%

0%

Treasury Management Scheme of Delegation

Full Council

  1. Receiving and reviewing reports on treasury management policies, practices and activities.
  2. Approval of annual strategy.
  3. Budget consideration and approval.
  4. Approval of the division of responsibilities.

Cabinet

  1. Approval of and amendments to the organisation’s adopted clauses, treasury management policy statement and treasury management practices.
  2. Budget consideration and recommendation.
  3. Receiving and reviewing regular monitoring reports and acting on recommendations.
  4. Approving the selection of external service providers and agreeing terms of appointment.

Audit and Finance Committee

  1. Reviewing the treasury management policy and procedures and making recommendations to the responsible body.

Treasury Management Role of the Section 151 Officer

  1. Recommending clauses, treasury management policy/practices for approval, reviewing the same regularly, and monitoring compliance.
  2. Submitting regular treasury management policy reports.
  3. Submitting budgets and budget variations.
  4. Receiving and reviewing management information reports.
  5. Reviewing the performance of the treasury management function.
  6. Ensuring the adequacy of treasury management resources and skills, and the effective division of responsibilities within the treasury management function.
  7. Ensuring the adequacy of internal audit, and liaising with external audit.
  8. Recommending the appointment of external service providers.