Agenda item

Members considered a report on Treasury Management and the revised Minimum Revenue Provision (MRP) policy.  Having been brought to the November Audit Committee, the report updated the detail on the changes to the MRP policy following comments from the Committee.  The report informed the Audit Committee of treasury activities undertaken during the period to 30 September 2017 and provided details of the proposal to change the MRP policy for supported borrowing.

The Council continued to be both a short term investor of cash and borrower to manage day-to-day cash flows.  Current forecasts indicated that in the future, temporary borrowing would continue to be required to fund normal day to day cash flow activities.

The first half of the year saw the successful sale of Friars Walk development which allowed borrowing which had been undertaken in relation to the loan provided to Queensberry Newport Ltd to be repaid.  All borrowing in relation to this development had been fully repaid, and this had meant that net borrowing had fallen from £209.2m to £149.1m during the year.  All borrowing and investments undertaken during the first half of the year was as expected and within the Council’s agreed limits.

There had been significant financial constraints on Authorities to look at MRP.  A number of councils had changed their MRP Policy and Newport carried out an assessment of unsupported borrowing.  There were four alternative approaches ‘Regulatory Method’, ‘CFR Method’ (current methodology/policy), ‘Asset Life’ and ‘Depreciation Method’.

The Council currently charged MRP for supported borrowing at 4% reducing balance.  It was proposed that this be changed to a 2.5% straight line charge, which would reduce the revenue charge for the provision by c£2.4m.

The ‘Asset Life’ method was consistent with reviews undertaken by other Local Authorities when reviewing their supported borrowing MRP policy/methodology.  It provided for a lower charge and believed to be prudent as built on asset life, a straight line charge rather than reducing balance.  

Wales Audit Office had been consulted on the proposed charge and had reviewed the basis of the charge and was content that it was in line with current guidance.  The Council’s Treasury Advisors had also advised that all methods reviewed complied with Welsh Government Guidance. 

Para 38 Page 92/93 outlined the advantages of the ‘Asset Life’ method:-

·         Met Welsh Government guidance of charging MRP.

·         Provided a straight line charge to the revenue account, which would assist in future planning, and did not cause increased budget pressures in future years with the annuity method.

·         Provided a number of positives which would be beneficial to the Wellbeing and Future Generations Act, such as:-

o   Linking the MRP charge to the useful life of the asset, therefore applying the charge to the taxpayers who had use of the asset.

o   From this there was a reduction in the time to extinguish the ‘repayment’ of the borrowing undertaken to fund capital expenditure which would be reduced from c 150 years to 40 years.

o   Protected front line services from being cut to for future generations to use, while funding was being cut.

o   Asset life being used was well inside the maximum allowable guidance of 50 years.

However, it was recognised that there were a number of consequences of reducing the MRP charge from the current policy which included:-

·         The current method would see (with all other factors remaining equal) a reducing charge in each year.  The revised method costing more than the reduced charge.  However, in reality the reduced Capital Financing Requirement would be replaced by a further supported capital expenditure, therefore it was unlikely that this reduced charge would be realised as future savings.

·         Reduced MRP charge would reduce cash-flow over the short to medium term, which would mean that borrowing may need to be brought forward.

·         Reduced headroom for new borrowing without increasing the current ‘borrowing requirement’ compared to current methodology. (Chart 2, Appendix C)

Comments made included:

·         What were the implications of the changes in MRP for the future? – The Assistant Head of Finance responded that in 13 years’ time there would be a constantly reducing charge – which would be straight line.  The prudency of the charge had been assessed and it was considered that 40 years was a prudent charge. Because it was a straight line charge of £4m it was set so the impact of the spend today and in 40 years’ time would be £4m.  The MRP policy would be reviewed on annual basis so if it ever became imprudent it would be reviewed 

·         The change in MRP policy was bringing forward a benefit but Cabinet should understand that it would have to paid for at some time in the future.

·         The report stated the cost was from year 13.   Page 92 paragraph 35 stated:

o   ‘straight line produces a saving of c£2.4m compared to the current budget level and this is then a fixed saving from that point – no future pressures on the budget.  Appendix C shows this’

According to the Appendix this was a pressure on this budget going forward.  The ongoing saving of £2.4m was not tied into what it said in Appendix C.

·       The bullet point on page 93 which stated that it  ‘protects front line services frombeing cut for future generations to use, while funding is being cut’  was felt to be badly worded and should be more rounded.  The change in policy  protects front line services initially but did it protect them going forwards if  there was pressure in the budget. If the policy was to spread it over 40 years one line in isolation was not answering the future generations question.  It was protecting services today but not later on. 

·         The proposal was in line with the code of practice (WAO confirmed).  Whilst there was a saving in year 1 all things being equal there would be apressure point at year 13.  It was for the Council to determine who that affected.Overall it could be argued that it was fair among generations but notfair to protect services today at the detriment of future generations. Thegraph needed to show 150 years and 40 years.

·         With the straight line method paying £4m a year, was it a saving as £4m later onwould be less? – The Assistant Head of Finance responded that thiswould not be the case as the Council was paying on an MVP basis.  MTFPbasis. If it didn’t move for the next 40 years it would be like for like.

·         On a like for like basis there was pressure.  So on that basis some of the            sentences need to be tightened up.  The report was saying no pressure but  the paper in isolation was not tallying to the Appendix.

·         It was recognised that the MRP Policy was being reviewed every year but it should be noted that although rates had not gone up it could be realisticallyassumed that they could go up.

·         Wording in paragraph 45 line 2 to be amended to remove the words ‘that it is prudent’ as it was not for the WAO to assess whether it was prudent.

·         Page 93, paragraph 41 ‘This underspend will continue, until a saving is           taken in relation to this’ did not make sense.

·         The £10m balance was queried – The Assistant Head of Finance responded  that the Council currently had a significant investment balance because of Friars Walk.  In 2019/20 the investment balance would go down.  Council taking different view on whether there should be a permanent £10m balance or not.

Agreed

1.    To note the report on treasury management activities for the period up to 30 September 2017.

2.    To note the proposed change to the Minimum Revenue Provision (MRP) policy for supported borrowing.