Cabinet
Full Council
Overview & Scrutiny
14 February 2011
23 February 2011
18 February 2011
Agenda Item No_____10________
TREASURY MANAGEMENT STRATEGY STATEMENT AND INVESTMENT STRATEGY
2011/12 TO 2013/14
Summary:
Conclusions:
Recommendations:
This report set out details of the Council’s treasury management
activities along with the Prudential Indicators, and presents a strategy
for the prudent investment of the Council’s surplus funds for members
to approve.
The preparation of this Strategy Statement is necessary to comply
with the Chartered Institute of Public Finance and Accountancy’s
Code of Practice for Treasury Management in Public Services. The
Prudential Indicators are required to be set each year in accordance
with the Prudential Code.
That the Council be asked to RESOLVE that the Treasury
Management Strategy Statement and Investment Strategy and
Prudential Indicators, for 2011/12 to 2013/14, be approved.
Cabinet member(s):
All
Contact Officer, telephone number,
and e-mail:
Ward(s) affected:
All
Tony Brown 01263 516126
tony.brown@north-norfolk.gov.uk
1.
Introduction
1.1
The Chartered Institute of Public Finance and Accountancy’s Code of Practice for
Treasury Management in Public Services and the Prudential Code require local
authorities to determine the Treasury Management Strategy Statement and Prudential
Indicators on an annual basis. The Strategy Statement also incorporates the Investment
Strategy as required under the Department for Communities and Local Government’s
Investment Guidance.
1.2
The Council is required 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 indicators to which regard should be given
when determining the Council’s treasury management strategy are included within
Appendix H.
1.3
CIPFA has defined Treasury Management as:
“the management of the organisation’s investments and cash flows, its banking, money
market and capital market transactions; the effective control of the risks associated with
those activities; and the pursuit of optimum performance consistent with those risks.”
1.4
No treasury management activity is without risk, but the successful identification,
monitoring and control of risk is the prime criteria by which the effectiveness of the
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Council’s treasury management activities will be measured. Treasury management risks
are identified in the Council’s approved Treasury Management Practices and include:
•
•
•
•
•
•
1.5
Liquidity Risk (Adequate cash resources)
Market or Interest Rate Risk (Fluctuations in the value of investments).
Inflation Risks (Exposure to inflation)
Credit and Counterparty Risk (Security of Investments)
Refinancing Risks (Impact of debt maturing in future years).
Legal & Regulatory Risk (Compliance with statutory and regulatory
requirements).
This strategy takes into account the impact of the Council’s Revenue Budget and Capital
Programme on the Balance Sheet position. The projected treasury position for 2010/11
to 2013/14 is as follows:
Total external
debt
Total
Investments
(Managed inhouse)
Average
Interest Rate
Interest
Receivable
Forecast
Outturn
2010-11
Nil
Estimate
Estimate
Estimate
2011-12
Nil
2012-13
Nil
2013-14
Nil
£26,100,000
£22,800,000
£16,400,000
£15,000,000
2.13%
2.42%
3.06%
3.35%
£556,000
£552,000
£502,000
£503,000
1.6
The Council approved the adoption of the CIPFA Treasury Management Code at Full
Council on 24 February 2010. The Council has incorporated the changes from the
revised CIPFA Code of Practice into its treasury policies, procedures and practices.
2.
Balance Sheet and Treasury Position
2.1
The underlying need to borrow for capital purposes as measured by the Capital
Financing Requirement (CFR) together with Balances and Reserves are the core drivers
of Treasury Management Activity. The estimates, based on the current Revenue Budget
and Capital Programmes, are set out below:
CFR
Balances & Reserves
- Capital Receipts
- General Reserve
- Earmarked Reserves
Total
Net Investment Capacity
2.2
31 Mar 11
Estimate
£
Nil
31 Mar 12
Estimate
£
Nil
8,996,000
981,000
3,399,000
13,376,000
13,376,000
6,910,000
1,466,000
2,402,000
10,778,000
10,778,000
31 Mar 13
Estimate
£
Nil
4,672,000
1,266,000
2,403,000
8,341,000
8,341,000
31 Mar 14
Estimate
£
Nil
3,883,000
1,066,000
2,438,000
7,387,000
7,387,000
The Council’s level of physical debt and investments is linked to these components of
the Balance Sheet. The Council’s CFR is anticipated to be zero over the life of the
Strategy and no external borrowing for capital purposes is therefore anticipated. Market
conditions, interest rate expectations and credit risk considerations will influence the
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Council’s strategy in determining the investment activity against the underlying Balance
Sheet position. 3.
Outlook for Interest Rates
3.1
The economic interest rate outlook provided by the Council’s treasury advisor,
Arlingclose Ltd, is attached at Appendix I. The Council will keep its Treasury Strategy
under review and realign it with evolving market conditions and expectations for future
interest rates if required. Investment Policy and Strategy
4.
4.1
Guidance from CLG requires that local authorities set an Annual Investment Strategy
(AIS).
4.2
The Council’s investment priorities are:
• Security of the invested capital;
• Liquidity of the invested capital;
• An optimum yield which is commensurate with security and liquidity.
4.3
Investments are categorised as ‘Specified’ or ‘Non Specified’ investments based on the
criteria in the government guidance. Potential instruments for the Council’s use within its
investment strategy are contained in Appendix J. The Chief Financial Officer, under
delegated powers, will undertake the most appropriate form of investments in keeping
with the investment objectives, income and risk management requirements and
prudential Indicators. Decisions taken on the core investment portfolio will be reported
to Cabinet.
4.4
The following changes to the investment strategy are now considered
appropriate for the 2011/12 strategy, and have been recommended by the
Council’s Treasury Advisor.
•
•
•
•
•
4.5
AAA-rated Variable Net Asset Value (VNAV) Money Market Funds. The Council
currently uses Constant Net Asset Value Funds (CNAV) which ensure the
principal sum invested is always repaid (plus any interest). With VNAV Funds,
the principal value can change. Funds which have a track record of maintaining
the value of the principal sum for at least 12 months will be included on the
approved counterparty list.
Treasury Bills. These are short term Government debt instruments issued by the
Debt Management Office (DMO) and provide an alternative to the DMO deposit
account facility. They are secure with an implicit AAA rating, can be acquired
and sold on a daily basis, and pay a yield which is currently around 0.5%. This
compares very favourably with the current DMO deposit rate of around 0.25%.
Local Authority Bills. These are issued by Local Authorities as short term debt
instruments to borrow money. They haven’t been used for some time, but this
could change in the future. The cost of borrowing from the Public Works Loan
Board has increased since the Comprehensive Spending Review and as Local
Authorities look for alternative sources of borrowing, they could become a useful
investment tool.
Term deposits in Non-UK banks to include Sweden. The economic indicators
and credit rating for Sweden show it is appropriate to include the country’s banks
on the Council’s lending list.
Increase the maximum duration of new term deposits to 2 years. As credit
conditions continue to improve it is appropriate to increase the maximum term
from 1 to 2 years to secure higher returns with strong institutions.
The Council’s estimated levels of investments are set out in 1.4 of this TMSS.
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4.6
The Council’s in-house investments are made with reference to the outlook for the UK
bank rate and money market rates. In any period of significant stress in the markets, the
Council will resort to making investments with just the Debt Management Office or in UK
Treasury Bills. The rates of interest are below money market rates but this will be an
acceptable trade-off for the guarantee that the Council’s capital is secure.
4.7
The Council selects countries and the institutions within them for the counterparty
list after analysis and careful monitoring of:
•
•
•
•
•
•
•
Credit Ratings (minimum long-term A+ for counterparties; AA+ for countries)
Credit Default Swaps (where quoted)
GDP; Net Debt as a Percentage of GDP
Sovereign Support Mechanisms/potential support from a well-resourced parent
institution
Share Prices (where quoted)
Macro-economic indicators
Corporate developments, news and articles, market sentiment.
4.8
The Council and its Treasury Advisors, Arlingclose, will continue to analyse and monitor
these indicators and credit developments on a regular basis and respond as necessary
to ensure security of the capital sums invested.
4.9
The UK Bank Rate has been maintained at 0.5% since March 2009, and is anticipated to
remain at low levels throughout 2011/12. Short-term money market rates are likely to
remain at very low levels for an extended period which will have a significant impact on
investment income.
4.10
To protect against a lower for longer prolonged period of low interest rates and to
provide certainty of income, 2-year deposits and longer-term secure investments will be
actively considered within the limits the Council has set for Non-Specified Investments
(see Appendix J). The longer-term investments will be likely to include:
• Term Deposits with counterparties rated at least A+ (or equivalent)
• Supranational Bonds (bonds issued by multilateral development banks): Even at
the lower yields likely to be in force, the return on these bonds will provide
certainty of income against an outlook of low official interest rates.
4.11
Collective Investment Schemes (Pooled Funds). The Council has evaluated the use of
Pooled Funds and determined the appropriateness of their use within the investment
portfolio. Pooled funds enable the Council to diversify the assets and the underlying risk
in the investment portfolio and provide the potential for enhanced returns.
4.12
Investments in pooled funds will be undertaken with advice from Arlingclose and their
performance and suitability in meeting the Council’s investment objectives will be
regularly monitored.
5.
2010/11 Minimum Revenue Provision (MRP) Statement
5.1
The Local Authorities (Capital Finance and Accounting)(England)(Amendment)
Regulations 2008 (SI2008/414) place a duty on local authorities to make a prudent
provision for debt redemption. Guidance on Minimum Revenue Provision (MRP) has
been issued by the Secretary of State and local authorities are required to “have regard”
to such guidance under section 21 (1A) of the Local Government Act 2003.
5.2
There are four alternative methods available and the Council will apply the CFR (Capital
Financing Requirement) Method. The CFR at 31 March 2011 is estimated to be £Nil and
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as such, under this calculation method, there will be no requirement to charge MRP in
2011/12.
6.
Reporting on the Treasury Outturn
6.1
The Technical Accountant will report on treasury management activity and performance
as follows:
•
•
•
The treasury management position is monitored during the year against the
approved strategy for the year. A mid-year review is prepared and, as part of the
budget monitoring process, quarterly reports are presented to Cabinet and
Scrutiny Committee.
The Council will produce an outturn report on its treasury activity no later than 30
September after the financial year end.
The Overview and Scrutiny Committee will be responsible for the scrutiny of
treasury management activity and practices.
7.
Training
7.1
In accordance with CIPFA’s Code of Practice, the “responsible officer” ensures that all
members tasked with treasury management responsibilities, including scrutiny of the
treasury management function, receive appropriate training relevant to their needs and
understands fully their roles and responsibilities.
8.
Investment Consultants
8.1
The Council employs a Treasury Management Advisor, Arlingclose Limited, to provide
advice and information on counterparty credit worthiness, treasury strategy, economic
updates and technical support on all treasury matters. The Treasury Advisory Service is
periodically subject to tender to ensure the Council receives a quality service. A new
contract commencing 1 April 2011 is currently being tendered.
9.
Risks to the Council
9.1
The strategy ensures that the identification, monitoring and control of risk (as detailed at
1.3) are the prime criteria by which treasury activities are undertaken.
10.
Financial Implications
10.1
The effectiveness of the Treasury Strategy will have a significant impact on the budget
and finances of the Council. Investment decisions will be made based on the Council’s
forecast of interest rate movements. If actual rate movements prove to be very different,
there will be implications for the investment return achieved.
10.2
It is not possible to predict with certainty the future movements in interest rates. The
Strategy must therefore be flexible enough to allow the Council to respond to changing
market conditions. It must also enable the Council to respond to future changes in
legislation.
10.3
The security of the Council’s investments is of prime concern, and the Strategy must
ensure that, as far as possible, the Council’s investments are repaid in full, with interest
earned, on the due date.