Cabinet
Full Council
Overview & Scrutiny
06 February 2012
22 February 2012
15 February 2012
Agenda Item No______8_______
TREASURY MANAGEMENT STRATEGY STATEMENT AND INVESTMENT STRATEGY
2012/13 TO 2014/15
Summary:
Conclusions:
Recommendations:
This report sets 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
Code has been revised in November 2011 and this Strategy
Statement incorporates the changes which have been made.
The Prudential Indicators are required to be set each year in
accordance with the Prudential Code.
That the Council be asked to RESOLVE that;
(a) The Treasury Management Strategy Statement and
Investment Strategy and Prudential Indicators, for 2012/13
to 2014/15, are approved.
(b) The revised Treasury Management Policy Statement is
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 (CIPFA) 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 includes the Annual
Investment Strategy, which is a requirement of the Communities and Local
Government’s (CLG) Investment Guidance.
1.2
The Code is required to be formally adopted by the Council, and this was done on 28
April 2010. In November 2011 CIPFA issued an updated and revised Code and
associated Guidance Notes following recent developments, anticipated regulatory
changes relating to the Localism Bill 2011, housing finance reform and the introduction
of the General Power of Competence.
1.3
The revised Code requires the Council’s high level policies for borrowing and
investments to be included in the Policy Statement. An amended Statement
incorporating these policies is included for approval at Appendix D. In addition, the
revised Code requires the Council to explicitly state in the Strategy Statement whether it
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Full Council
Overview & Scrutiny
plans to use derivative instruments to manage risk.
derivatives is included in section 6 of this report.
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22 February 2012
15 February 2012
The Council’s position on
1.4
Treasury Management is about the management of risk. The Council is responsible for
its treasury decisions and activity, recognising that no treasury management activity is
without risk. All activities will comply with relevant statute, guidance and accounting
standards.
1.5
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. These indicators, along with those to which the
Council should have regard to when determining the Council’s treasury management
strategy are included within Appendix E.
2.
Interest Rate Forecast
2.1
The economic and interest rate forecast provided by the Council’s treasury management
advisor, Arlingclose Ltd, is attached at Appendix C. The Council will keep its Treasury
Strategy under review and realign it in response to evolving economic, political and
financial events. 3.
Borrowing Strategy
3.1
The Council is currently debt free and its capital expenditure and financing plans do not
currently imply any external borrowing requirement in 2012/13.
4.
Annual Investment Strategy
4.1
In accordance with Investment Guidance issued by the CLG and best practice the
Council’s primary investment objective remains the security of capital. The liquidity or
accessibility of the investments followed by the yields earned are important, but are
secondary considerations.
4.2
The Credit Markets are where governments and companies raise funds and these
remain in a state of distress as a result of the excessive and the high cost of debt. In
some cases, Greece and Italy being the most notable examples, the extent and
implications of the debt which has been built up have led to a sovereign debt crisis and
banking crisis with the outcome still largely unknown. It is against this backdrop of
uncertainty that the Council’s investment strategy is framed.
4.3
Investments are categorised as “Specified” or “Non-Specified” within the investment
guidance issued by the CLG.
Specified investments are sterling denominated
investments with a maximum maturity of one year. They also meet the “high credit
quality” as determined by the council and are not deemed capital expenditure
investments under statute. All other investments are classified as non-specified.
4.4
The types of investments that may be used by the Council and whether they are
specified or non-specified are as follows:
Investment
Specified
NonSpecified
Term deposits with banks and building societies
3
3
Term deposits with other UK local authorities
3
3
Certificates of deposit with banks and building societies
3
3
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Gilts
3
3
Treasury Bills (T-Bills)
3
2
Bonds issued by Multilateral Development Banks
3
3
Local Authority Bills
3
2
Commercial Paper
3
2
Corporate Bonds
3
3
AAA rated Money Market Funds
3
2
Other Money Market and Collective Investment Schemes
3
3
Debt Management Account Deposit Facility
3
2
4.5
Corporate bonds are now included as available investment instrument; CLG has
indicated they will become an eligible non-capital investment from 1 April 2012. In
response to evolving conditions in financial markets, the Council amended in December
2011 the minimum credit criteria for individual institutions to which the Council is
prepared to lend its funds. The criteria in the next paragraph are a continuation of that
policy.
4.6
The Council and its advisors, Arlingclose Ltd, select countries and financial institutions
after analysis and ongoing monitoring of:
•
•
•
•
•
•
•
Published credit ratings for financial institutions (minimum long term rating of Aor equivalent for counterparties; AA+ or equivalent for non-UK countries.
Credit Default Swaps (where quoted)
Economic fundamentals (for example Net Debt as a percentage of GDP)
Sovereign Support Mechanisms
Share Prices
Corporate developments, news and articles, market sentiment and momentum.
Subjective judgement (or put more simply – common sense)
4.7
The countries and institutions which currently meet the criteria for term deposits,
Certificates of Deposit (CDs) and call accounts are included on the recommended
Sovereign and Counterparty List included at Appendix C Institutions can be temporarily
suspended or removed from the list should any of the factors identified above give rise to
concern. Institutions which meet the minimum criteria and which are judged appropriate
investment counterparties by the Council’s treasury advisors can be added to the list in
the future.
4.8
The Council’s policy is to make exceptions to the counterparty policy established around
credit ratings in appropriate circumstances. Institutions which meet the credit criteria
may be suspended from the lending list, but institutions which do not meet the criteria
cannot be added.
4.9
The Council banks with the Co-operative Bank plc. At the current time the bank does
not meet the minimum credit criteria of a long term rating of A- (or equivalent). Despite
this the Bank will continue to be used for short term liquidity requirements (overnight and
weekend investments) for a maximum sum which can be placed in the Public Sector
Reserve Account of £500,000.
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4.10
Short-term interest rates are forecast to remain low for a long period, Arlingclose Ltd
think that it could be 2016 before the official bank rate begins to rise. It would be usual
in such an interest rate environment to lengthen investment periods, where cash flow
requirements permit, in order to lock in higher rates of return with acceptable levels of
risk. However, the problem currently is finding investment counterparties which provide
acceptable levels of counterparty risk.
4.11
Investments will be placed with a range of approved investment counterparties in order
to achieve a diversified portfolio of prudent counterparties, investment periods and rates
of return. Maximum investment levels will be set for individual counterparties to ensure
prudent diversification is achieved.
4.12
Money market funds (MMFs) will be utilised.
These funds do provide good
diversification, but the Council will seek to further diversify its exposure by utilising
several MMFs. The Council will also restrict its exposure to MMFs with lower levels of
funds under management by limiting investments to 0.5% of the net asset value of the
Fund.
5
Collective Investment Schemes (Pooled Funds)
5.1
The Council will continue to evaluate the use of Pooled Funds to determine the
appropriateness of their use within the investment portfolio. Pooled funds enable the
authority to diversify the assets and the underlying risk in the investment portfolio and
provide the potential for enhanced returns.
5.2
Investments in pooled funds will be undertaken with advice from Arlingclose Ltd. The
performance and continued suitability in meeting the Council’s investment objectives of
any investment in these funds will be regularly monitored.
6
The Use of Financial Instruments for the Management of Risks
6.1
The CIPFA Code requires authorities to explicitly state in their Strategy whether they
plan to use derivative instruments to manage risks (such as interest rate swaps to
manage interest rate risks), and to ensure they have the legal power to do so.
6.2
The legal power under which local authorities may use derivatives instruments remains
unclear. The General Power of Competence in the Localism Bill is not sufficiently
explicit and consequently the Council does not intend to use derivatives.
6.3
Should this position change, the Council would develop a detailed and robust risk
management framework governing the use of derivatives, but this change in strategy will
require approval of Full Council.
7
2011/12 Minimum Revenue Provision (MRP) Statement
7.1
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.
7.2
There are four alternative methods available and the Council will apply the CFR (Capital
Financing Requirement) Method. The CFR at 31 March 2013 is estimated to be £Nil and
as such, under this calculation method, there will be no requirement to charge MRP in
2012/13.
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8.
Monitoring and Reporting on the Treasury Outturn and Prudential Indicators
8.1
The Technical Accountant will report to Cabinet 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 quarterly
reports are prepared as part of the budget monitoring process.
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.
9.
Training
9.1
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.
10.
Investment Consultants
10.1
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 and
Arlingclose successfully tendered for a new contract commencing 1 April 2011 for a
period of 3 years, with the option to extend for a further year.
11.
Risks to the Council
11.1
This strategy ensures that the identification, monitoring and control of risk are the prime
criteria by which the effectiveness of treasury management activities is measured.
12.
Financial Implications
12.1
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.
12.2
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.
12.3
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.