Cabinet
Overview & Scrutiny
Full Council
04 February 2013
20 February 2013
27 February 2013
Agenda Item No___ 9__________
Treasury Management Strategy Statement and Investment Strategy 2013/14 to 2015/16
Summary:
Options Considered:
Conclusions:
Recommendations:
Reasons for
Recommendation:
This report sets out details of the Council’s treasury management
activities and presents a strategy for the prudent investment of the
Council’s surplus funds.
In addition it includes the prudential
indicators for approval.
Alternative investment options are continuously appraised by the
Council’s treasury advisors, Arlingclose and all appropriate options are
included within this Strategy.
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 all the requirements of the new Code.
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 2013/14 to 2015/16, are approved.
The Strategy provides the Council with a flexible treasury strategy
enabling it to respond to changing market conditions and ensure the
security of its funds.
Cabinet Member(s)
Ward(s) affected: All
Cllr W Northam
Contact Officer, telephone number and email: Tony Brown, 01263 516126, tony.brown@northnorfolk.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
In accordance with the requirements of the Prudential Code, the Council has adopted
the CIPFA Treasury Management Code at a meeting of Full Council on 28 April 2010.
1.3
The Council invests substantial sums of money and therefore has potentially large
exposures to financial risks including the loss of invested funds and the effect of
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changing interest rates. The successful identification, monitoring and control of risk are
therefore central to the Council’s treasury management strategy.
1.4
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 are set out in Appendix J.
1.5
The treasury strategy set out in this report supports the budget for 2013/14 which is
included as a separate report elsewhere on this agenda.
2.
Interest Rate Forecast
2.1
The Council’s treasury advisors expect interest rates to remain low for a long period.
Their forecast is for is for official UK interest rates to remain at 0.5% until 2016, given the
poor outlook for economic growth and the extension of austerity measures announced in
the Chancellor’s Autumn Statement. Until there is a credible resolution to the problems in
the Eurozone, and while the UK maintains its safe haven status with minimal prospect of
increases in official interest rates, all these factors together will continue to combine and
support this forecast.
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 2013/14 to 2015/16.
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 is secondary, followed by the yields earned on them.
4.2
The Council and its treasury advisors remain alert to signs of credit or market distress
that might adversely affect the Council.
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
Investments with Registered Providers
3
3
Certificates of deposit with banks and building societies
3
3
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Overview & Scrutiny
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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
Registered Providers of Social Housing (RPs) have been included within permitted
investments for 2013/14. Investments with RPs will be analysed on an individual basis
and discussed with Arlingclose prior to investing.
4.6
The minimum long term rating for counterparties is A- (or equivalent) for specified
investments, with a sovereign rating for non-UK counterparties of AA+ (or equivalent).
The Head of Finance will have discretion to make investments with counterparties that
do not meet this criteria on advice from Arlingclose.
4.7
The other credit characteristics, in addition to credit ratings, that the Authority monitors
are listed in the Prudential Indicator on Credit Risk (see Appendix J). Any institution will
be suspended or removed from the counterparty list should any of the factors identified
give rise for concern. Specifically credit ratings are monitored by the Council on an ongoing basis. Arlingclose advises the Council on ratings changes and any appropriate
action to be taken. The countries and institutions that currently meet the criteria for
investments are included in Appendix I.
4.8
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
investments) for a maximum sum which can be placed in the Public Sector Reserve
Account of £500,000.
4.9
Short term interest rates are anticipated to be low for some time, and in this situation the
investment strategy would be to lengthen investment periods, where cash flow
requirements allow, in order to secure higher rates of return for an acceptable level of
risk. The problem in the current environment is finding an investment counterparty
providing acceptable levels of counterparty risk.
4.10
In order to diversify the Council’s investment portfolio which is largely invested in cash,
deposits, investments will be placed with approved counterparties over a range of
maturity periods. Maximum investment levels with each counterparty will be set to
ensure prudent diversification is achieved.
4.11
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
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funds under management by limiting investments to 0.5% of the net asset value of the
Fund.
4.12
The Council is exploring opportunities to invest in the delivery of affordable housing in
the District through the provision of loan finance to Registered Providers. This may have
a long term borrowing implication, but at this stage this has not been factored into the
Strategy or Prudential Indicators. Any decision to make capital investments in
Registered Providers, or to undertake external borrowing to finance this, will be taken in
conjunction with the council’s treasury advisor and will be presented to members at such
time.
5
Collective Investment Schemes (Pooled Funds)
5.1
The Council has decided to invest a proportion of the portfolio in the Local Authorities’
Property Fund (the LAMIT Fund) and will continue to evaluate the use of Pooled Funds
to determine the appropriateness of their further 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. The
performance and continued suitability in meeting the Council’s investment objectives of
any investment in these funds will be regularly monitored.
6
Policy on Use of Financial Derivatives
6.1
The CIPFA Code requires authorities to clearly detail their policy on the use of financial
derivatives in the annual strategy. These instruments are used to manage risks (such
as interest rate swaps to manage interest rate risks), and can be embedded into loans
and investments, or are standalone. 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.
6.2
The Council will only use standalone financial derivatives (such as interest rate swaps)
where it can be clearly demonstrated that they reduce the overall level of financial risks
that the Council is exposed to. They will only be used after seeking expertise, a legal
opinion and ensuring officers have the appropriate training for their use.
6.3
Embedded derivatives will not be subject to this policy, although the risks they present
will be managed in line with the overall treasury risk management strategy.
7
2012/13 Minimum Revenue Provision (MRP) Statement
7.1
The Council is required to set an annual policy on the way it calculates the prudent
provision for the repayment of borrowing (MRP).
7.2
There are four alternative methods available and the Council will apply the CFR (Capital
Financing Requirement) Method. The CFR at 31 March 2014 is estimated to be £nil, if
the impact of embedded finance leases are excluded. Under this calculation method,
there will be no requirement to charge MRP in 2013/14. The recognition of an
embedded finance lease in the council’s refuse and car park contracts establishes a
CFR. There is therefore a requirement to make an MRP charge which will be equal to
the annual principal repayment under the embedded finance lease.
8.
Monitoring and Reporting on the Treasury Outturn and Prudential Indicators
Cabinet
Overview & Scrutiny
Full Council
8.1
04 February 2013
20 February 2013
27 February 2013
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.
A requirement of the CIPFA Code of Practice is that there are clearly defined
responsibilities for the scrutiny of treasury management activities, and these are
considered by CIPFA to be an essential element of the Council’s treasury management
arrangements. Full Council nominated Overview and Scrutiny Committee to be
responsible for the scrutiny of treasury management activity and practices at its meeting
on 28 April 2010.
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.
Treasury Management Advisors
10.1
The Council employs a Treasury Management Advisor, Arlingclose Limited, to provide
advice and information on counterparty creditworthiness, 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.
Financial Implications and Risks
11.1
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.
11.2
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.
11.3
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.
12.
Sustainability – None as a direct consequence of this report.
13.
Equality and Diversity – None as a direct consequence of this report.
14.
Section 17 Crime and Disorder considerations – None as a direct consequence of
this report.
Appendix I
Recommended Sovereign and Counterparty List
Country/
Domicile
Counterparty
Maximum
Counterparty
Limit
Maximum
Group
Maximum
Maturity Limit
(term deposits and
instruments
without a
secondary
market)1
Maximum
Maturity Limit
(negotiable
2
instrument)
UK
Santander UK Plc
(Banco Santander Group)
£3m
2 years
5 years
UK
£3m
2 years
5 years
2 years
5 years
UK
Bank of Scotland
(Lloyds Banking Group)
Lloyds TSB
(Lloyds Banking Group)
Barclays Bank Plc
£3m
2 years
5 years
UK
HSBC Bank Plc
£3m
2 years
5 years
UK
Nationwide Building Society
£3m
2 years
5 years
UK
NatWest
(RBS Group)
£3m
2 years
5 years
UK
£3m
2 years
5 years
UK
Royal Bank of Scotland
(RBS Group)
Standard Chartered Bank
£3m
2 years
5 years
Australia
Australia and NZ Banking Group
£3m
2 years
5 years
Australia
Commonwealth Bank of Australia
£3m
2 years
5 years
Australia
National Australia Bank Ltd
£3m
2 years
5 years
Australia
Westpac Banking Corp
£3m
2 years
5 years
Canada
Bank of Montreal
£3m
2 years
5 years
Canada
Bank of Nova Scotia
£3m
2 years
5 years
Canada
£3m
2 years
5 years
Canada
Canadian Imperial Bank of
Commerce
Royal Bank of Canada
£3m
2 years
5 years
Canada
Toronto-Dominion Bank
£3m
2 years
5 years
Finland
Nordea Bank Finland
£3m
2 years
5 years
Finland
Pohjola
£3m
2 years
5 years
UK
£3m
£4.5m
£4.5m
1
2 years is the maximum approved duration for term deposits and illiquid investments (those without
a secondary market), although in practice the Council may be investing on a shorter term basis
depending on operational advice of the authority’s treasury management adviser.
5 years is the maximum approved duration for negotiable instruments such as Certificates of
Deposits, Medium Term Notes and Corporate Bonds, although in practice the Authority may be
investing for shorter periods depending on operational advice of the authority’s treasury management
adviser.
2
Appendix I
Country/
Domicile
Counterparty
Maximum
Counterparty
Limit
Maximum
Group
Maximum
Maturity Limit
(term deposits and
instruments
without a
secondary
market)1
Maximum
Maturity Limit
(negotiable
2
instrument)
France
BNP Paribas
£3m
2 years
5 years
France
£3m
2 years
5 years
2 years
5 years
France
Credit Agricole CIB (Credit Agricole
Group)
Credit Agricole SA (Credit Agricole
Group)
Société Générale
£3m
2 years
5 years
Germany
Deutsche Bank AG
£3m
2 years
5 years
Netherlands
ING Bank NV
£3m
2 years
5 years
Netherlands
Rabobank
£3m
2 years
5 years
Netherlands
Bank Nederlandse Gemeenten
£3m
2 years
5 years
Singapore
DBS Bank Ltd
£3m
2 years
5 years
Singapore
£3m
2 years
5 years
Singapore
Oversea-Chinese Banking
Corporation (OCBC)
United Overseas Bank (UOB)
£3m
2 years
5 years
Sweden
Svenska Handelsbanken
£3m
2 years
5 years
Switzerland
Credit Suisse
£3m
2 years
5 years
US
JP Morgan
£3m
2 years
5 years
France
£3m
£4.5m
Please note this list could change if, for example, a counterparty/country is upgraded, and meets our
other creditworthiness tools or a new suitable counterparty comes into the market. Alternatively, if a
counterparty is downgraded, this list may be shortened.
Appendix J
Prudential Indicators 2013/14 – 2015/16
1.
Background:
1.1
There is a requirement under the Local Government Act 2003 for local authorities to
have regard to CIPFA’s Prudential Code for Capital Finance in Local Authorities (the
“CIPFA Prudential Code”) when setting and reviewing their Prudential Indicators.
2.
Gross Debt and the Capital Financing Requirement:
2.1
This is a key indicator of prudence. In order to ensure that over the medium term debt
will only be for a capital purpose, the Council should ensure that debt does not, except in
the short term, exceed the total of the capital financing requirement in the preceding year
plus the estimates of any additional capital financing requirement for the current and next
two financial years. The Council will have no difficulty in meeting this requirement as no
long term borrowing is anticipated for the period of the Strategy.
3.
Estimates of Capital Expenditure:
3.1
This indicator is set to ensure that the level of proposed capital expenditure remains
within sustainable limits and, in particular, to consider the impact on Council Tax.
Capital Expenditure
Total
3.2
2013/14
Estimate
£000s
9,267
2014/15
Estimate
£000s
2015/16
Estimate
£000s
1,113
448
Capital expenditure will be financed or funded as follows:
Capital Financing
2013/14
Estimate
£000s
2014/15
Estimate
£000s
Capital receipts
3,421
670
Government Grants
5,443
443
Revenue contributions
and Reserves
Total Financing
2015/16
Estimate
£000s
448
403
9,267
1,113
448
This table shows that the capital expenditure plans of the Council can be funded entirely
from sources other than external borrowing.
4.
Ratio of Financing Costs to Net Revenue Stream:
4.1
This is an indicator of affordability and highlights the revenue implications of existing and
proposed capital expenditure by identifying the proportion of the revenue budget
required to meet financing costs. The definition of financing costs is set out in the
Prudential Code.
4.2
The ratio is based on costs net of investment income.
Appendix J
Ratio of Financing
Costs to Net
Revenue Stream
Total
2013/14
Estimate
%
2014/15
Estimate
%
(2.87)
(3.01)
2015/16
Estimate
%
(3.11)
The indicator is negative because the Council has interest receivable and no financing
costs.
5.
Capital Financing Requirement:
5.1
The Capital Financing Requirement (CFR) measures the Council’s underlying need to
borrow for a capital purpose. The calculation of the CFR is taken from the amounts held
in the Balance Sheet relating to capital expenditure and financing.
Capital Financing
Requirement
Total CFR
2013/14
Estimate
£000s
1,634
2014/15
Estimate
£000s
2015/16
Estimate
£000s
1,328
998
The total CFR indicated in the table relates to vehicles and equipment used on the
Council’s refuse and car park management contracts. These are recognised under
IFRS accounting regulations which require equipment on an embedded finance lease to
be recognised on the balance sheet.
7.
Incremental Impact of Capital Investment Decisions:
7.1
This is an indicator of affordability that shows the impact of capital investment decisions
on Council Tax levels. The incremental impact is calculated by comparing the total
revenue budget requirement of the current approved capital programme with an
equivalent calculation of the revenue budget requirement arising from the proposed
capital programme.
Incremental Impact of
Capital Investment
Decisions
Increase in Band D
Council Tax
2013/14
Estimate
£
2014/15
Estimate
£
2015/16
Estimate
£
Nil
Nil
Nil
7.2
The Council’s capital plans, as estimated in forthcoming financial years, have a neutral
impact on council tax. This reflects the fact that capital expenditure is predominantly
financed from internal resources (grants, contributions, and revenue and capital
receipts), and there is no increase in the underlying need to borrow.
8.
Authorised Limit and Operational Boundary for External Debt:
8.1
The Council has an integrated treasury management strategy and manages its treasury
position in accordance with its approved strategy and practice. Overall borrowing will
therefore arise as a consequence of all the financial transactions of the Council, and not
just those arising from capital spending reflected in the CFR.
Appendix J
8.2
The Authorised Limit sets the maximum level of external debt on a gross basis (i.e.
excluding investments) for the Council. It is measured against all external debt items (i.e.
long and short term borrowing, overdrawn bank balances and long term liabilities). The
indicator separately identifies borrowing from other long term liabilities such as finance
leases. It is consistent with the Council’s existing commitments, its proposals for capital
expenditure and financing and its approved treasury management policy statement and
practices.
8.3
The Authorised Limit is the statutory limit determined under Section 3(1) of the Local
Government Act 2003 (referred to in the legislation as the Affordable Limit).
8.4
The Operational Boundary is based on the same estimates as the Authorised Limit
reflecting the most likely, prudent but not worst case scenario, and without the additional
headroom included within the Authorised Limit for unusual cash movements.
2013/14
2014/15
2015/16
Estimate
£000s
Estimate
£000s
Estimate
£000s
Authorised Limit for
Borrowing
6,900
6,900
6,900
Authorised Limit for Other
Long-term Liabilities
1,634
1,328
998
Authorised Limit for
External Debt
8,534
8,228
7,898
Operational Boundary for
Borrowing
4,840
4,840
4,840
Operational Boundary for
Other Long-term Liabilities
1,634
1,328
998
Operational Boundary
for External Debt
6,474
6,168
5,838
9.
Adoption of the CIPFA Treasury Management Code:
9.1
This indicator demonstrates that the Council has adopted the principles of best practice.
Adoption of the CIPFA Code of Practice in Treasury Management
The Council approved the adoption of the CIPFA Treasury Management Code at Full
Council on 28 April 2010.
Appendix J
10.
Upper Limits for Fixed Interest Rate Exposure and Variable Interest Rate Exposure:
10.1
These indicators allow the Council to manage the extent to which it is exposed to
changes in interest rates. The Council calculates these limits on net principal sums
outstanding (i.e. fixed rate debt net of fixed rate investments).
10.2
The purpose of the limit is to ensure that the Council is not exposed to interest rate rises
on any borrowing which could adversely impact the revenue budget. Variable rate
borrowing can be used to offset exposure to changes in short term rates on investments.
However, the Council does not anticipate entering into a borrowing during the period of
the Strategy. The limit therefore allows maximum flexibility for fixed or variable rate
investments and investment decisions will ultimately be made on expectations of interest
rate movements as set out in the Strategy.
2014/15
2013/14
Estimate Estimate
%
%
2015/16
Estimate
%
Upper Limit for
Fixed Interest
Rate Exposure
(100%)
(100%)
(100%)
Upper Limit for
Variable Interest
Rate Exposure
(100%)
(100%)
(100%)
10.3
As the Council’s investments exceed its borrowing, these calculations have resulted in a
negative figure.
11.
Maturity Structure of Fixed Rate borrowing:
11.1
This indicator highlights the existence of any large concentrations of fixed rate borrowing
needing to be replaced at times of uncertainty over interest rates and is designed to
protect against excessive exposures to interest rate changes in any one period, in
particular in the course of the next ten years.
11.2
It is calculated as the amount of projected borrowing that is fixed rate maturing in each
period as a percentage of total projected borrowing that is fixed rate. The Council does
not anticipate entering into any borrowing therefore the limits have been set to allow the
Council maximum flexibility should any borrowing be required (potentially for cash flow
purposes).
Maturity structure of fixed rate borrowing
under 12 months
Lower Limit Upper Limit
for 2013/14 for 2013/14
%
%
0
100
12 months and within 24 months
0
100
24 months and within 5 years
0
100
5 years and within 10 years
0
100
10 years and within 20 years
0
100
Appendix J
12.
20 years and within 30 years
0
100
30 years and within 40 years
0
100
40 years and within 50 years
0
100
50 years and above
0
100
Credit Risk:
12.1
The Council considers security, liquidity and yield, in that order, when making investment
decisions.
12.2
Credit ratings remain an important element of assessing credit risk, but they are not a
sole feature in the Council’s assessment of counterparty credit risk.
12.3
The Council also considers alternative assessments of credit strength, and information
on corporate developments of and market sentiment towards counterparties. The
following key tools are used to assess credit risk:
− Published credit ratings of the financial institution (minimum A- or equivalent) and
its sovereign (minimum AA+ or equivalent for non-UK sovereigns);
− Sovereign support mechanisms;
− Credit default swaps (where quoted);
− Share prices (where available);
− Economic fundamentals, such as a country’s net debt as a percentage of its
GDP);
− Corporate developments, news, articles, markets sentiment and momentum;
− Subjective overlay.
12.4
Credit ratings are the only indicator where an absolute prescriptive value can be applied.
The other indicators of creditworthiness are considered in relative terms.
13.
Upper Limit for total principal sums invested over 364 days:
13.1
The purpose of this indicator is to limit exposure to the possibility of loss which may arise
as a result of the Council having to seek early repayment of the sums invested.
Upper Limit for
total principal
sums invested
over 364 days
Total
2013/14
2014/15
2015/16
Estimate Estimate Estimate
£m
£m
£m
15
15
15