Cabinet
6 June 2011
Scrutiny
22 June 2010
Full Council
28 June 2011
Agenda Item No______9_______
ANNUAL TREASURY MANAGEMENT REPORT FOR 2010/11
Summary:
This report sets out the Treasury Management activities actually
undertaken during 2010/11 compared with the Treasury Management
Strategy for the year.
Conclusions:
Treasury activities for the year have been carried out in accordance
with the CIPFA Code and the Council’s Treasury Strategy.
Recommendations:
That the Council be asked to RESOLVE the following;
(a) The Treasury Management Annual Report for 2010/11 is
approved.
(b) The maximum period of investment for non-UK banks is
reduced from 2 years to a maximum of 1 year.
Cabinet member(s):
Ward(s) affected:
All
All
Tony Brown 01263 516126
Tony.brown@north-norfolk.gov.uk
Contact Officer, telephone number,
and e-mail:
1.
INTRODUCTION
1.1
The Chartered Institute of Public Finance and Accountancy (CIPFA) defines treasury
management as “the management of the Council’s investments and cash flows, its
banking and its capital market transactions; the effective control of the risks associated
with those activities and the pursuit of optimum performance consistent with those risks”.
1.2
The Council’s treasury management activities are undertaken in accordance with the
CIPFA Code of Practice on Treasury Management. The Code requires public sector
authorities to determine an annual Treasury Management Strategy and, as a minimum,
formally report on their treasury activities and arrangements to full Council mid-year and
after the year-end. These reports enable those tasked with implementing policies and
undertaking transactions to demonstrate they have properly fulfilled their responsibilities,
and to enable those with ultimate responsibility for governance of the treasury
management function to scrutinise and assess its effectiveness and for compliance with
policies and objectives.
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28 June 2011
1.3
This report is prepared in accordance with the requirements of the revised CIPFA
Treasury Management and Prudential Codes, and sets out details of investment
transactions; reports on the risk implications of treasury decisions and transactions;
gives details of the actual results for the year and confirms compliance with treasury
limits and Prudential Indicators.
2.
ECONOMIC FORECAST AND OUTTURN FOR 2010/11
2.1
At the time the Treasury Strategy Statement for 2010/11 was prepared, the outlook for
the economy and interest rates was as follows:
2.2
Interest rates were expected to remain low in response to the fragile state of the UK
economy. Spending cuts in the public sector and tax increases seemed inevitable post
the General Election, if the new government had a clear majority. There were concerns
in the financial markets that there would be a hung parliament, and if there would be a
credible plan to bring down government borrowing. The outlook for growth was uncertain
due to consumers and businesses trimming their spending, and financial institutions
exercising restraint in new lending.
2.3
The economy’s two headline indicators moved in opposite directions with low growth and
rising inflation. The economy grew by just 1.3% in the 12 months to December 2010, and
by March 2011 the Office for Budget Responsibility’s forecast for 2011 was revised down
to 1.7%. Higher commodity, energy and food prices and the increase in VAT to 20%
pushed the February 2011 annual inflation figure to 4.4%. The Bank Rate was held at
0.5% as the economy tried to contend with uneven growth and the austerity measures
set out in the coalition government’s Comprehensive Spending Review (CSR).
Significant cuts were made to public expenditure, in particular local government funding.
2.4
The credit crisis moved from banks to European sovereign states, and the sovereign
credit ratings of Ireland Portugal Greece and Spain were all downgraded. The price of
UK Government bonds (Gilts) rose as a consequence of the decisive CSR plans as well
as from their relative ‘safe haven’ status when compared to European sovereign
weakness. The interest rate (or yield) on 5-year and 10-year gilts fell to lows of 1.44%
and 2.83% respectively. However, yields rose again in the final quarter of 2010/11 on
concerns that higher inflation would become embedded and greatly diminish the real rate
of return for fixed income investors.
2.5
During the year money market rates increased only marginally for shorter investment
periods (overnight to 3 months), whereas the rates for longer investment periods (6 - 12
months) increased by 0.25% to 0.30%, reflecting the expectation that the Bank Rate
would be raised later in 2011.
3.
LONG TERM BORROWING
3.1
The Council has no long-term debt. The strategy has been to remain debt-free and not
to borrow long-term monies to finance its capital spending, relying instead on usable
capital receipts, government grants and revenue contributions. Any decision to borrow
in the future will need to have regard to the treasury implications, including taking
account of the additional credit risk of holding both investments and borrowing.
4.
ANNUAL INVESTMENT STARTEGY AND OUTTURN
4.1
The Department for Communities and Local Government’s (DCLG) revised Guidance on
Local Government Investments came into effect on 1st April 2010 and reiterated the
need to focus on security and liquidity, rather than yield. It also recommended that
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treasury strategies include details of assessing credit risk, reasons for borrowing in
advance of need and the use of treasury advisors.
4.2
The table below gives Members an appreciation of the investment activity undertaken in
2010/11, showing the position at the start and end of the year, together with the
transactions during the year. The percentages show the average investment return
achieved for each investment category for 2010/11, and the average life of the
investments to maturity, weighted to investment value.
Balance
01/4/2010
Invested
Matured
£000s
£000s
£000s
Balance
31/3/2011
Return
£000s
%
Weighted
Average
Life
(days)
Internally
managed
(short-term)
7,815
94,130
(86,855)
15,090
1.00
66
Bonds issued
by multilateral
development
banks
(Nominal
Value)
9,500
0
(3,000)
6,500
4.29
628
All investments
17,315
94,130
(89,855)
21,590
2.07
235
4.3
Security of the capital sum invested remained the Council’s main investment objective.
This was maintained by following the Council’s counterparty policy as set out in its
Treasury Management Strategy Statement for 2010/11. New investments were placed
with the Debt Management Office, AAA-rated Stable Net Asset Value Money Market
Funds and appropriate UK banks and building societies which are systemically important
to the banking system.
4.4
Credit Risk
Counterparty credit quality was assessed and monitored with reference to the following;
1. Credit ratings (The Council’s minimum long-term counterparty rating of A+ across
all three rating agencies, Fitch, S&P and Moody’s).
2. The price of credit default swaps (this is similar to an insurance policy which pays
out the value of an investment should a counterparty fail to repay an investment),
where quoted.
3. Gross Domestic Product (GDP) of the country in which the institution operates.
4. The country’s net debt as a percentage of GDP
5. Any potential support mechanisms and share price (where quoted).
4.5
Each investment counterparty is given a credit score based on this information.
Weighted average scores are then calculated for both value and time. The value
weighted average reflects the credit quality of investments compared to the size of the
deposit. The time weighted average reflects the credit quality of investments compared
to the number of days to maturity of the deposit.
4.6
Appendix C shows the different credit scores which apply to the long-term credit ratings
of an institution (The final score will also take the other factors listed above into account).
The Council aims to achieve a score of 5 or lower (A+ or better), to reflect the Council’s
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6 June 2011
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28 June 2011
overriding priority of security of monies invested and a minimum credit rating threshold of
A+ for investment counterparties, as set out in the Council’s Treasury Management
Strategy Statement.
4.7
The table below shows how the scores and ratings have changed over the financial
year. The more investments the Council has with counterparties with higher credit
ratings, the lower the score will be. Over the year the value weighted score has risen
(although it is well below the minimum level of 5 which represents the lowest credit rating
the Council will accept). The rise in score is a result of £3m of highly secure Eurosterling
bonds maturing in December 2010 being replaced by deposits with UK banks, which are
slightly lower rated
4.8
The time weighted score should be below the value weighted score. This would indicate
that when longer-term deposits are made, they are made with counterparties which have
the stronger credit ratings. It is desirable to place longer-term deposits with the more
highly rated and consequently more secure counterparties. The score improved in June
because the highly rated bonds had a bigger impact on the overall credit score for that
quarter.
Date
Value
Weighted
Average
Credit Risk
Score
Value
Weighted
Average
Credit
Rating
Time
Weighted
Average
Credit Risk
Score
Time
Weighted
Average
Credit
Rating
Average
Life (days)
31/03/2010
2.20
AA+
1.50
AA+
471
30/06/2010
2.61
AA
1.47
AAA
272
30/09/2010
2.59
AA
1.84
AA+
254
31/12/2010
3.22
AA
2.17
AA+
249
31/03/2011
3.19
AA
1.88
AA+
235
4.9
The graphs shown at Appendix D show the Council’s position at 31 March 2011 and
compares how the Council has performed in relation to other clients of the Council’s
treasury advisors, Arlingclose Limited.
4.10
The first graph shows that at the 31 March 2011 the rate of interest on the Council’s
investments was 1.94% with a value weighted credit score of 3.19. The average credit
score for Arlingclose clients (non-metropolitan district councils) was 3.50 with an
average interest rate of 1.4%, indicating that the Council’s investment portfolio is
performing well in comparison to the client group, with an above average return
achieved by taking a below average credit risk.
4.11
The second graph shows that the Council is achieving a very low credit score of 1.88 on
a time weighted basis compared to the client group average of 3.5. This illustrates that
the Councils longer-term investments are with very secure counterparties.
4.12
Liquidity
In accordance with the DCLG’s Guidance on Investments, the Council maintained
sufficient level of liquidity through the use of Money Market Funds, overnight deposits
and call accounts with banks.
4.13
Yield
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The Council sought to optimise returns commensurate with its objectives of security and
liquidity. The UK Bank Rate was maintained at 0.5% through the year. Short term
money market rates remained at very low levels and this had a significant impact on
investment income. Interest earned from longer-dated investments made in European
Investment Bank Euro-sterling bonds averaged 4.29%. These bonds provide excellent
security and their enhanced yield provides some cushion against the low interest rate
environment. A total of £3m of these bonds matured in December 2010 but were not
replaced as the yield for comparable bonds at the time was only around 2.06%, which
was not considered a good return for the length of investment required. Instead deposits
were made with UK banks and building societies, as per the Council’s treasury
management strategy statement.
4.14
The Council’s investment income for the year was £547,241 compared to the revised
budget of £562,000. The anticipated rate of return on investments in the revised budget
was 2.19% and a rate of 2.07% was actually achieved. The average balance available
for investment in the year was £26.5m compares to a revised budget of £25.7m
4.15
All investments made during the year complied with the Council’s agreed Treasury
Management Strategy, Prudential Indicators, Treasury Management Practices and
prescribed limits. Maturing investments were repaid in full on the due date.
5.
Compliance with Treasury Management Prudential Indicators
5.1
The Council confirms its adoption of the CIPFA Code of Treasury Management at its
meeting on 14 February 2011.
5.2
Affordable Borrowing Limit, Authorised Limit and Operational Boundary for
External Debt
5.3
Section 3(1) of The Local Government Act 2003 requires the Council to set an
Affordable Borrowing Limit, irrespective of their indebted status. This is a statutory limit
and should not be breached.
5.4
The Council’s Affordable Borrowing Limit (referred to as the Authorised Limit within the
Prudential Code) was originally set at £9.1m for 2010/11 (£9.1m 2009/10) and has
remained at this level throughout the financial year.
5.5
The Limit has been set on the estimate of the most likely, prudent but not worst case
scenario for its total external debt gross of investments with, in addition, sufficient
headroom over and above this to allow for unusual cash movements. The limit is
consistent with the Council’s existing commitments, proposals for capital expenditure
and financing and with its approved treasury management policy statement and
practices.
5.6
The Operational Boundary is based on the same estimates as the Authorised Limit but
reflects the most likely, prudent but not worst case scenario without the additional
headroom included within the Authorised Limit.
5.7
The Operational Boundary was set at £5.1m for 2010/11 (£5.1m 2009/10) and again this
indicator has remained at this level throughout the financial year.
5.8
The Section 151 Officer confirms that there were no breaches to the Authorised Limit
and the Operational Boundary during the financial year. As the Council did not undertake
temporary or long-term borrowing, actual borrowing was nil through the year.
5.9
Upper Limits for Fixed Interest Rate Exposure and Variable Interest Rate Exposure
5.10
These indicators allow the Council to manage the extent to which it is exposed to
changes in interest rates. The exposures are calculated on a net basis, i.e. fixed rate
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debt net of fixed rate investments. The upper limit for variable rate exposure allows for
the use of variable rate debt to offset exposure to changes in short-term rates on our
portfolio of investments.
Prudential Indicator
2009/10
2010/11
2010/11
Outturn
Estimated
Outturn
Upper Limit for Fixed Rate
Exposure
100%
100%
100%
Upper Limit for Variable Rate
Exposure
100%
100%
100%
The Council did not operate at these limits. At the year end the Council had no fixed or
variable rate debt (this was the same as the position in 2009/10), and of the total
investment portfolio of £21.59m (£17.315m 2009/10), £10.09m (£2.815m 2009/10) was
at variable rates, which is equal to 46.7% (16.3% 2009/10) of total investments. These
variable rate investments include money market funds, call accounts and a variable rate
bond.
5.11
Maturity Structure of Fixed Rate borrowing
5.12
This indicator is to limit large concentrations of fixed rate debt 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.
5.13
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.
Upper
limit
Lower
limit
%
%
under 12 months
100%
0%
12 months and within 24 months
100%
0%
24 months and within 5 years
100%
0%
5 years and within 10 years
100%
0%
10 years and above
100%
0%
Maturity structure of fixed rate
borrowing
5.14
As the Council is debt-free the upper limit has been set at 100% to allow flexibility to
undertake borrowing in any of the maturity bands, as appropriate. There were no
breaches of these limits during the financial year, but again it should be noted that as the
Authority is currently debt free and is not intending to enter into any long-term borrowing
in the near future the above indicators are not currently relevant.
5.15
Total principal sums invested for periods longer than 364 days
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5.16
This indicator allows the Council to manage the risk inherent in investments longer than
364 days. The Council is required to set an upper limit for each forward financial year
period for the maturity of such investments.
Prudential Indicator
2009/10
2010/11
£
£
Limit on Amounts invested in
excess of 364 days
£15m
£15m
Compliance with limit set by the
Council?
Yes
Yes
At the year end the total amount invested for more than 1 year was £5.0m (£9.5m
2009/10) and the Council complied with the limit throughout the year.
5.17
Compliance with Capital Related Prudential Indicators 2010/11
Please note that the Prudential Indicators no longer include any reference to the
Housing Revenue Account (HRA) following the transfer of the housing stock under Large
Scale Voluntary Transfer (LSVT) back in February 2006. The indicators shown below
therefore relate solely to the General Fund.
5.18
Estimated and Actual Capital Expenditure
5.19
This indicator is set to ensure that the level of proposed investment in capital assets
remains within sustainable limits and, in particular, to consider the impact on the Council
Tax.
Prudential Indicator
2009/10
2010/11
2010/11
2010/11
Outturn
£m
Estimated
£m
Revised
indicator
£m
Outturn
£m
Capital Expenditure
General Fund Total
3,500
7,524
6,907
2,765
5.20
Estimated and Actual Ratio of Financing Costs to Net Revenue Stream
5.21
This is an indicator of affordability and demonstrates the revenue implications of capital
investment decisions by highlighting the proportion of the revenue budget required to
meet the borrowing costs associated with capital spending.
Prudential Indicator
Ratio of Financing
2009/10
2010/11
2010/11
2010/11
Outturn
%
Estimated
%
Revised
indicator
%
Outturn
%
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Costs to Net Revenue
Stream
General Fund Total
(4.57)
(3.12)
(3.43)
(3.38)
5.22
The negative ratio reflects the fact that interest receivable exceeds interest payable,
which represents a very healthy position for the Council.
5.23
Capital Financing Requirement
5.24
The Capital Financing Requirement (CFR) measures the Council’s underlying need to
borrow for a capital purpose. In order to ensure that over the medium term net borrowing
will only be for a capital purpose, the Council ensures that net external borrowing does
not, except in the short term, exceed the Capital Financing Requirement in the preceding
year plus the estimates of any additional CFR for the current and next two financial
years.
5.25
The Council met this requirement in 2010/11. It should be noted that, following the
repayment of the Council’s borrowing, the CFR has been reduced to zero.
Prudential Indicator
31/3/10
31/3/11
31/3/11
31/3/11
Outturn £
Estimated
£
Revised
indicator
£
Outturn
£
0
0
0
0
Capital Financing
Requirement
General Fund Total
5.26
Incremental Impact of Capital Investment Decisions
5.27
This is an indicator of affordability that shows the impact of capital investment decisions
on Council Tax.
Prudential Indicator
2009/10
2010/11
2010/11
2010/11
Outturn
Estimated
£
Revised
Indicator
£
Outturn
£
£
Incremental Impact of
Capital Investment
Decisions
Total increase in Band D
Council tax
5.28
0.29
0.10
0.30
0.25
The code requires the impact of alternative capital investment decisions on Council Tax
to be calculated, and reflects the incremental impact of new capital decisions proposed
over and above the capital investment decisions that have already been taken in the
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past by the Council, and therefore relates only to the new resources to be committed.
These indicators take into consideration the effects of self-financing and the effects of
government support, along with any associated impact on interest receivable/due as a
consequence of the financing methods used. They also reflect the revenue implications
of capital schemes other than financing costs, such as additional support contracts for
new computer systems. This is a purely notional calculation designed to show the effect
of changes in capital investment decisions. The true estimated level of council tax in
future years is shown in the Financial Plan, and the actual decision on Council Tax for
the forward years 2011/12 and 2012/13 will only be determined at the time that the
actual budget is set for those years.
5.29
The outturn for this indicator is £0.25 for 2010/11 (£0.29 for 2009/10).
6.
EXTERNAL SERVICE PROVIDERS
6.1
During the year the Council subjected the Treasury Advisory Service to a joint tender
with Broadland District Council and South Norfolk Council. The Council’s current
advisor, Arlingclose Limited successfully retained the contract and was awarded a
contract for all three councils for a three year period commencing 1 April 2011 with an
option to extend for a further year.
6.2
The Council is clear as to the services it expects and is provided under the contract and
the service provision is comprehensively documented. The Council is also clear that the
overall responsibility for treasury management remains with the Council.
7.
2011/12 STRATEGY
7.1
The Strategy approved an increase to the maximum duration of new term deposits with
appropriately rated counterparties from 1 to 2 years. This was in recognition of improving
credit conditions and would enable higher returns to be secured with strong institutions.
7.2
The Council’s treasury advisors, Arlingclose, have been closely monitoring the economic
and credit situation in Europe, and in particular the sovereign debt and rating issues
surrounding the nations of Portugal, Ireland, Italy, Greece and Spain. Arlingclose have
considered the implications for the financial intuitions which they currently recommend
as investment counterparties, and remain comfortable with the banks on their
recommended list. However, as a proactive risk management response to the
continuing uncertainty in Europe, they advise a temporary reduction to the maturity limit
for new investments with non-UK banks from 2 years to 1 year.
7.3
Arlingclose remain comfortable with a 2 year maximum investment period for UK banks
currently on their recommended list (excluding Santander UK and Clydesdale where
shorter maturity limits are currently in place). The UK banks on the list remain, in their
view, systemically important to the UK and global economy and benefit from an implicit
high level of credit protection from the UK Government.
8.
FINANCIAL IMPLICATIONS
8.1
The financial impact of implementing the Council’s treasury strategy for 2010/11 has
been set out in this report.
9.
RISKS TO THE COUNCIL
9.1
This report confirms that the Council considers that security and liquidity are the primary
objectives of its prudent investment policy.
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Arlingclose Client Benchmarking
6.00%
Average Rate of Investments
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
1
2
Lower Risk
3
4
5
Average Credit Risk Score - Time Weighted Average
Benchmarking
North Norfolk District Council - 31/03/2011
6
Higher Risk
7