TREASURY MANAGEMENT POLICY - CIPFA PRUDENTIAL CODE FOR
CAPITAL FINANCE IN LOCAL AUTHORITIES
CABINET : 9 FEBRUARY 2006
MEMBER REPORTING : COUNCILLOR EGLISE
1.
PURPOSE OF REPORT
This report sets and amends policy statements in adherence with the Prudential Code of
Practice for Capital Finance in Local Authorities and guidance issued by the First
Secretary of State on Local Government Investments.
2.
MEMBER’S RECOMMENDATION: That Council be recommended to approve the
limits and indicators contained in Appendix 1 to this report be approved for the year
2006/07 and the future years as required by the CIPFA Prudential Code for Capital
Finance.
3.
SUPPORTING INFORMATION
3.1
Wards Affected
All Wards are affected.
3.2
Relevant Matters Upon Which Decision is Based
3.2.1
The Prudential Code for Capital Finance in Local Authorities was developed by the
Chartered Institute of Public Finance and Accountancy (CIPFA) and seeks to play a key
role in ensuring that the capital investment plans of local authorities are affordable,
prudent, sustainable and have the flexibility to enable timely remedial action to be taken
where problems arise.
3.2.2
In order to demonstrate that it has fulfilled these objectives each authority must develop,
within a prescribed format, a set of prudential indicators to support and record local
decision-making. The indicators are not intended to be used to compare one local authority
with another but merely to support capital financing decisions in a manner that is publicly
accountable.
3.2.3
In setting its prudential indicators an authority must have regard to the following matters:
 affordability i.e. implications for Council Tax
 prudence and sustainability i.e. implications for capital receipts or external borrowing
 value for money – appraisal of options
 stewardship of assets – Treasury Management policy
 service objectives – implications for the strategic plan
 practicality – achievability of capital programme
3.2.4
The Prudential Code arrangements have to be adopted by a local authority under Part 1 of
the Local Government Act 2003 and in order to achieve compliance the Royal Borough
must incorporate the code requirements within its capital budget forecasts for 2006/07,
including a range of three-year prudential indicators as indicators of affordability.
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3.2.5
looking ahead for the three-year period the indicators must include:
 estimates of the ratio of financing costs to net revenue stream.
 estimates of the incremental impact of capital investment decisions on Council Tax.
 estimates of capital expenditure
 estimates of capital financing requirement (how capital expenditure is to be financed)
 authorised limit for external debt
 operational boundary for external debt
3.2.6
A statement of indicators to be included in the capital budget of the Royal Borough in line
with the Prudential Code guidance is included as Appendix 1 to this report. The
Operational Limit for External Debt represents the total of the Council’s limit for both
short-term and long-term borrowing requirements. For 2004/05 this included the
management of the Berkshire Pension Fund cash that technically counts as short term
borrowing by the Council. The decision taken by Cabinet to manage the cash balances of
the Berkshire Pension Fund on a separate basis has resulted in much reduced Operational
Limit for External Debt for the Council since there is no longer a requirement to treat such
monies as a loan in the accounts of the Royal Borough. The Council is also required to
publish the impact of its new capital investment decisions on Council Tax for the next
three years. It is estimated that the draft capital programme to be presented to Council will
add £XX per band D property in 2006/07, £XX in 2007/08 and £XX in 2008/09. These
figures have been built into the Medium Term Financial Plan and are net of saving and
income derived as a direct result of the capital investment undertaken by the Council.
3.2.7
In terms of prudence the code stipulates the following requirements and indicators with
regard to treasury management:
 compliance with the CIPFA ‘Code of Practice for Treasury Management in the Public
Services’.
 upper limits on fixed interest rate and variable interest rate exposures.
 upper and lower limits for the maturity structure of borrowings
 upper limit for principal sums invested for periods longer than 364 days.
3.2.8 The Office of the Deputy Prime Minister has issued further information on the subject by
way their ‘Guidance on Local Government Investments. The main features of this
guidance are:
 An ‘Annual Investment Strategy’ should be approved by the Council before the start
of each financial year.
 Specified Investments mature within twelve months are issued by:
EITHER: the UK government or a UK local authority
OR: a body or investment scheme with a high credit rating as defined in the Annual
Investment strategy.
 The Annual Investment Strategy should regulate the use (if any) to be made of nonspecified investments.
 The Annual Investment Strategy should set out procedures for determining the
maximum periods for which funds may prudently be committed.
3.2.9
Attached as Appendix 2 to this report is a revised Treasury Management Policy Statement
that meets the requirements of both the Prudential Code and the guidance set out in
paragraph 3.2.8. This has been reviewed but there are no significant changes to the Policy
Statement approved by Cabinet in February 2005. It is attached to this report for
completeness.
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3.3
Relevant National/Regional Guidance
Chartered Institute of Public Finance and Accountancy (CIPFA) – ‘Treasury Management
in Local Authorities Code of Practice’.
Chartered Institute of Public Finance and Accountancy (CIPFA) – ‘The Prudential Code
for Capital Finance in Local Authorities’ 2003
ODPM - Guidance on Local Government Investments 2004.
3.4
Relevant Council Policies/Strategies
The Council’s Treasury Management Policy Statement.
The Council’s Capital Budget Statement
3.5
Options Available
Not applicable
4.
CONSULTATION CARRIED OUT
Not applicable.
5.
IMPLICATIONS
5.1
Financial
The financial implications are contained within the body of this report.
5.2
Legal, Human Rights Act, Planning & Sustainable Development
None
Background Papers: Chartered Institute of Public Finance and Accountancy (CIPFA); ‘Treasury Management in Local
Authorities Code of Practice – 1992; Chartered Institute of Public Finance and Accountancy (CIPFA) ‘The Prudential
Code for Capital Finance in Local Authorities – 2003; Office of the Deputy Prime Minister – Guidance on Local
Government Investments 2004
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APPENDIX 1
Royal Borough of Windsor and Maidenhead
The actual figures for 2004/05, the revised estimates for 2005/06 and estimates for 3 further years are shown below.
These prudential indicators are prepared in accordance with the CIPFA Prudential Code for Capital Financing in Local
Authorities.
The figures set out below include this Council's share of the old Berkshire County Council's debt that is now managed
by the Royal Borough.
2004/05
2005/06
Revised
Estimate
Actual
2006/07
2007/08
2008/09
Estimate
Estimate
Estimate
£000
25,811
£000
18,626
£000
19,083
£000
16,052
£000
9,200
of which covered by income derived directly
from the Capital Programme
16.50%
5.90%
14.80%
11.90%
3.20%
Financing costs not covered as a direct result
of capital expenditure
2.0%
2.3%
2.4%
2.4%
2.0%
50,196
52,700
60,861
65,119
66,922
Capital Expenditure
Ratio of financing costs to net revenue stream
Capital Financing Requirement
In respect of its external debt, the Council approves the following authorised limits for its external debt,
gross of investments for the next three financial years.
2005/06
£000
120,000
Authorised limit for external debt
2006/07
£000
120,000
2007/08
£000
120,000
2008/09
£000
120,000
The Council also approves the following boundary for external debt for the same period.
2005/06
£000
100,000
Operational boundary for external debt
2006/07
£000
100,000
2007/08
£000
100,000
2008/09
£000
100,000
The proposed operational boundary for external debt is based on the same estimates as the authorised limit but reflects
the Head of Finance's estimate of the most likely, prudent but not worse case scenario, without the additional
headroom included within the authorised limit to allow for example for unusual cash movements, and equates to the
maximum of external debt projected by this estimate. It includes both long term and short term (i.e. less than 364 day)
borrowing.
The estimate of the incremental impact of capital investment decisions proposed in this report, over and
above capital investment decisions previously taken by the Council is:
2005/06
£6.66
for the Band D Council Tax Payer
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2006/07
£11.44
2007/08
£15.33
Appendix 2
ROYAL BOROUGH OF WINDSOR AND MAIDENHEAD
TREASURY MANAGENT POLICY STATEMENT
1. INTRODUCTION.
1.1
The Chartered Institute of Public Finance and Accountancy (CIPFA) is one of six
premier accountancy bodies in the UK and a member of the Consultative Committee of
Accountancy Bodies. Its members specialise in public sector financial management and
accountancy and are expected to adhere to the principles of Codes of Practice issued by
the Institute.
1.2
The "CIPFA Code of Practice for Treasury Management in the Public Services (Revised
2001)" specifies that each local authority should, as a matter of best practice, have in
place a Treasury Management Policy Statement. The thinking behind this is that Section
45 of the Local Government and Housing Act of 1989 required every Local Authority in
England and Wales to determine several fundamental items of financial policy annually
for at least the ensuing year.
1.3
Subsequently, Chapter 1 of the Local Government Act 2003 and regulations and
guidance issued in accordance therewith has replaced the statutory framework. The
main statutory provisions are included in the Annex to this document.
1.4
In parallel with the changed statutory framework, CIPFA Issued the Prudential Code for
Capital Finance in Local Authorities. This requires certain prudential indicators to be set
and reviewed periodically.
1.5
The Treasury Management Policy Statement set out in the following paragraphs
specifies those financial objectives that the Royal Borough wishes to pursue. The
Treasury Management Policy Statement is the key document for the Authority and the
Head of Finance in the operation, review and performance assessment of treasury
management.
1.6
The external auditor will review the Treasury Management Policy Statement as part of
the annual audit.
2.
TREASURY MANAGEMENT
2.1
The "CIPFA Code of Practice for Treasury Management in the Public Services" defines
treasury management as:
"The management of the organisation's 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."
2.2
The objectives of the Code are to both support the quality and status of treasury
management in local authorities and to provide guidance on the proper practices to be
employed for treasury management. This Council has, therefore, adopted CIPFA's
"Code of Practice for Treasury Management in the Public Services (Revised 2001)".
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2.3
The Council has also adopted the "Non-Investment Products (NIPS) Code" with respect
to its Treasury dealings. The NIPS Code was issued by the Bank of England with a view
to formalising, in a clear and concise manner, the principles and standards that broking
firms and their employees, and "core principals" in the wholesale money markets and
their employees, should observe. The NIPS Code succeeded the "London Code of
Conduct (July '95)" in December 2001.
2.4
For the purpose of meeting Section 151 of the Local Government Act 1972, the Head of
Finance in conjunction with the lead member will have the responsibility for corporate
decision making relating to treasury management matters.
3.
TREASURY MANAGEMENT STRATEGY
3.1
The Council's investment strategy is aimed at ensuring that sufficient funds are
available to cover precept payments, capital commitments and other defined cash
requirements. Whilst the Council will endeavour to achieve competitive rates of interest
on any surplus funds lent out, the security of such funds is paramount, and therefore no
unnecessary risks will be taken with public money. Accordingly, this Council will
forego those marginal gains that might be achieved through lending to institutions with
lower credit ratings than those approved and authorised by the Council. This is in
keeping with the comments of the Treasury and Civil Service Committee of the House
of Commons which stated in its report on the BCCI closure:
"In balancing risk against return, local authorities should be more concerned to avoid
risks than to maximise returns" (Para. 58, Second Report, December 1991).
3.2
Should the Council decide to finance any part of its capital programme from long-term
borrowing it will borrow funds for the purpose of funding precept payments, capital
commitments and other cash requirements.
3.3
The Council's investment portfolio will be managed with a view to ensuring there are
contingent sums available to cover all reasonable eventualities that may arise. To this
effect £3 million of the in-house portfolio will be kept on call, 2 or 7 day notice at all
times.
3.4
The remainder of the Council's investment portfolios will be invested for periods of up
to 5 years. However, all investments greater than 364 days will be made, generally,
through the use of approved investment instruments which can be converted to cash if
required, although opportunities for secure fixed term investments will be considered if
appropriate.
3.5
In all instances, the priority of investments will be to ensure that sufficient funds are
available to cover precept payments, capital commitments and other cash requirements.
With regard to investment policy, surplus funds may be invested with a view to
ensuring the Council has a balanced portfolio. However, if interest rate yields in the
medium to long-term look more favourable, and if the cash flow position allows,
investments may be made to take advantage of these opportunities as they arise.
4.
RAISING CAPITAL FINANCE.
4.1
The Council may in certain circumstances outlined in 3.2 above be prepared to borrow
funds for the purpose of funding precept payments, capital commitments and other cash
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requirements. The Council will not borrow funds for the purpose of lending said funds
out at a higher rate.
4.2
In its capacity as a borrower, the Council may be in a position to deal with a wider
range of counter-parties than when it is acting as a lender. This is due to the fact that
there will be no risk of the counter-party defaulting on repayment of the loan, or of the
Council losing money, as in this case the counter-party in question will be the Council.
4.3
In accordance with the CIPFA Prudential Code for Capital Finance in Local Authorities
the following limits have been set for any future borrowing purposes:
Under 12 months
12 months to 2 years
2 years to 5 years
5 years to 10 years
10 years and above
Upper Limit the
Larger of
£13 mill. or 25%
£10 mill. or 20%
£10 mill. or 40%
£10 mill. or 40%
£75 mill. or 100%
Lower Limit
0%
0%
0%
0%
40%
5. ORGANISATIONS FOR INVESTMENT
5.1
It is the Council's policy to use FITCH Ratings Agency credit ratings as a basis for
assessing investment risk.
5.2
The list of organisations to which the Council currently lends is attached at Appendix A.
It covers all banking institutions, building societies and local authorities to which the
Council will lend. This list is constantly reviewed.
5.3
The main criteria relating to the sums that the Council may lend are:
i) That no more than £3million can be lent to any one institution or "group", with the
exception of,
ii) Those F1+ FITCH IBCA short-term credit rated institutions - to which £4 million
may be lent.
iii) Those AAA FITCH IBCA long-term credit rated institutions - to which £5 million
may be lent.
5.4
It is the Council’s policy not to replace those building societies, currently on the lending
list, which may convert to banking status.
6.
EXTERNAL FUND MANAGERS.
6.1
Treasury management will be the function of the Council's staff with the exception of
those funds managed externally on the Council's behalf. In such instances, fund
managers will operate within the Council’s written guidelines, but have effective dayto-day management of the funds placed with them.
6.2
If a decision is taken to employ one or more external fund managers to manage the
Council's cash balances, the reasons for doing so must be transparent and the reasons for
choosing them clearly justified. It would be expected that any such justification would
draw one or more of the following reasons:
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-
6.3
6.4
The expectation that the appointed manager will provide added value, especially
over the medium to long term, compared to internal management arrangements;
It adds to the Council’s own working knowledge of the money market and other
investment instruments and,
It is another source of advice /information on such matters as interest rate forecasts,
economic data etc, to supplement internal resources and the advice available from
specialist advisers.
The effectiveness of the Council's external fund managers will be reviewed periodically
and at such time, expressions of interest will be sought from those fund managers that
are able to present an appropriate "track record", supported by satisfactory references.
Key guidelines, which may be revised at any time are:
i) Loans are restricted to the Council's own approved lending list and to other
institutions agreed with, and approved by, the Council's external fund managers;
ii) The maximum exposure to any one institution and its wholly owned subsidiaries is
limited to £4million, or 10% of the value of the portfolio, whichever is the lesser
amount;
iii) The maximum maturity of any asset, excluding gilts, is 5 years;
iv) The overall maximum exposure to gilts is 50% of the externally managed portfolio;
v) Investments may be in UK Domestic Certificates of Deposit, Eligible Bills, UK
Treasury Bills, UK Gilts, Local Authority Bonds and Loans or Deposits.
6.5
The number of external fund managers, and the size of the portfolios they manage, is
decided by the Council's Cabinet. Delegated power for treasury related decisions rests
with the Head of Finance, in conjunction with the Lead Member for Resources.
7.
DELEGATED POWERS.
The duties and accountabilities of treasury management are delegated as set out below.
In the absence of the appropriate officer, the responsibility will pass upwards to the next
senior officer in the treasury management hierarchy, except in the case of absence of the
Chief Investment officer, where responsibility will first pass down to the Office
Manager.
7.1 CABINET.
- To recommend to Council the Treasury Management Policy Statement and any
variations made;
- To receive and comment on periodic reports on the treasury function;
- To recommend to Council the treasury elements of the annual budget.
7.2 CHIEF EXECUTIVE.
- To ensure a treasury management system is put in place and resourced;
- To ensure that the Head of Finance reports regularly to lead member and other elected
members on treasury policy, activity and performance.
7.3 MONITORING OFFICER.
Under Section 5 of the Local Government and Housing Act of 1989, the Monitoring
Officer has a duty to report on any contravention of any enactment, rule of law or
code of practice underpinned by enactment.
The Monitoring Officer for the Council is the Borough Secretary.
7.4 HEAD OF FINANCE.
- To prepare the draft Treasury Management Policy Statement;
- To determine funding policies for the ensuing period;
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- To determine lending policies for the ensuing period;
- To report to Members on treasury policy, activity and performance not less than twice
a year, ensuring that one such report is the Annual Report on treasury management,
and that this is presented by 30th September of the succeeding financial year;
- To chair the monthly Officer Monitoring Group to ensure that approved policies areadhered to and to identify necessary changes if required;
- To report to the Lead Member - Monitoring Officer - the Borough Secretary - any
material changes for the approved Treasury Management Policy Statement and any
major breaches, which may have occurred.
7.5 FUND MANAGER (designated "TREASURY MANAGER”).
- To review performance of the treasury management function;
- To ensure compliance with any statutory requirement;
- To satisfy any requirements of the external auditor;
- To appoint and monitor the performance of brokers;
- To prepare and review the list of excluded borrowers.
7.6 CHIEF INVESTMENT OFFICER
- To be responsible for the day to day dealing;
- To ensure compliance with all approved policies, procedures and limits;
- To ensure day to day activities accord with the Treasury Management Policy
Statement;
- To establish and implement the treasury system procedures;
- To manage the overall treasury function;
- To ensure that appropriate segregation of duties are in place;
- To produce regular performance reports.
7.7 OFFICE MANAGER.
- To prepare and monitor cash flow projections;
- To ensure that funds are properly transmitted and received;
- To report activities as specified to the Financial Services Officer;
- To provide cover in the absence of the Chief Investment Manager (Designated).
7.8 SENIOR CLERICAL OFFICER.
- To ensure all deals, repayments and variations are properly recorded and that
supporting paperwork is readily available for inspection.
7.9 HEAD OF AUDIT AND REVIEW.
- To review compliance with approved treasury policy and procedures;
- To review segregation of duties and operational practice;
- To assess value for money from treasury activities.
8.
MONITORING ARRANGEMENTS.
8.1
There will be a monthly review of the loans portfolio with a view to optimising
management performance. The Monitoring Group shall consist of the Lead Member for
Resources, Head of Finance, the Fund Manager and the Chief Investment Officer.
8.2
The Monitoring Group shall be chaired by the Head of Finance.
9.
REPORTING ARRANGEMENTS.
9.1
A Treasury Management Strategy Policy including the Annual Investment Strategy,
limits and indicators related to borrowing will be considered by Cabinet in February of
each year and recommended to the budget meeting of the Council.
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9.2
An Annual Report on Treasury Management will be made each year to the October
cycle of Cabinet meetings. This report will review the previous years treasury
management activities and performance.
16th January 2006
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