INTEGRATED PLAN PART C
THE PRUDENTIAL CODE FOR CAPITAL FINANCE AND TREASURY
MANAGEMENT STRATEGY
CONTENTS OF THE REPORT
Page
Section 1:
Background
2
Section 2:
Capital Expenditure and Capital Financing
Requirement
2
Section 3:
Context for the Treasury Management Strategy
5
Section 4:
Treasury Management Strategy
6
Section 5:
Policy on Use of Financial Derivatives
8
Section 6:
Treasury Management Prudential Indicators
9
Section 7:
Financial Implications and Sensitivity to
Interest Rates
12
Section 8:
Treasury Management Training and Advice
13
Section 9:
Performance Indicators and Reporting
14
Appendix 1:
Treasury Management Policy Statement
16
Appendix 2:
2012/13 Lending Policy
18
Appendix 3:
Prudential Indicators Summary
22
1
1.
Background
1.1
The CIPFA Prudential Code for Capital Finance in Local Authorities
(Prudential Code) requires the Council to agree and monitor a number of
prudential indicators to facilitate the decision making process and support
capital spending decisions. The indicators cover affordability, prudence,
capital expenditure, and treasury management. These indicators also form
the basis of in-year monitoring.
1.2
The Council is also required to agree the Minimum Revenue Provision Policy
(MRP) on an annual basis. This determines the basis upon which the cost of
borrowing is reflected in the revenue budget.
1.3
CIPFA’s Treasury Management in the Public Services: Code of Practice Fully
Revised Second Edition 2009 (the CIPFA Code) also requires the Council to
adopt the CIPFA Code and to approve a treasury management strategy in
advance of each financial year. The Department for Communities and Local
Government (CLG) has also published guidance on local authority
investments in March 2010 that requires the Council to approve an investment
strategy in advance of each financial year.
1.4
The 2009 edition of the CIPFA Code was adopted by the Council on
23 February 2010. A revised edition of the CIPFA Code was subsequently
published in November 2011 to reflect the additional financial freedoms
available to local authorities in the Localism Act 2011. This necessitates
amendments to the Council’s Treasury Management Policy Statement and
formal adoption of the 2011 edition of the CIPFA Code.
1.5
The Council is therefore asked to formally adopt the Treasury Management in
the Public Services: Code of Practice 2011 Edition and the revised Treasury
Management Policy Statement detailed in Appendix 1.
1.6
This report fulfils the Council’s legal obligation under the Local Government
Act 2003 to have regard to both the CIPFA Code and the CLG Guidance.
2.
Capital Expenditure and the Capital Financing Requirement
2.1
Capital expenditure plans will be partially financed by resources such as
capital receipts and capital grants. The remaining element which can not be
immediately financed from other sources will impact on the Council’s
underlying need to finance (the Capital Financing Requirement, or CFR). The
summary capital expenditure, financing and the impact on the CFR are shown
in Table 2. This forms one of the required prudential indicators.
2.2
There are two main limiting factors on the Council’s ability to undertake
financing for capital expenditure:

Whether revenue resource is available to support in full the implications of
capital expenditure, both borrowing costs and running costs.
2

The Government may seek to ensure that either the total of all councils’
plans do not jeopardise national economic policies or may assess that local
plans are unaffordable for a specific council and implement a control to
limit its capital expenditure plans. No such control was implemented during
2011/12.
2.3
It is noted that a key risk of the plan is that some of the estimates for other sources
of funding, particularly grants and capital receipts, may be subject to change over
time.
2.4
Taking this key risk into consideration, the Council is asked to approve the
capital expenditure projections in Table 1 that reflect the recommended capital
programme.
Table 1
Capital expenditure
Total expenditure
Capital receipts
Capital grants
Revenue
Other contributions
Net capital
requirement
2.5
2010/11
Actual
£000s
165,881
2011/12
2012/13
2013/14
2014/15
Revised
Estimated Estimated Estimated
£000s
£000s
£000s
£000s
200,115
251,548
151,484
154,068
33,866
91,913
18,788
20,385
13,093
116,645
37,788
28,970
20,000
155,782
44,661
8,093
30,000
93,075
7,130
5,347
25,000
113,717
7,130
1,383
929
3,619
23,012
15,932
6,838
The net capital expenditure will impact directly on the CFR. The Council is
asked to approve the capital expenditure and CFR projections in Table 2 that
support the recommended capital programme. The Council sets aside each
year an amount for debt repayment known as the MRP, after deducting the
estimated borrowing for future years this has resulted in a net reduction in the
Council’s capital financing debt position illustrated in Table 2 below.
Table 2
Capital Financing Requirement
Total CFR
Net movement in
CFR
2010/11
Actual
£000s
596,225
2011/12
2012/13
Revised Estimated
£000s
£000s
574,396
572,683
(21,829)
2013/14
Estimated
£000s
563,914
2014/15
Estimated
£000s
546,171
(1,713)
(8,769)
(17,743)
Movement in CFR represented by:
Net capital
requirement
less MRP*
3,619
23,012
15,932
6,838
(25,446)
(24,725)
(24,702)
(24,581)
Total Movement
(21,827)
(1,713)
(8,770)
(17,743)
* MRP is the minimum revenue provision, which represents the revenue charge for the repayment
of debt
3
2.6
Local Government and Public Involvement in Health Act 2007 regulations
require an annual statement of the MRP policy to be approved by full Council.
The MRP policy statement for capital expenditure for the financial year
2012/13 is as follows:
For capital expenditure incurred before 1 April 2008, the policy is:

Based on Capital Financing Requirement – this is a continuation of
current practice.
From 1 April 2008 for all unsupported borrowing, the policy is:

2.7
Asset Life Method – this method spreads the cost over the estimated
life of an asset.
The Prudential Code requires the Council to assess the affordability of its
capital spending plans. This is done through the setting and monitoring of two
prudential indicators. These provide an indication of the impact of the capital
spending plans on the overall Council finances. The Council is asked to
approve the following indicators:

Actual and estimates of the ratio of financing costs to net revenue
stream – This indicator identifies the trend in the cost of capital (borrowing
costs net of lending income) against the net revenue stream.
Table 3
Ratio
Ratio of financing costs to net revenue stream
2010/11
Actual
1.72%
2011/12
Comparator
1.64%
2012/13
Estimate
1.70%
2013/14
Estimate
1.85%
2014/15
Estimate
1.90%
The estimates of financing costs include current commitments and the
proposals in this budget report.

Estimates of the incremental impact of capital spending decisions on
the Council Tax – This indicator identifies the trend in the cost of
proposed changes in the three year capital programme recommended in
this budget report compared to the Council’s existing commitments and
current plans. The forward projections are based on the assumptions
included in the budget, but will invariably include some areas, such as the
level of government support, which is not published over a three year
period.
Table 4 shows the incremental impact of additional capital spending proposed
in part B of this report for 2012/13 to 2014/15. This relates to spending over
and above the levels included in the capital programme agreed in July 2011
for 2011/12 to 2014/15.
4
Table 4
Incremental impact of capital spending decisions on
Band D Council Tax for 2012/13
Council Tax Impact - Band D
Proposed
Budget
2012/13
Forward
Projection
2013/14
Forward
Projection
2014/15
£0.03
£(0.15)
£0.01
3.
Context for the Treasury Management Strategy
3.1
The UK economy is continuing its weak recovery from the 2008/09 recession,
with GDP growth forecast to be around just 1.0% in 2011 and to remain slow
throughout much of 2012. Government spending cuts, rising unemployment
and uncertain export markets are conspiring to keep demand low. Consumer
price inflation, which peaked at 5.2% in September, is expected to fall sharply
as one-off factors such as the 2010 VAT increase and fuel price rises fall out
of the annual comparison.
3.2
In these circumstances, it is anticipated that the Bank of England will not raise
the Bank Rate for several months. However, once a more robust recovery
appears to be taking root, it is anticipated that the Bank would prefer to
gradually raise interest rates earlier, rather than waiting too late and needing
to make a sharp correction.
3.3
The Eurozone sovereign debt crisis remains a major driver of market
sentiment and with the UK seen as a safe haven, gilt yields and hence PWLB
rates have fallen markedly this year. Once a resolution to the crisis is agreed,
long term rates are expected to increase to more normal levels.
3.4
A second UK recession or a European sovereign default would see short and
long term interest rates remaining lower for longer, while a faster economic
recovery and a bold solution to the Eurozone crisis could, potentially, see rates
rise more quickly.
3.5
The Council’s treasury advisors, Sterling Consultancy Services, forecast the
Bank Rate remaining at 0.50% for the majority of 2012 rising to 0.75% in the
last quarter. Longer term rates are forecasted to rise slowly as the economic
situation improves as shown in Table 5.
Table 5
Sterling Consultancy Services central interest rate forecast –
November 2011
Base Rate – Annual Average %
2011/12
2012/13
2013/14
2014/15
0.50
0.56
1.25
2.25
5
3.6
Tables 6a and 6b show the treasury position at 31 March 2011 and the
estimated position at 31 March 2012. No additional long term borrowing has
been taken in 2011/12 and so cash balances have been used to fund capital
and therefore have been maintained at a low level during 2011/12. The
authority has agreed early repayment of LOBO loans totalling £27m in April
2012, this is highlighted in the movement in Table 6a under borrowing
maturing in under 2 years for 2011/12.
Table 6a Treasury position for borrowing
2010/11
Actual
£000s
Borrowing at 31 March
Analysed as:
Maturing in under 2 years
Maturing in 2 to 10 years
Maturing in 10 to 30 years
Maturing in 30 years or later
1
2
Sources of
Borrowing
PWLB 1
LOBO 2
2011/12
Estimated
£000s
Sources of
Borrowing
PWLB 1
LOBO 2
285,780
103,280
182,500
285,780
103,280
182,500
1
3,145
48,233
234,401
1
3,145
48,233
51,901
0
0
0
182,500
27,001
3,145
48,233
207,401
1
3,145
48,233
51,901
27,000
0
0
155,500
PWLB = Borrowing sourced from the government’s Public Works and Loans Board
LOBO = Borrowing sourced from commercial banks
Table 6b Treasury Position for Lending
2010/11
Actual
£000s
2011/12
Estimated
£000s
Lending at 31 March
83,207
13,108
Iceland Investments
Maturing in 2011/12
Maturing in 2012/13
Maturing in 2013/14
Maturing in 2014/15
22,307
58,900
2,000
0
0
11,108
0
2,000
0
0
4.
Treasury Management Strategy
4.1
It is proposed that in the light of the economic context described in section 3
above, the Council’s approach to treasury management in 2012/13 continues
to reflect the on-going risks in the wider economy and banking institutions.
4.2
The primary consideration for the Treasury Management Strategy is security
of the Council’s funds. The secondary consideration is liquidity, ensuring that
sufficient funds are available to meet the Council’s forecasted cashflow
requirements. Only once both of these matters have been taken into account
will the yield be considered.
4.3
The Council’s cash balances for investment purposes reduced during 2011/12
as schools’ balances, previously co-mingled with the Council’s balances, were
separated from the Council’s cash balances on 1 April 2011. In addition, no
6
new borrowing was taken to fund the capital programme further reducing cash
balances.
4.4
During 2012/13, it is proposed that cash balances are maintained at low
levels, borrowing long term only when absolutely necessary to avoid a
prolonged short term overdraft. This strategy meets the primary aim of
security by limiting the value of surplus cash available for deposits.
Additionally, this means that the Council will not undertake any borrowing in
advance of need and will only invest for short periods of less than 364 days.
Borrowing
4.5
Long term borrowing will be undertaken only for a capital purpose or when it is
necessary to avoid a prolonged short term overdraft position. The Director of
Resources and Performance, in consultation with the Council’s treasury
management advisers, will take the most appropriate form of borrowing
depending on prevailing interest rates. The maturity profile of the borrowing
portfolio will also be taken into consideration when deciding the duration of
borrowing to ensure an even spread of loans. This will minimise the risk of
refinancing during periods of high interest rates.
4.6
The borrowing portfolio will be continually monitored in consultation with the
Council’s treasury management advisers to identify rescheduling opportunities
which could reduce interest costs. With long term rates set to increase further,
opportunities may arise to switch from long term to shorter term loans. The
potential refinancing and interest rate risks arising from rescheduling would be
considered at the same time to determine whether it is appropriate for the
Council.
4.7
The approved sources of long term and short term borrowing will be:





Public Works Loan Board;
any institution approved for investments in the Lending Policy (see
Appendix 2);
any other bank or building society approved by the Financial Services
Authority;
capital market bond investors; and
special purpose companies created to enable joint local authority bond
issues.
Lending
4.8
It is proposed that the 2012/13 Treasury Management Strategy is modelled on
the 2011/12 Treasury Management Strategy approved by County Council on
23 February 2010 and revised on 24 November 2011. Full details are
provided in the proposed Lending Policy in Appendix 2.
4.9
Investment regulations require the Council to determine what specified and
non-specified investments it will use. Specified investments are defined as
investments denominated in sterling with the UK government, a UK local
7
authority or an institution of high credit quality and with a maturity of no more
than a year.
4.10 A non-specified investment is an investment not meeting the definition of a
specified investment and can be a sterling denominated or a foreign currency
denominated investment. It is proposed not to make any non-specified
investments due to the long term nature of this type of investment and the risk
of principal losses through exchange rate movements. The only exception to
this would be if the Council’s bank no longer had sufficient credit ratings to be
a specified investment, small balances may be deposited with them when it is
uneconomic to invest elsewhere.
4.11 The Council understands that credit ratings are a good predictor of investment
default but are rating agencies’ expressed opinions and not a perfect indicator.
Therefore, Officers will use other sources of information to determine the credit
quality of an organisation. These are detailed in the section 4 of the proposed
Lending Policy in Appendix 2.
4.12 No investments will be made with an organisation if there are substantive
doubts about its credit quality even though it may meet the Lending Policy
criteria. This means the Lending Policy applied operationally may at times be
more restrictive than it formally allows.
4.13 When deteriorating financial market conditions affect the creditworthiness of all
organisations but these are not generally reflected in credit ratings, then the
Council will restrict its investments in those organisations to maintain the
required level of security. These restrictions may mean that insufficient
commercial organisations of “high credit quality” are available for investment
and so any cash surplus will be deposited with the government’s Debt
Management Office or with other local authorities. This may cause a reduction
in the level of investment income earned but will protect the principal sums
invested.
4.14 The proposed 2012/13 Treasury Management Strategy has considered a full
range of risks and Officers will apply the strategy to ensure that security of
deposits is the prime consideration. However, in agreeing the proposed
strategy, Members should be aware that there is always a risk of default of
counterparties other than the Debt Management Office which is guaranteed by
the government.
5.
Policy on Use of Financial Derivatives
5.1
The 2011 CIPFA Code requires authorities to clearly detail their policy on the
use of derivatives in the annual strategy.
5.2
Local authorities have previously made use of financial derivatives embedded
into loans and investments both to reduce interest rate risk (e.g. interest rate
collars and forward deals) and to reduce costs or increase income at the
expense of greater risk (e.g. LOBO loans).
8
5.3
The Council will only use standalone financial derivatives (such as swaps,
forwards, futures and options) to manage specific risks such as currency risk
or where they can be clearly demonstrated to reduce the overall level of the
financial risks that the Council is exposed to. Additional risks presented,
through entering into such contracts, such as credit exposure to derivative
counterparties, will be taken into account when determining the overall level of
risk. Officers will seek external advice/opinion before entering into any such
form of contract.
5.4
Financial derivative transactions that are arranged will only be with
organisations that meets the Council’s approved investment criteria. The
current value of any amount due from a derivative counterparty will count
against the counterparty credit limit and the relevant foreign country limit.
6.
Treasury Management Prudential Indicators
6.1
The Prudential Code and Treasury Management Code of Practice require the
Council to set a range of prudential indicators relating to borrowing and
lending activities. The purpose of these prudential indicators is to contain the
activity of the treasury function within certain limits, thereby reducing the risk
or likelihood of an adverse movement in interest rates or borrowing decisions
impacting negatively on the Council’s overall financial position.
6.2
These indicators reflect the proposed strategy set out in section 4. Firstly, the
Council needs to ensure that net external borrowing does not, except in the
short term, exceed the total of the CFR in the preceding year plus the
estimates of any additional CFR for 2012/13 and next two financial years.
Table 7
Limits to borrowing activity
2010/11
Comparator
£000s
2011/12
Estimate
£000s
2012/13
Estimate
£000s
2013/14
Estimate
£000s
2014/15
Estimate
£000s
285,780
285,780
355,000
370,000
375,000
83,207
13,108
16,000
7,000
6,000
Net Borrowing
202,573
272,672
339,000
363,000
369,000
CFR
596,225
574,396
572,683
563,914
546,171
Gross Borrowing
Lending
6.3
The Council complied with the prudential indicator requirement to keep net
borrowing below the relevant CFR in 2011/12, and no difficulties are
envisaged for the current or future years. This view takes into account current
commitments, existing plans, and the proposals in the budget report. This
also reflects the borrowing strategy set out in section 4 and an allowance for
potential short term borrowing to cover temporary overdrafts.
6.4
A further two prudential indicators control the overall level of borrowing. These
are:
9
6.5

The authorised limit
This represents the limit beyond which borrowing is prohibited, and needs
to be set and revised by Members. It reflects the level of borrowing which,
while not desired, could be afforded in the short term, but is not
sustainable. It is the expected maximum borrowing need with some
headroom for unexpected movements. This is the statutory limit
determined under section 3 (1) of the Local Government Act 2003.

The operational boundary
This indicator is based on the probable external debt during the course of
the year; it is not a limit and actual borrowing could vary around this
boundary for short times during the year. It should act as an indicator to
ensure the authorised limit is not breached.
The proposed limits In Table 8 reflect the capital programme and the
borrowing strategy, including the potential for a temporary overdraft situation.
Table 8
Authorised and operational limits
Authorised limit for
external debt
Borrowing
Other long term liabilities
Total
Operational boundary
for external debt
Borrowing
Other long term liabilities
Total
6.6
2011/12
£000
Comparator
411,000
30,000
441,000
2011/12
£000
Comparator
381,000
30,000
411,000
2012/13
£000
Estimate
385,000
30,000
415,000
2012/13
£000
Estimate
355,000
30,000
385,000
2013/14
£000
Estimate
400,000
30,000
430,000
2013/14
£000
Estimate
370,000
30,000
400,000
2014/15
£000
Estimate
405,000
30,000
435,000
2014/15
£000
Estimate
375,000
30,000
405,000
The next indicator is the upper limit on fixed and variable rate exposure.
Table 9 shows the proposed indicator, which is a continuation of current
practice, that fixed lending or borrowing could be up to 100% of the portfolio,
but borrowing or lending at variable rates can only be up to 30% of the
portfolio. The Code requires that monetary amounts are provided, and the
percentages are shown in addition to provide clarity.
Table 9
Fixed and variable rate exposure
Limits on fixed
interest rates
Limits on variable
interest rates
2011/12*
Upper
£000s
381,000
2012/13
Upper
£000s
355,000
2013/14
Upper
£000s
370,000
2014/15
Upper
£000s
375,000
100%
114,300
100%
106,500
100%
111,000
100%
112,500
30%
30%
30%
30%
* Original indicators
10
6.7
The next indicator is the maturity structure of borrowing. The gross limits are
set to reduce the Council’s exposure to large fixed rate sums falling due for
refinancing in the same period known as maturity risk. The proposed upper
and lower limits in Table 10 are the same as previous years. The indicators
are set relatively high to provide sufficient flexibility to respond to opportunities
to repay or reschedule debt during the financial year, while remaining within
the parameters set by the indicators.
Table 10 Maturity structure of fixed interest rate borrowing
2011/12
Under 12
months
12 months
to 2 years
2 years to 5
years
5 years to
10 years
10 years to
20 years
20 years to
30 years
30 years
and above
6.8
2012/13
2013/14
2014/15
Lower
Upper
Lower
Upper
Lower
Upper
Lower
Upper
0%
25%
0%
25%
0%
25%
0%
25%
0%
40%
0%
40%
0%
40%
0%
40%
0%
60%
0%
60%
0%
60%
0%
60%
0%
80%
0%
80%
0%
80%
0%
80%
0%
85%
0%
85%
0%
85%
0%
85%
0%
90%
0%
90%
0%
90%
0%
90%
0%
100%
0%
100%
0%
100%
0%
100%
The next indicator is the total principal funds invested for greater than 364
days. As discussed in the Treasury Management Strategy in section 4, it is
proposed not to lend any new funds for more than 364 days during 2012/13.
However, the indicator needs to reflect the deposits already placed, which
mature more than 364 days after 31 March 2012, including those at risk in
Iceland.
Table 11 Investments greater than 364 days
Maximum principal sums
invested > 364 days
2011/12*
£000’s
2012/13
£000’s
2013/14
£000’s
2014/15
£000’s
25,000
16,000
7,000
6,000
* Original indicators
6.9
The final indicator is the upper limit on net debt indicator which was introduced
in 2011 and is intended to highlight where the Council is borrowing in advance
of need. Further guidance is awaited from CIPFA to clarify the application of
this indicator where net debt does not change when loans are borrowed and
re-invested. In the meantime, the Council’s treasury advisers recommend that
a deliberately high limit is set for 2012/13.
11
Table 12 Gross and net debt
2012/13
2013/14
2014/15
100%
100%
100%
Upper limit on net debt
6.10 All the prudential indicators will be monitored throughout the year as part of
the quarterly revenue and capital budget monitor reports to Cabinet. A full
summary statement of all the indicators is shown in Appendix 3.
7.
Financial Implications and Sensitivity to Interest Rates
7.1
The financial implications of treasury management activity are included in the
Capital Financing and Interest on Balances budget which is part of the
Council’s overall budget being considered elsewhere on this agenda. This
section highlights the financial implications of the Treasury Management
Strategy described in section 4.
7.2
Table 13 shows forecasts of interest payable on long term borrowing split
between existing commitments and a forecast of additional interest expected
to be paid as a result of the proposed new borrowing set out in section 2.
Table 13 Forecasts of interest payable on borrowing
2011/122
Comparator
3
£000’s 4
Additional
borrowing
Interest already
committed as at
end of 2010/11
Estimated interest
from new
borrowing
Total estimated
interest payable
2012/13
Estimate
£000’s
2013/14
Estimate
£000’s
2014/15
Estimate
£000’s
45,232*
23,012
15,932
6,838
13,750
13,062
12,945
12,945
5,498*
719
1,665
2,241
19,248
13,781
14,610
15,186
* The additional borrowing and interest figures are estimates based on the capital
programme approved by Council in February 2011 and revised in July 2011.
7.3
Table 14 shows the interest the Council expects to pay over the short term in
the coming three financial years. The Council will continue to diversify the risk
of managing an investment portfolio by maintaining low investment balances.
Cashflow will be maintained on a short term basis to meet known cash
outflows in the next month, plus a contingency to cover unexpected cashflows
over the same period. The cashflow forecast for the financial year 2012/13
indicates a net short term borrowing position over the year although there will
be occasions when surplus cash will be invested for short term periods. The
12
table below is a projection of the net interest that will be paid on a short term
basis over the three year forecast period.
Table 14 Forecasts of short term Interest
2011/12 5
Comparator
6
£000’s 7
Forecast Average
Balance
Forecast Interest
Rate
Earned Interest
committed
Net Interest to be
paid in year
Total Interest
forecast – earned /
(paid)
7.4
2012/13
Estimate
£000’s
2013/14
Estimate
£000’s
2014/15
Estimate
£000’s
(25,000)
38,226
38,226
38,226
1.00%
0.4%
0.9%
1.9%
165
37
0
0
(290)
114
351
731
(125)
151
351
731
Changes to interest rates have an impact on treasury management activity.
Table 15 demonstrates the impact of a 1% rise or fall in interest rates.
Table 15 Sensitivity to a 1% increase/decrease in interest rates
2012/13
estimated +1%
Impact £000’s
Cost / (Saving)
2012/13
estimated -1%
Impact £000’s
Cost / (Saving)
Interest on borrowing
2,015
(674)
Investment income
(286)
114
Total impact on treasury
1,729
(560)
7.5
The Council seeks to minimise the interest rate risk by agreeing fixed rates for
long term borrowing in the majority of cases. This is demonstrated by the
prudential indicator in Table 9 which states that no more than 30% of the
Council’s long term borrowing portfolio will have a variable rate of interest. In
setting the budget for short term interest earned or paid the Council takes
advice about the likely pattern of interest rates over the coming financial year
and models the impact of a change in rates as shown in Table 15 above to
ensure members understand the risk. If the interest rate forecast changes
during the year, this will be reported to Members.
8.
Treasury Management Training and Advice
8.1
CLG investment guidance requires the Council to note the following matters
each year as part of the annual strategy:
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
Treasury management advisers
The Council contracts with Sterling Consultancy Services to provide
advice and information relating to its investment and borrowing activities.
The services provided are:
-
Advice and guidance on relevant policies, strategies and reports
Advice on investment decisions
Notification of credit ratings and changes
Other information on credit quality
Advice on debt management decisions
Technical accounting advice
Reports on treasury performance
Forecasts of interest rates; and
Training courses.
The quality of service is reviewed through quarterly meetings and the
contract re-tendered every 3 years.

Investment training
Training on treasury management will be provided in 2012/13 by the
Council’s treasury advisors Sterling. Training will be provided to induct
new members and to ensure that Members continuing in their roles in
relation to treasury management, keep their knowledge and skills up to
date. All treasury management Officers are required to attend an
introductory course run by Sterling before they are able to transact.
Officers new to treasury management are shadowed by more experienced
Officers until they are judged to be competent to undertake transactions
themselves and demonstrate a good understanding of the Council’s
treasury policies. In order to keep Officers’ knowledge up to date, the
Council is a member of the CIPFA Treasury Management Forum which
provides information and training to its members. In addition the Council’s
advisers provide continuous guidance, updates and training.
9.
Performance Indicators and Reporting
9.1
The CIPFA Treasury Management Code of Practice requires the Council to
set performance indicators to assess the treasury function over the year.
These are reported on a quarterly basis as part of the revenue budget
monitoring report. The indicators that will be measured are:
Security, Liquidity and Yield Indicators
 Weighted average long term credit rating of the portfolio
 Weighted average maturity of the portfolio
 Return on lending compared to the 7 day LIBID rate
 Average rate payable on the borrowing portfolio
Operational Indicators
 Any breaches of the Lending Policy
 Number of transactions carried out
 Number of counterparties used
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9.2
Officers report to Cabinet on a quarterly basis on treasury management as
part of the revenue budget monitoring process. The County Council and the
Audit Committee will receive a mid year report and a report at the end of the
financial year on treasury management activities and performance.
9.3
The Treasury Management Strategy set out in this report is expected to be
relevant throughout 2012/13. However, there may be a need to review it
during the year where there are significant changes to the economic
background, interest rate or changes to government guidance or best practice.
If required, proposed revisions will be reported to full Council for Members’
consideration in accordance with the Code of Practice.
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APPENDIX 1
TREASURY MANAGEMENT POLICY STATEMENT
The Council’s financial regulations require it to create and maintain a Treasury
Management Policy statement, stating the policies, objectives and approach to risk
management of its treasury activities, as a cornerstone for effective treasury
management.
1.
Definition
The Council defines its treasury management activities as the:



2.
management of the Council’s investments and cashflows, its banking,
money market and capital market transactions;
effective control of the risks associated with those activities; and
pursuit of optimum performance consistent with those risks.
Risk management
The Council regards the successful identification, monitoring and control of risk to be
the prime criteria by which the effectiveness of its treasury management activities will
be measured. Accordingly, the analysis and reporting of treasury management
activities will focus on their risk implications for the organisation, and any financial
instruments entered into to manage these risks.
3.
Value for money
The Council acknowledges that effective treasury management will provide support
towards the achievement of its business and service objectives. It is therefore
committed to the principles of achieving value for money in treasury management,
and to employing suitable comprehensive performance measurement techniques,
within the context of effective risk management.
4.
Borrowing policy
The Council values revenue budget stability and will therefore borrow the majority of
its long term funding needs at long term fixed rates of interest. Short term and
variable rate loans will only be borrowed to the extent that they either offset short
term and variable rate investments or can be shown to produce revenue savings.
The Council will set an affordable borrowing limit each year in compliance with the
Local Government Act 2003, and will have regard to the CIPFA Prudential Code for
Capital Finance in Local Authorities when setting that limit. It will also set limits on its
exposure to changes in interest rates and limits on the maturity structure of its
borrowing in the Treasury Management Strategy report each year.
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5.
Investment Policy
The Council’s primary objectives for the investment of its surplus funds are to protect
the principal sums invested from loss, and to ensure adequate liquidity so that funds
are available for expenditure when needed. The generation of investment income to
support the provision of local authority services is an important, but secondary,
objective.
The Council will have regard to the Communities and Local Government Guidance
on Local Government Investments and will approve an investment strategy each year
as part of the Treasury Management Strategy. The strategy will set criteria to
determine suitable organisations with which cash may be invested, limits on the
maximum duration of such investments and limits on the amount of cash that may be
invested with any one organisation.
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APPENDIX 2
2012/13 LENDING POLICY
1. Policy for determining which institutions should be on the lending list
The Council will lend to the following types of institutions:






Debt Management Account Deposit Facility (DMADF)
Local Authorities
UK Banks and UK Building Societies meeting the credit rating criteria set out
below.
Banks domiciled in other countries or their subsidiaries domiciled in the UK,
providing the country has a sovereign rating of at least AAA from each of the
three credit rating agencies and the bank meets the credit rating criteria set out
below. Sovereign credit rating criteria and foreign country limits will not apply to
investments in multilateral development banks (e.g. the European Investment
Bank and the World Bank) or other supranational organisations (e.g. the
European Union).
AAA rated Money Market Funds
The Council’s bank if it does not meet the descriptions of institutions above. To
be used for small balances up to £1m which it is uneconomic to invest elsewhere.
This is the only occasion when a non-specified investment will be made.
Minimum credit rating criteria for banks and building societies
Fitch
Moody’s
Standard
and
Poor’s
Short term
F1
P-1
A-1
Long term
A
A2
A
bbb
C
N/A
1
N/A
N/A
Individual / Viability
Support
When determining whether the Council should lend to a bank or building society, it
must have at least the minimum credit rating shown above from each of the
agencies which provides a rating on it. The lowest available credit rating will be
used to determine credit quality. If an agency removes one of the set of ratings it
issues for a bank or building society, the institution will be removed from the list.
If the ratings of a parent bank fall below the minimum criteria, no lending will be
undertaken with its subsidiaries even if their ratings continue to meet the minimum
criteria.
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2. Policy for determining limits for deposits
a
Time
 Deposits will be made for a maximum of 364 days.
 Deposits to institutions not based in the UK will be limited to a maximum of 3
months.
b
Monetary limits
 Debt Management Account Deposit Facility – No limit
 AAA rated Money Market Funds – A limit of £15m per Fund Manager.
 Local Authorities – a £10m limit per authority
 UK Banks, UK Building Societies and Overseas Banks – limits as set out in
the following tables:
Upper Limit
£30m
Fitch
Moody’s
Standard
and Poor’s
Short term
F1+
P-1
A-1
Long term
AA-
Aa3
AA-
Individual / Viability
a
B
N/A
Support
1
N/A
N/A
Fitch
Moody’s
Standard
and Poor’s
Short term
F1
P-1
A-1
Long term
A
A2
A
bbb
C
N/A
1
N/A
N/A
Lower Limit
£20m
Individual / Viability
Support
c
Banking Group Limit
Where a number of banks are owned by a single institution, a group limit of £35m
will be applied. The limit for each bank within the group will apply according to
the credit rating table above.
d
Country Limits
Limits are placed on the percentage of the portfolio which can be invested in
institutions, according to the country in which they are domiciled. For the
avoidance of doubt a UK based subsidiary with an overseas parent will be
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considered to be domiciled in the country of the parent. These limits will apply at
the point of investment.
Maximum percentage of portfolio permitted to be in UK
institutions
Maximum percentage of portfolio permitted to be in non UK
institutions
Maximum percentage of portfolio permitted to be in any one
country, other than UK
e
40%
10%
Sector Limits
A limit is placed on the percentage of the portfolio which can be invested in
Building Societies as a sector. This is to ensure the Council is not heavily
exposed to institutions with a common risk factor – in this case the property
market.
Maximum percentage of portfolio permitted to be invested with
Building Societies
3
100%
40%
Policy to be followed when credit ratings change
Negative Watch
A status that credit rating agencies apply while they are deciding whether to lower
that organisation's credit rating.
 If an institution is on a £20m limit when it is put on negative rating watch, it will be
removed from the list.
 If an institution is on a £30m limit when it is put on negative rating watch, the limit
will be reduced to £20m.
Downgrading
 If an institution is downgraded below the minimum credit rating criteria, then it will
be removed from the list with immediate effect, along with any subsidiaries.
 If the downgrade reduces the upper monetary limit of £30m to the lower
monetary limit of £20m, then the monetary limit will be reduced with immediate
effect.
 If funds are on call with an institution when a downgrade happens, they will be
withdrawn or the balance reduced as appropriate, at the earliest possible
opportunity, which may be the following working day.
 If there are outstanding fixed term deposits with an institution which has been
removed from the list, terms for repayment will be sought and, if offered, fully
considered and documented by Officers.
 Downgradings and the action taken will be reported in the weekly treasury
management meetings and quarterly reports to members.
4
Other matters to be considered by Officers
In applying the policy set out above, Officers will refer to the following sources of
market information on a regular basis:
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




Credit Default Swap Rates
Equity Prices
Economic data
Outlook reports from credit agencies
Financial Times and other news sources
A meeting of all Officers involved in the dealing function plus either the Head of
Specialist Accounting or the Assistant Director of Finance, will be held on a weekly
basis to review all relevant information and take decisions within the policy about how
to react to it. By its very nature the information will not be definitive and therefore
although Officers will do all they can to react to these sources of information with the
primary objective of security. The frequency of these meetings will be kept under
review and will be altered where appropriate.
Officers maintain an overview of prevailing market rates in their regular contact with
brokers. When considering fixed term deposits, Officers will receive a minimum of 3
quotes from brokers for a range of periods before making decisions. The maximum
deposit size when placing funds for fixed terms is £10m in order to spread risk. The
only exceptions to this are deposits with the DMADF and movements in and out of
call accounts and Money Market Funds.
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APPENDIX 3
PRUDENTIAL INDICATORS SUMMARY
2012/13
Table 1
Table 2
Table 7
Table 4
Table 5
Table 8
Table 3
Table 9
Table 9
Table 9
Table 10
Table 11
Table 12
2013/14
2014/15
Capital expenditure
251,631
151,484
154,068
Capital Financing Requirement
572,683
563,914
546,171
(CFR)
Treasury position
Borrowing
355,000
370,000
375,000
Investments
16,000
7,000
6,000
Net borrowing
339,000
363,000
369,000
Net borrowing less than CFR



Authorised limit (against
385,000
400,000
405,000
maximum position)
Operational boundary
355,000
370,000
375,000
Ratio of financing costs to net
1.70%
1.85%
1.90%
revenue stream
Upper limits on fixed interest
100%
100%
100%
rates (against maximum position)
Upper limits on variable interest
30%
30%
30%
rates (against maximum position)
Limits on fixed interest rates
355,000
370,000
375,000
Limits on variable interest rates
106,500
111,000
112,500
Maturity structure of fixed rate borrowing (against maximum
position)
Under 12 months
25%
25%
25%
12 months to 2 years
40%
40%
40%
2 years to 5 years
60%
60%
60%
5 years to 10 years
80%
80%
80%
10 years to 20 years
85%
85%
85%
20 years to 30 years
90%
90%
90%
30 years and above
100%
100%
100%
Investments greater than 364
16,000
7,000
6,000
days (maximum limit)
Upper limit on net debt
100%
100%
100%
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