MEDWAY COUNCIL


                               27 JUNE 2006


Portfolio holder:   Councillor Alan Jarrett, Deputy Leader and Finance

Report from:        Neil Davies, Director of Finance and Corporate Services

Author:             Mick Hayward, Assistant Director Financial Management

1.     Summary

1.1    This report gives an overview of treasury management activity during

2.     Decision issues

2.1    The management of the council’s treasury activity is a matter for Cabinet.

3.     Background

3.1    To comply with the Chartered Institute of Public Finance and Accountancy
       (CIPFA) Code of Treasury Management (2001), it is necessary to report
       as soon as practicable after the year end on the performance of the
       treasury management function and its activities. Accordingly this report
       sets out the council’s treasury management performance in 2005/2006 in
       compliance with the Code.

3.2    Performance reporting covers:
        the treasury portfolio position as at 31 March 2006
        the borrowing strategy and outturn for 2005/2006
        compliance with treasury limits
        investment strategy and outturn for 2005/2006
        Prudential Indicators for 2004/2005 and 2005/2006

4.     Portfolio position as at 31 March 2006

4.1    The council’s debt and investment positions at the beginning and end of
       the year are reflected in table 1 below with average borrowing and
       investment rates shown alongside the balances.
      Table 1 – borrowing and investment levels

                                 31 March 2006               31 March 2005
       Description of        Principal     Rate          Principal     Rate
      debt/investment           £m          %               £m          %
 - fixed rate borrowing             115                         100
 - variable rate borrowing           45                          45

 Total debt                         160          4.37           145          4.35

 - in-house                          22          4.64            18          4.72
 - fund managers                     56          4.60            53          4.65

 Total investments                   78                          71

5.    Borrowing Activity 2005/2006

5.1   The borrowing strategy for the council confirmed the holding of £45m in
      LOBO debt. These are debts that are subject to immediate repayment on
      request from the lender on the review dates (generally every six months).
      No debts were recalled in 2005/2006, but in the event of any being
      recalled we would replace with other debts at the most advantageous
      rates available at the time.

5.2   During 2005/2006 two new loans of £7.5 million each were taken out to
      support capital investments (The total capital investment of £63.2m was
      financed from borrowing, grants and contributions from Government and
      other agencies, part proceeds from the sale of capital assets and
      contributions from revenue and specific reserves).

6.    Compliance with treasury limits

6.1   Under the CIPFA Code of treasury management practice, the Council
      operates a strict regime of financial control over investment activity.
      Augmented by other measures, this involves reviewing the credit rating of
      all relevant financial institutions. We impose a set of rules that permit
      investments with only the highest rated financial institutions, in fact only
      organisations with a rating of AAA to A, in range that extends to D –
      essentially the top six of a credit rating scheme that involves 23
      categories. There are further controls that restrict the size of the
      investment within the AAA to A credit range adopted by the Council.

6.2   Part of the outturn reporting requires an analysis of our investment
      procedures, involving a review of our performance against the investment
      thresholds. During 2005/2006 there were 305 investment transactions,
      with ten instances of variations to the approved limits. These were all in
      respect of monies invested with one bank whose credit rating changed in
      July 2005 from AAA to A; thus it remained in the top six categories but the
      control over the level of investment was exceeded. Whilst these carried
      limited risk and obviously had no financial implications, approved limits
      were exceeded, and as a consequence internal procedures have been
      reviewed and strengthened.

7.    Investment strategy 2005/2006

7.1   The council employed Investec Asset Management and AllianceBernstein
      to manage investments externally for 2005/2006 along with the in house
      team managing a cashflow portfolio.

7.2   The strategy for the fund managers has been to optimise on its
      investments commensurate with proper levels of security and liquidity as
      set by the Council.

7.3   The in-house team’s investment strategy is limited by the need to ensure a
      smooth cashflow for the council. Use was made, however, of deposit
      accounts with Abbey, HBOS (Halifax Bank of Scotland) and Natwest.
      These accounts, with rates tied to base rate, offer the flexibility to invest at
      fixed rates when available market rates are poor.

8.    Investment outturn 2005/2006

8.1   During the 2005/06 financial year, an average balance of £31.34m was
      managed in-house. The council’s surplus monies of £54.46m (average
      balance for 2005/06) were managed by the two external fund managers
      mentioned above. Year end and average balances are shown in the table

                                      Balance at       Balance at        Average
                                      31 March         31 March          Balance
                                        2005             2006           2005/2006
                                       £000’s           £000’s            £000’s
       Internally managed              18,090           21,931            31,340
       Externally managed:
           Investec                      31,439          32,882           32,230
           AllianceBernstein             21,705          22,737           22,232

8.2   In total interest of £3.9m (net of fees) was earned in 2005/06 on
      investments at an average rate of 4.62% (average of cumulative of both
      the in-house and external fund managers). A comparison of investment
      performance against benchmark between 1 April 2005 and 31 March 2006
      is as follows:
                                        Annualised      Benchmark
       Description                        return           return
                                                        (7 day rate)
                                             %               %
       Internally managed                   4.64            4.64
       Externally managed:
           Investec                         4.59            4.64
           AllianceBernstein                4.62            4.64
       NB – the benchmark for managed funds is the 7 Day London Inter-Bank
       Bid rate (LIBID). In this report the compounded 7-Day LIBID benchmark
       used has been provided by Sector.
8.3    The internally managed funds matched the 7-Day LIBID and outperformed
       both fund managers.

8.4    Investec, unusually, had a poor return by under performing the benchmark
       by 0.05%. Investec have been very good performers in the past and were
       anticipating a good return until the last quarter of the financial year.
       However, during the final quarter Investec increased its holding in Gilts
       which transpired to be a mistake with a reduced year end performance.
       AllianceBernstein was only 0.02% below the benchmark,
       AllianceBernstein unlike Investec had stayed out of the Gilt market.

8.5    No institutions in which investments were made showed any difficulty in
       repaying investments and interest in full during the year.

9.     Debt rescheduling
9.1    As part of treasury management policy the opportunities for replacing debt
       at high interest rates with lower market rates are constantly reviewed.
       This practice is only cost-effective when the premiums charged by the
       lenders for early repayment are more than outweighed by the savings
       from the cheaper new borrowing.

10.    Prudential Indicators for 2004/05 and 2005/06

10.1   As part of this analysis it is necessary to report the outturn for Council’s
       prudential indicators. The key objectives of the prudential code are to
       ensure, within a clear framework, that the capital investment plans of local
       authorities are affordable, prudent and sustainable. For completeness,
       the relevant prudential indicators are set out in Appendix 1, with a brief
       analysis of outturn summarised below.

10.2   In brief the indicators set out in appendix 1 demonstrate:

           The capital expenditure indicator identifies the quantum of the capital
            spend, by reference to net borrowing requirement the relevant impact
            upon the Council’s indebtedness can be established. This
            demonstrates that borrowing is the minor funding source, capital
            receipts and developer contributions etc have a greater role.
           The capital financing requirement is the representation of that part of
            the Council’s asset base that is financed from borrowing and as such
            presents the maximum borrowing potential for capital purposes. The
            comparison with the net borrowing requirement demonstrates that
            prudence is being observed in the amount of borrowing undertaken.
           The ratio of financing costs to net revenue stream and the impact of
            capital investment decisions on council tax and rents are both
            indicators of affordability. Again these are within acceptable limits.
11.    Financial implications

11.1   Overall the interest and financing budget for the council contributed a
       £1.8m surplus against the budget which was a significant factor in
       producing an overall underspending for 2005/2006. The performance of
       the in-house treasury team on cashflow management played a major part
       in this achievement combined with advantageous borrowing costs. The
       body of the report and the appendix outline the significant financial
       implications. Any transactions undertaken on either investments or
       borrowings are governed by the London Code of Conduct, the council’s
       treasury policy statement, and the CIPFA Code of Practice on Treasury
       Management in Local Authorities.

12.    Legal implications

12.1   For the financial year 2005/06 our investments were managed in
       compliance with the Codes of Practices, guidance and regulations made
       under the Local Government Act 2003.

13.    Recommendations

13.1   In accordance with the CIPFA Code of Practice, Cabinet is asked to note
       the content and approve this report, particularly the impressive investment
       returns of the internal team.

14.    Suggested reasons for decision

14.1   In line with CIPFA’s Code of Treasury Management Practice an annual
       report must be taken to Cabinet detailing the council’s treasury
       management outturn within six months of the close of each financial year.

15.    Background papers

15.1   Fund managers’ reports from Investec Asset Management and Alliance
       Bernstein. Sector Treasury, London Code of Conduct
       CIPFA’s Treasury Management in Local Authorities
       CIPFA’s Treasury Management in the Public Services: Code of Practice
       Annual treasury report
       Treasury policy statement

       Lead Officer Contact

       Mick Hayward, Asst Director Financial Management, Civic Centre. 01634

PRUDENTIAL INDICATOR                             2004/05    2005/06

(1). EXTRACT FROM BUDGET                          £'000      £'000
                                                 actual     actual
Capital Expenditure
  Non - HRA                                       £49,492    £60,826
  HRA (applies only to housing authorities)       £3,625     £2,324
  TOTAL                                           £53,117    £63,150

Ratio of financing costs to net revenue stream
  Non - HRA                                       3.95%      4.17%
  HRA (applies only to housing authorities)       15.31%     15.53%

Net borrowing requirement
  brought forward 1 April                         £55,901    £71,638
  carried forward 31 March                        £71,638    £81,622
  in year borrowing requirement                   £15,737    £9,984

Capital Financing Requirement as at 31 March
  Non – HRA                                      £168,169   £174,202
  HRA                                             £18,466    £19,418
  TOTAL                                          £186,635   £193,620

Annual change in Cap. Financing Requirement
  Non – HRA                                       £12,839    £6,033
  HRA                                             £1,453      £952
  TOTAL                                           £14,292    £6,985

Incremental impact of capital investment           £ p        £ p
  Increase in council tax (band D) per annum       £8.92     £13.84

  Increase in average housing rent per week        £0.76      £0.48
  (housing authorities only)

To top