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					                             Executive Board – 31 March 2004



Somerset County Council

Executive Board – 31 March 2004                                          Item No. 5
TREASURY MANAGEMENT STRATEGY STATEMENT
Executive Portfolio Holder:       Jill Shortland
Division and Local Member:        All
Lead Officer:                     Chris Bilsland, Corporate Director (Treasury)
Author:                           Jeff Mohun, Loans and Leasing Officer
Contact Details:                  jmohun@somerset.gov.uk or (01823) 355489




1      Summary
1.1    The Treasury Management Strategy Statement (TMSS) is a formal document
       which needs to be considered each year by the County Council. The purpose of
       this summary is to highlight the essential features without going into the detail
       necessary for the TMSS itself.

1.2    During 2003/2004 the Corporate Director (Treasury) has continued to monitor
       and review strategy with the Treasury Management Team.

1.3    The new CIPFA Code of Practice on ‘Treasury Management in the Public
       Services’ replaced the 1996 Code. I am confident that our current practices and
       arrangements, now set out in our Treasury Management Practices (TMPs), are
       very much in accord with those recommended by CIPFA. I will however
       continue to monitor each of the specific areas identified to ensure that no further
       changes are required.

1.4    Overall, our strategy has been to:

          Minimise the cost of borrowing
          Maximise our investment return from cash
          Reduce our exposure to interest rate changes

1.5    We have been successful in each of these. The average cost of our long term
       funding has been reduced to 4.58% from last year’s 4.81%, with new funding
       being obtained at an average rate of 3.92% (last year 4.07%). In the draft
       CIPFA statistics for debt management, which have just been published for
       2002/03, Somerset’s average interest rate is the lowest of all county councils.

1.6    Investment returns continue to exceed benchmarks, and compare well with other
       local authorities and external managers.

1.7    Our exposure to interest rate changes has been further reduced during the year
       by increasing the long term fixed rate element from 93% of our funding
       requirement to 96%.

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                             Executive Board – 31 March 2004



1.8    Fuller details of treasury and debt management performance will be included in
       the ‘Annual Treasury Management Report’ which will be presented to the
       Executive in September, as usual.

1.9    For 2004/05 our additional strategic aim is to assemble in advance all the capital
       finance we need to support the 3-year capital investment plans.

1.10   Specifically, then, In terms of the Council’s borrowing strategy, I am proposing to
       take new loans to finance the entire three year Capital Programme early in the
       new financial year. Even though Government has recently written to local
       authorities advising that borrowing will not be limited during 2004/05, this
       strategy is based on the risk assessment that the Government could impose
       borrowing limits in future years and this early action will remove the potential
       impact such a move would have on our Capital Programme. Based on current
       rates I anticipate this course of action to be at least cost neutral. Anticipated
       investment rates received until the funding is required should match the interest
       rate payable on the debt.

1.11   The Funding of the capital programme is also reliant on capital receipts
       (particularly from the sale of Wyvern Waste), and the borrowing strategy
       provides cover against any delay from this. I therefore propose to further utilise
       borrowing. The level of new borrowing this year is therefore likely to be around
       £116m, as a minimum.

2      Recommendations
       The Executive is invited to:

2.1    Welcome the introduction of the new Prudential Code for Capital Finance and
       the Guidance on Local Government Investments, giving as they do, greater
       freedom to the Council in determining its methods of funding capital expenditure
       and investing surplus funds.

2.2    Note the following prudential indicators:

                                                      2004/05      2005/06    2006/07
                                                         £ms          £ms        £ms

       Authorised limit (borrowing only)                397.0         366.0      358.0

       Operational boundary ( “ )                       385.5         343.5      337.5

       Upper limit on fixed interest
       rate exposure                                      98%          98%        98%

       Upper limit on variable
       Interest rate exposure                             22%          22%        22%




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                           Executive Board – 31 March 2004



      Maturity structure of borrowing                                Upper      Lower
                                                                      Limit      Limit

      Under 12 months                                                   9%         5%
      12 months and < 24 months                                         9%         8%
      24 months and < 5 years                                          21%        20%
      5 years and < 10 years                                           34%        29%
      10 years and above 33%                                           32%

                                                    2004/05        2005/06     2006/07
                                                       £ms            £ms         £ms

      Prudential Limit for principal sums
      invested for periods longer than
      364 days                                          54.0           27.0         nil


2.3   In light of the need to cover for the timing of the sale of Wyvern Waste, to
      recommend to Council that the relevant Prudential Indicators be increased.

                                                    2004/05        2005/06     2006/07
                                                       £ms            £ms         £ms

      Authorised limit (borrowing only)                423.0          381.0      375.0

      Operational boundary ( “ )                       412.0          370.0      363.0

      Prudential Limit for principal sums
      invested for periods longer than
      364 days                                           75.0           52.0           nil

2.4   Adopt the Treasury Management Strategy Statement (Appendix A).


3     Background
3.1   This year the Government are introducing two new measures that affect the
      Council’s Treasury Strategy Statement.

3.2   The first of these is the ‘Prudential Code for Capital Finance in Local Authorities’
      which applies to all local authorities from 1 April 2004. The key objectives of the
      Code are to ensure, within a clear framework, that the capital investment plans
      of the Council are affordable, prudent, and sustainable. Similarly it seeks to
      ensure that treasury management decisions are taken in accordance with good
      professional practice and in a manner that again demonstrates that account has
      been taken of these same three factors.

3.3   To demonstrate that these objectives have been met, the Prudential Code sets
      out the indicators that must be used, and the factors that must be taken into
      account. These indicators are designed to support and record local decision
      making. They have not been designed to be used in comparing performance,

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                           Executive Board – 31 March 2004



       which could be both misleading and counter productive. The system is
      specifically designed to support such local decision making in a manner that is
      publicly accountable.

3.4   Prudential indicators are generally required to be set at the time of agreeing the
      Council’s budget, and to be in respect of the forthcoming and two following
      years.

3.5   They may be revised at any time, following due process, and must be reviewed
      and revised if appropriate for the current year when the indicators are set for the
      following year.

3.6   Treasury Management and External Debt indicators were considered and
      approved as part of the Budget process, but are also referred to in this
      Statement as they form a control over the Council’s treasury management and
      borrowing activities. They will also feature in the Annual Outturn Report.

3.7   The second matter to bring to members’ attention is that the Office of the Deputy
      Prime Minister (ODPM) is currently consulting with local authorities on Local
      Government Investments. The intention is that new guidance on investments
      will be introduced at the same time, 1 April 2004, as the Prudential Capital
      Finance System.

3.8   The overriding aim of the guidance is to encourage authorities to invest
      prudently, without burdening them with detailed prescriptive regulation. The
      emphasis is to give priority to security and liquidity, rather than yield. It is not
      that yield can be ignored, but that the aim should be to achieve the highest rate
      of interest consistent with the proper levels of security and liquidity.

3.9   A written Annual Investment Strategy is central to the guidance, but we have
      decided to incorporate this into our Treasury Management Strategy Statement,
      which is allowed providing the document states where it is dealing with the
      ODPM requirements.



4     Personnel, Equality and Financial Implications
4.1   This Treasury Management Strategy Statement supports the current Capital
      Strategy that aims to maximise capital investment within affordable revenue
      consequences.      Provided that resources, particularly those from central
      government, remain reasonably constant the objective is to achieve an
      estimated value of new starts of between £45m and £50m per annum.

4.1.1 The financial implications have been taken into account when producing the
      Council budget for 2004/2005 and the Medium Term Financial Plan. These are
      reflected in an estimated budget for financing costs of £22.3m in 2004/05,
      representing some 4.9% of the £456m revenue budget. This budget supports a
      capital programme incorporating estimated expenditure in 2004/05 in excess of
      £69m that is financed from both borrowing and other sources of finance
      including direct government grants. Estimated investment income incorporated
      into the budget is £1.5m.

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                           Executive Board – 31 March 2004




4.2   There are no direct personnel implications or Equality implications.

5     Legal Implications
5.1   The Treasury Strategy Statement must be approved prior to the financial year to
      which it relates.

6     Background Papers
6.1   None.




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