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					     KEY DECISION

    NO
    DATE ADDED TO
    FORWARD PLAN

    N/A
                                          CABINET

                                      3 AUGUST 2005

                 TREASURY MANAGEMENT ANNUAL REPORT 2004/2005

SPECIFIC WARDS AFFECTED

None

EXEMPT/CONFIDENTIAL ITEM

No



1         DECISION REQUESTED

          1.1   To receive the Treasury Management Annual Report for 2004/2005
                (Appendix A and B).

          1.2   To approve the updated credit and counterparty policies contained in the
                Council’s Treasury Management Code of Practice (Appendix C).

2         JUSTIFICATION FOR THE DECISION

          2.1   The Council’s Treasury Management Policy requires an annual report on the
                performance of the Council’s treasury management operation. This complies
                with the requirements of the CIPFA Treasury Management Code of Practice
                2001.

          2.2   Any recommended change to the Council’s counterparty limits must be
                approved by Cabinet.

3         FACTS SUPPORTING THE PROPOSED DECISION

          3.1   The Treasury Management Annual Report details the activities of the
                Treasury Management function for the financial year 2004/2005. Its
                production is a requirement of the Treasury Management Policy.

          3.2   The strategy for 2004/2005 reflected the views on interest rates of leading
                market forecasts provided by Sector, the Council’s advisor on Treasury
                matters.

          3.3   The Treasury Management team have assessed the current investment
                requirements for the Council and have concluded that the current
            counterparty limits are too restrictive with regard to building societies. The
            current policy limits the investment with non-rated building societies to a
            maximum of £2.5m for a maximum of 3 months. The recommended policy is
            to limit the investment in the top 10 non-rated building societies to a
            maximum of £5m for a maximum of 1 year and to limit the investment in the
            building societies below the top 10, but with total assets of £500m and above,
            to a maximum of £2.5m for a maximum of 1 year. This will enable the
            Treasury Management team to be much more flexible in investing the
            Council’s cash-flow.

    3.4     The reasons some Building Societies are not credit-rated is not necessarily
            because they are a bad risk but that they are not prepared to pay the cost to
            be credit-rated or incur the time and effort that is involved. Critical to the
            creditworthiness of Building Societies is the regulatory position within the
            sector. They are regulated by the Financial Services Authority - FSA (as are
            all credit institutions under the Financial Services and Markets Act 2000).
            There are a number of high level rules and standards that must be adhered
            to (dictated by the FSA Handbook). (Appendix C)

    3.5     The Council’s Treasury Management advisors Sector have revised their
            recommended lending criteria. This has been reflected in the updated credit
            and counterparty policy (Appendix C).

4   RISKS ASSOCIATED WITH THE PROPOSED DECISION

    None.

5   OTHER IMPLICATIONS

    Financial            -   Opening Investment Position 31st March 2004 – £20.3m
                             Closing Investment Position 31st March 2005 - £18.2m
                             Average Investment for 2004/2005 - £25.6m
                             Average Interest Rate for 2004/2005 – 4.60%
                             Investment Income Outturn for 2004/2005 - £1,179,000
    Staffing             -    None
    Legal                -    None
    Assets               -    Contained within Annual Report
    Policy               -    None
    Other implications   -    No significant implications

6   ALTERNATIVE OPTIONS AND IMPLICATIONS THEREOF

    None

7   APPENDICES

    Appendix A – Treasury Management Annual Report 2004/2005
    Appendix B - Prudential Indicators 2004/2005
    Appendix C - Update of Treasury Management Practices - Schedules
Cabinet Portfolio Holder                         Cllr G Marshall   Tel Ext No: 4178

Director                                         Mrs E Alexander   Tel Ext No: 4700

Head of Service                                  Mrs C Booth       Tel Ext No: 4801

The Contact Officer for this report is Miss L D Quinn.



BACKGROUND PAPERS

The following documents were used to complete this report and are available for public
inspection for four years from the date of the meeting from the Contact Officer named
above.

Treasury Management Annual Report – Sector Template 2004/2005
Report to Cabinet 17 March 2004 – Treasury Management Strategy Report 2004/2005
Report to Cabinet 16th April 2003 – Treasury Management - Code of Practice
                                                                               Appendix A
Treasury Management Annual Report 2004/2005
Introduction and Background

The Council fully complies with the requirements of the Chartered Institute of Public
Finance and Accountancy’s Code of Practice on Treasury Management 2001. The
primary requirements of the Code are the: -
1. Creation and maintenance of a Treasury Management Policy Statement which sets out
   the policies and objectives of the Council’s treasury management activities
2. Creation and maintenance of Treasury Management Practices which set out the
   manner in which the Council will seek to achieve those policies and objectives.
3. Receipt by the Cabinet/Council of an annual strategy report for the year ahead and an
   annual review report of the previous year.
4. Delegation by the Council of responsibilities for implementing and monitoring treasury
   management policies and practices and for the execution and administration of
   treasury management decisions.

Treasury management in this context is defined as:

       “The management of the local authority’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. ”

This annual treasury report covers:

       the Council’s treasury position;
       forecast prospects for interest rates for 2004/2005;
       interest rate outturn for 2004/2005:
       compliance with treasury limits;
       investment strategy for 2004/2005;
       investment outturn for 2004/2005;
       other issues.

1. Treasury Position

The Council was debt-free during 2004/2005. The treasury position therefore relates to
investments only. The Council manages all of its investments in-house. The investment
position at the beginning and the end of the year was as follows:

Investments held at 31st March 2004                            Principal        Rate
                                                                   £             %

Abbey National Plc                                         5,000,000             3.93
Bank of Scotland                                           3,900,000             3.95
Cheshire Building Society                                  2,000,000             3.48
Portman Building Society                                   1,400,000             4.04
West Bromwich Building Society                             1,500,000             4.07
Chelsea Building Society                                   1,500,000             4.08
Scarborough Building Society                               2,000,000             4.06
Derbyshire Building Society                                2,000,000             4.06
West Bromwich Building Society                             1,000,000             4.06

Total Investments                                          20,300,000
Investments held at 31st March 2005                         Principal             Rate
                                                                £                  %

Abbey National Plc                                          3,300,000             4.75
Bank of Scotland                                            4,400,000             4.82
Cheshire Building Society                                   2,000,000             4.09
West Bromwich Building Society                              1,500,000             4.79
Principality Building Society                               2,000,000             4.79
Leeds & Holbeck Building Society                            1,500,000             4.80
Coventry Building Society                                   2,500,000             4.77
HSBC                                                        1,000,000             5.22

Total Investments                                          18,200,000

2. Interest Rate Prospects for 2004/2005

The Council’s treasury advisors, Sector, as part of their service assist in formulating a view
on interest rates. The following table was Sector’s central view:

                Q1 2004        Q2 2004       Q3 2004      Q4 2004       Q1 2005

Base Rate         4.00%         4.00%          4.25%         4.25%       4.25%

There was a strong US and UK economic recovery in the second half of 2003 after
weakness in consumer expenditure and confidence during the Iraq war period. The
growing optimism in an economic recovery in the US, UK and Japan from July 2003
caused equity prices to rise, bond prices to wilt and bond yields to rise. However, it was
expected that consumer expenditure was likely to weaken in 2004 hence the outlook was
fragile. The upside potential in base rate was limited due to the super sensitivity of over
borrowed consumers to interest rate rises and lack of major inflationary factors.

The view was that the US Federal rate had bottomed at 1% from June 2003. It was
expected to rise to 1.25% in August 2004 with a possible further 50bp by the year end to
1.75%. The MPC raised the UK base rate to 4% in February 2004 and the vote was 9 – 0
in favour of a rise. With little visible evidence of inflation the MPC appeared to have raised
rates in order to rein in household debt and house price inflation. The forecast was for
base rate to rise by 25bp in the third quarter of 2004 to 4.25% and it was then expected
that the base rate would remain at the same level through to the first quarter of 2005.

4. Interest Rate Outturn for 2004/2005

Base rate rose in 0.25% steps from 4.0% in February 2004 to reach 4.75% in August
where it stayed for the rest of the financial year. House prices grew strongly during 2004
and consumer confidence was high which fed through into strong increases in personal
borrowing. Early in 2005, the housing market slowed sharply and consumer confidence
fell as high oil prices reduced spending power and negatively impacted sentiment. This
eased pressure for a further increase to 5.0%.

5. Compliance with Treasury Limits

During the financial year the Council operated within the treasury limits and Prudential
Indicators set out in the Council’s Treasury Policy Statement and annual Treasury Strategy
Statement (see Appendix B).
6. Investment Strategy for 2004/2005

Up to 2003/04 investments had been made in accordance with the Local Authorities
(Capital Finance) (Approved Investments) Regulations 1990 made under Part 4 of the
Local Government and Housing Act 1989. The whole of Part 4 was repealed on 1 st April
2004 and replaced by Part 1 of the Local Government Act 2003, which introduced the new
Prudential Capital Finance System. The Approved Investments regulations ceased to have
effect on the same day.

The capital finance regulations made under the 2003 Act do not cover investments. From
1st April 2004 investments are dealt with through guidance rather than secondary
legislation. This is consistent with the treatment of borrowing which requires authorities to
have regard to the CIPFA Prudential Code when determining how much they can borrow.
Similarly there is guidance on prudent investment practice, issued by the Secretary of
State under Section 15(1)(a) of the 2003 Act.

This Council has regard to the ODPM’s Guidance on Local Government Investments and
CIPFA’s Treasury Management Code. The Annual Investment Strategy stated which
investments the Council may use for the prudent management of its treasury balances
during the financial year under the heads of Specified Investments and Non-Specified
Investments.

Investment Objectives

All investments were to be in sterling. The general policy objective for this Council was the
prudent investment of its treasury balances. The Council’s investment priorities were the
security of capital and liquidity of its investments.

The council aimed to achieve the optimum return on its investments commensurate with
the proper levels of security and liquidity. The ODPM maintains that the borrowing of
monies purely to invest or on-lend and make a return is unlawful and this Council does not
engage in such activity.

Security of Capital - The Use of Credit Ratings

The Council relies on credit ratings published by Fitch Ratings to establish the credit
quality of counterparties and investment schemes. The Council also determined the
minimum long-term, short-term and other credit ratings it deemed to be “high” for each
category of investment.

Monitoring of credit ratings:
     All credit ratings were to be monitored monthly. The Council has access to Fitch
      credit ratings and is alerted to changes through its use of the Sector website.
     If a counterparty’s or investment scheme’s rating was downgraded with the result
      that it no longer met the Council’s minimum criteria, the further use of that
      counterparty/investment scheme as a new investment was to be withdrawn
      immediately.
     If a counterparty was upgraded, so that it fulfilled the Council’s criteria, it was to be
      added to the approved list.
Investment balances/Liquidity of investments

Based on its cash flow forecasts, the Council anticipated its fund balances in 2004/2005 to
range between £0m and £25m.

During the financial year, £15.6m was earmarked for capital spending commitments and
an additional £10.8m was earmarked for 2005/2006. It was intended that there would be
little or no slippage in spending in each year but given the size and complexity of some of
the capital schemes this situation was to be continually monitored.

Consideration was also to be given to the pattern and level of Right-to-Buy capital receipts,
which was expected to be £7m in 2004/2005, and the timing of transitional pooling
payments to the ODPM.

The minimum amount of its overall investments that the Council was to hold in short-term
investments was £0m/0%.

Giving due consideration to the Council’s level of balances over the following 3 years, the
need for liquidity, its spending commitments and provisions for contingencies, the Council
determined that £3m of its overall fund balances could be prudently committed to longer
term investments i.e. those with a maturity exceeding one year.

Provisions for Credit-Related losses

If any of the Council’s investments appeared at risk of loss due to default (i.e. this a credit-
related loss, and not one resulting from a fall in price due to movements in interest rates)
the Council would make revenue provision of an appropriate amount.

Investment Strategy to be Followed In-House

Investments would be made having regard to the cash flow patterns for the year, the
fluctuations in interest rates and the lending list criteria. The advice from the Council’s
Treasury advisors was to, in the main, keep investments short given that rates may have
risen later in the financial year. However, there may have been scope to commit additional
funds to longer term investments given the increased availability of investment funds and
the need to secure the budgeted investment income. While interest rates were relatively
low it was necessary to be as flexible as possible within the Council’s current treasury
policies to improve our investment return.

7. Investment Outturn for 2004/2005

Detailed below is the result of the investment strategy undertaken by the Council.

                               Average         Rate of Return        Benchmark Return
                             Investment
Internally Managed             £25.6m               4.60%                    4.50%


The investment income outturn was £1,179,000. No institutions in which investments were
made had any difficulty in repaying investments and interest in full during the year.

The following graph shows the interest performance against the 7 day LIBID rate, which is
the Council’s agreed benchmark comparator:
                                Year to date 2004/05 Comparison of Average 7
                                  day LIBID Rate to Average Interest Rates
                                                  Received              Base Rate
                             5.0000

                             4.8000

                             4.6000                                                      Av. 7 day LIBID
                             4.4000                                                      Rate year to date
           Interest Rate %




                             4.2000

                             4.0000                                                      MBC Average Rate
                                                                                         year to date
                             3.8000

                             3.6000
                                                                                         Av. 3 Month LIBID
                             3.4000
                                                                                         Rate year to date
                             3.2000

                             3.0000
                                       Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

                                                          Months



The following graph shows the cumulative interest earned month by month and breaks this
down by type of investment:



                                       Cumulative Interest analysed by Type
                                                    2004/2005



                                                                                         STERLING
                        1,400
                                                                                         ABBEY NAT.
                        1,200
                                                                                         B.O.SCOT.
    Thousands £




                        1,000
                          800                                                            DEALING
                          600                                                            B/FWD
                          400
                          200
                            0
                                      APR     JUN      AUG      OCT      DEC      FEB
                                                             Month
8. Other Issues

(a) Banking Facilities

    The bank user group which was established as part of the new contract with National
    Westminster Bank met twice in the year. The meetings have proved to be very useful
    and ensure that problem areas are tackled quickly and that we are informed of new
    services and improvements to existing services on a regular basis.

    In April 2004 a number of Finance officers visited the new Customer Centre at Bolton,
    which provided officers with an understanding of the banking system and gave the
    opportunity to meet bank staff that we deal with on a daily basis.

    Good progress has been made with the introduction of AUDDIS and paperless direct
    debits. AUDDIS is software that allows bank account details to be validated
    electronically. The introduction of paperless direct debits will reduce administrative
    time and contributes to the Council’s achievement of e-government targets.

(b) Callable Deposits

    In line with the Council’s investment strategy the Treasury team took full advantage of
    the Council’s debt-free status by using a new type of investment instrument and
    lending beyond 364 days (the lending limit for with-debt local authorities). Callable
    deposits are available to local authorities but had not been used at this Council before.
    The Treasury team invested £1m with HSBC for a three year period at 5.22%, with
    arrangements in place that HSBC could choose to repay the deposit after 6 months
    and then at 6 monthly intervals up to maximum maturity.
    When making the decision to invest in a callable deposit for a period longer than a
    year the Treasury team considered the risk of committing the funds over a longer
    period against the return on the investment. If interest rates are expected to fall the
    deposit is likely to be paid back early and if interest rates are expected to increase
    over the period the deposit is more likely to reach maturity.
                                                                                 Appendix B

                            Prudential Indicators 2004/2005

P1.   Capital Expenditure

The actual capital expenditure that was incurred in 2004/2005 and the estimates of capital
expenditure to be incurred for the current and future years are:


                               2004/05     2005/06      2006/07      2007/08
                                £000        £000          £000         £000
                               Actual     Estimate      Estimate     Estimate
                              Capital Expenditure
  Total non-HRA                  4,154.1      5,085.4        625.0       625.0
            HRA                  6,424.5      6,883.2      3,759.0     3,329.0
  Total                         10,578.6    11,968.6       4,384.0     3,954.0



P2.   Ratio of Financing Costs to Net Revenue Stream

This indicator reflects the cost of long term borrowing to meet the Capital Programme less
interest received on investments. The negative figures reflect the debt free status of the
authority.

The actual ratio of financing costs to net revenue stream for 2004/2005 and the estimates
for the current and future years are:


                               2004/05     2005/06      2006/07      2007/08
                                £000        £000          £000         £000
                               Actual     Estimate      Estimate     Estimate
                              Capital Expenditure
  Total non-HRA                  4,154.1      5,085.4        625.0       625.0
            HRA                  6,424.5      6,883.2      3,759.0     3,329.0
  Total                         10,578.6    11,968.6       4,384.0     3,954.0



P3.   Capital Financing Requirement

This indicator reflects the Authority’s underlying need to borrow for a capital purpose. The
end of year capital financing requirement for the authority for 2004/2005 and the estimates
for the current and future years are:


                               2004/05      2005/06    2006/07       2007/08
                                 £000         £000       £000          £000
                                Actual      Estimate   Estimate      Estimate
                         Capital financing requirement

  Total non-HRA                      6740        6758         6758        6758
            HRA                     -7882       -7881        -7881       -7881
  Total                             -1142       -1123        -1123       -1123
P4.    Authorised Limit for External Debt

This limit reflects the possibility of needing to borrow short term to finance the first precept
payments. There was no need to borrow on a short term basis during 2004/2005. The
estimates for the authorised limit for the current and future years are:

                                  2004/05       2005/06      2006/07       2007/08
                                    £000          £000        £000           £000
                                   Actual       Estimate    Estimate       Estimate
                           Authorised limit for external debt

  Borrowing                                         6631          7029          7451
  Other long term liabilities                          0             0             0
  Total                                             6631          7029          7451



P5.    Operational Boundary for External Debt

The proposed operational boundary for external debt is based on the same estimates as
the authorised limit. It reflects directly the Chief Finance Officer’s estimate of the most
likely, prudent but not worst 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. There was no need to borrow
on a short term basis during 2004/2005. The estimates for the operational boundary for the
current and future years are:

                                  2004/05     2004/05      2005/06         2006/07
                                    £000       £000          £000            £000
                                   Actual    Estimate      Estimate        Estimate
                        Operational boundary for external debt

  Borrowing                                              0             0              0
  Other long term liabilities                            0             0              0
  Total                                                  0             0              0



P6.    Impact of Capital Investment Decisions

The incremental impact of capital investment decisions during 2004/2005 was nil and the
estimate for current and future years are:

                                               2004/05       2005/06       2006/07
                                                  £              £             £
                                               Actual        Estimate      Estimate
  (a) for the Band D Council Tax                         0         0.00          0.00
  (b) for average weekly housing rents                   0            0             0



P7.    CIPFA Code of Practice for Treasury Management in the Public Services

Macclesfield Borough Council has adopted the CIPFA Code of Practice for Treasury
Management in the Public Services.
P8.   Upper Limit on Fixed Interest Rate Exposures

During 2004/2005 the Authority complied with the limit set for fixed interest rate exposure.
The Authority does not currently lend at variable rates. The fixed interest rate exposure is
therefore set at 100% of its net outstanding principal sums.

P9.   Upper Limit on Variable Interest Rate Exposures

During 2004/2005 the Authority complied with the limit set for variable interest rate
exposure. The Authority does not currently lend at variable rates. The variable interest rate
exposure is therefore set at 0% of its net outstanding principal sums.

P10. Fixed Rate Maturing Profile for Long Term Borrowing

In the event of the Council borrowing, the upper and lower limits for the maturity structure
of its borrowing would be as follows:


                                                          Upper       Lower
                                                          Limit       Limit

  under 12 months                                             20%           0%
  12 months and within 24 months                              20%           0%
  24 months and within 5 years                                50%           0%
  5 years and within 10 years                                 75%           0%
  10 years and above                                          90%          25%

The Authority remained debt free during 2004/2005.

P11. Investment Limit for Periods Longer than 364 Days

The investment limit for periods longer than 364 days is set at £3m for 2004/2005. The
Authority invested £2m for 1 year at 4.09% and £1m on callable deposit for a maximum of
3 years at 5.22% during 2004/2005.
                                                                                                    Appendix C
                    Update of Treasury Management Practices – Schedules

1.5       CREDIT AND COUNTERPARTY POLICIES

1.5.1. CRITERIA TO BE USED FOR MANAGING COUNTERPARTY LISTS/LIMITS

         the Chief Financial Officer will formulate suitable criteria for assessing and
          monitoring the credit risks of investment counter parties and shall keep an up to
          date list of all such counter parties
         treasury management staff will add or delete counter parties to/from the approved
          counter party list in line with the criteria
         this authority will use credit criteria in order to select credit worthy counter parties
          using credit ratings supplied by Fitch
         in addition the authority will use building societies which do not have credit ratings
          but have assets exceeding £500m

1.5.2. INVESTMENT LIMITS
ORGANISATION                                                                            MAXIMUM DEPOSIT   PERIOD
                                                                                              £m
Approved money market counter parties of the Bank of England                                    5          5 years
Local Authorities                                                                              10          5 years
Other Public Bodies                                                                             5          5 years
UK and European Banks -
         1. With Fitch short term rating F1+, long term rating AA and higher,                  5           5 years
         Individual rating B/C and higher and Support 1 or 2
         2. With Fitch short term rating F1+, long term rating AA-, Individual rating          5           2 years
         B/C and higher and Support 1 or 2
         3. With Fitch short term rating F1+, long term rating AA- and higher,                 5           1 year
         Individual rating C and higher, Support 1 or 2, Individual rating A and
         Support 1,2, or 3
         4. With Fitch short term rating F1+, long term rating AA- and higher,                 5          3 months
         Individual rating C to A/B and Support 3
         5. With Fitch short term rating F1, long term rating A+ or A, Individual              5           1 year
         rating B and higher and Support 1 or 2
         6. With Fitch short term rating F1, long term rating A+ or A, Individual              5          3 Months
         rating C or B/C and Support 1 or 2
         7. With Fitch short term rating F1, long term rating A+ or A, Individual              5          3 Months
         rating B and higher and Support 3
UK Building Societies -
         1. With Fitch short term rating F1+, long term rating AA- and higher,                 5           1 year
         Individual rating C and higher, Support 1 or 2, Individual rating A and
         Support 1,2, or 3
         2. With Fitch short term rating F1+, long term rating AA- and higher,                 5          3 months
         Individual rating C to A/B and Support 3
         3. With Fitch short term rating F1, long term rating A+ or A, Individual              5           1 year
         rating B and higher and Support 1 or 2
         4. With Fitch short term rating F1, long term rating A+ or A, Individual              5          3 months
         rating C or B/C and Support 1 or 2
         5. With Fitch short term rating F1, long term rating A+ or A, Individual              5          3 months
         rating B and higher and Support 3
UK Building Societies not Credit Rated but ranked in the top 10 analysis of total              5           1 year
assets
UK Building Societies not Credit Rated but with total assets exceeding £500m but              2.5          1 year
ranked below the top 10 analysis of total assets



          The above limits may only be amended with the approval of Cabinet

          The CFO is authorised to deviate from the above on a temporary basis only
          after consulting the Cabinet Portfolio Holder.

				
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