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					                        EXECUTIVE MEMBER BRIEFING PAPER

                     TO:       EXECUTIVE MEMBER (RESOURCES)

                     FROM: DIRECTOR OF FINANCE

                     DATE:     18 APRIL 2002



WARDS AFFECTED:
                        ALL


TITLE OF BRIEFING PAPER        TREASURY MANAGEMENT
                               STRATEGY REPORT - 2002/2003

1.   PURPOSE

          1.1   To advise Members of the Treasury Management policy issues for
                2002/03 and the borrowing strategy to be pursued during the year.
                The report is also designed to ensure Members are aware of the
                important issues governing the management of the Treasury
                Management functions.

          1.2   This report is in accordance with Section B.6.(v) of Financial
                Regulations which requires the Director of Finance to report not
                less than twice each financial year on the activities of the Treasury
                Management powers delegated to him. This report is for the
                purpose of reporting the strategy it is proposed to adopt for the
                forthcoming financial year. The second is a monitoring report
                detailing in retrospect the treasury management performance for
                the preceding year.


2.   RECOMMENDATIONS

          The Board is requested:-

          1)     to approve the Treasury Management strategy outlined in Section
                 3.6.

          2)     to authorise the Director of Finance to enter into leasing contracts
                 and to waive the requirement for leasing contracts to be signed
                 under seal.
3.   KEY ISSUES

         3.1   TREASURY MANAGEMENT DEFINED

               Treasury Management is the term used to describe the
               management of the Council'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 the
               optimum performance consistent with those risks.

         3.2   THE COUNCIL'S LOAN DEBT

               The existing loan debt is approximately £86M, which includes the
               debt managed by Lancashire County Council in respect of the
               services transferred at local government re-organisation. (This
               compares with the Council’s assets, which are valued at £193M).
               The periods for which this debt is borrowed vary. The external
               borrowing to finance this debt is not related to the borrowing
               period for the expenditure incurred on individual capital schemes.
               The loan debt is managed in much the same way as a Building
               Society manages its debt and its lending. The Council borrows to
               finance capital expenditure, in the same way that a Building
               Society borrows from investors to lend to house buyers. The
               Finance Department's function is to ensure that capital
               expenditure incurred can be funded, at a reasonable cost, and
               that the stringent legal requirements are observed, both in relation
               to borrowing and in the management of the capital accounts.

         3.3   BORROWING

               (a) 2002/03 Borrowing

               In 2002/03 the Council will need to borrow a total of £18.0M. This
               is analysed as follows: -
                                                                          £M
               To finance new capital expenditure covered
               by Credit Approvals                                       14.0
               To replace loans maturing                                  3.0
               To replace internal balances used to
               finance capital/revenue expenditure                        2.0
                                                                         19.0
               Less: MRP*                                                 1.0

               Total borrowing requirement 2002/03                       18.0


               * MRP (Minimum Revenue Provision) is the provision for debt
               redemption from the revenue account.
(b) Borrowing Strategy

There are two basic considerations applied in respect of
borrowing. The first is to ensure that the profile for the Council's
total loan debt is such that when maturity repayments are due
(e.g. to the Public Works Loan Board) the amount of re-borrowing
does not expose the Council to a high degree of risk. This would
occur if interest rates were higher than average at the time the re-
borrowing was undertaken and a higher than average re-
borrowing was required. When borrowing, therefore, regard is
had to the "profile" and the loan period for the new borrowing
which in turn is related to the profile. The current profile is
attached at Appendix A. Members will see from the profile that
only in the years 2004/05 and 2024/25 are there loans maturing in
excess of £8M.

The second important consideration is to borrow at rates as low as
possible. Long-term interest rates are currently comparatively low,
and provided the underlying rate of inflation remains at current
levels (below 2.5%) there is no reason why there should be a
great fluctuation in the rates. It is anticipated though that long-
term rates may possibly increase slightly during the year. Hence
the policy on longer term borrowing for 2002/03 will be to borrow
when rates are considered to be most beneficial, probably early in
the year, or when it is felt that a trough in the interest rate cycle
has occurred. Interest rates for borrowing periods up to a year are
much more aligned to base rates and it is anticipated that although
the base rate may dip to 3.75% before April 2002 it is expected to
rise during 2002/03 to nearer 5% by March 2003.

(c) Interest Rates

The function of Treasury Management involves taking a view on
future interest rates. That is not to say that interest rate
forecasting is undertaken, but rather, the officers reflect current
interest rates in the Council's borrowing and lending strategies,
and take advice on the future trend of rates. For example,
currently the view is being taken that long-term interest rates,
especially for periods in excess of 5 years, will increase slightly as
the year progresses. Short-term interest rates (up to twelve
months) are expected to decrease initially and then increase
gradually to around 5.00%. It must be borne in mind that interest
rates are nowadays affected by international events which are
unpredictable. Peaks and troughs, though, can occur at any time,
and when a trough is deemed to have occurred it is the opportune
time to effect borrowing.
    (d) Average Interest Rate

    The table below (Table A) sets out the average rate of interest
    payable on external borrowing.

                             TABLE A

       AVERAGE RATE OF INTEREST ON BORROWING
                 1992/93 to 2002/2003

              1992/93                            9.28%     *
              1993/94                            8.81%     *
              1994/95                            8.76%     *
              1995/96                            8.50%
              1996/97                            7.40%
              1997/98                            8.45%
              1998/99                            8.41%
              1999/00                            7.99%
              2000/01                            7.71%
              2001/02                            7.42%     (Est)
              2002/03                            7.15%     (Est)

*   The interest rate is artificially reduced due to use of discounts
    received on rescheduling of debt in 1992/93, 1993/94 and
    1994/95.

    Although performance measures have not yet been introduced,
    mainly because of the difficulty in establishing how performance
    can be measured, a rough guide is to compare Blackburn with
    Darwen's rate within a financial year with the pool rate of
    comparable authorities.

    On the basis of the last available year’s figures the rate for
    Blackburn with Darwen compared with other authorities is as
    follows: -

                                                         1999/2000
    Highest Rate of Unitary Authority :                     9.71%
    Average Rate of Unitary Authorities :                   7.91%
    Average Rate in England and Wales :                     8.09%
    Blackburn with Darwen's Rate :                          7.99%

    Blackburn with Darwen's position in Unitary Authorities:
    27th out of 40.
(e) Debt Rescheduling

An additional management tool that is used from time to time is
debt rescheduling. Quite simply this is a technique which involves
premature debt repayment. It may be advantageous to repay debt
earlier than the agreement provides for. Debt rescheduling can be
effected at either a discount or a premium which is calculated as
the difference between the rate of the loan to be prematurely
repaid and the current rate for a loan for the unexpired term. Debt
rescheduling is useful in terms of improving the debt repayment
profile and taking advantage of interest rate trends. No loans
have so far been rescheduled in 2001/02 but the Council has
been active in this direction in the past. A more active role in debt
rescheduling will be pursued as and when interest rates are
conducive.

(f) Sources of Borrowing

The Council can borrow money from either the Public Works Loan
Board (PWLB) or from the Money Market. The PWLB, which
usually charges a slightly lower interest rate than is available
commercially, restricts the amount of its lending to any one local
authority. This restriction is defined as the "quota" and rates are
specified for "quota" and "non quota" loans. Currently, "non quota"
loan rates are 1% higher than "quota" rates and are not a viable
source of funding. The Council generally utilises to the maximum
its "quota" loans facility. The "quota" for the Council in 2002/03 is
expected to be approximately £14M. It follows therefore that any
further long term funding will be obtained from the Money Market
or, possibly, by obtaining additional "quota" from the PWLB. In
terms of the Money Market, it is usual for the Council to borrow
from a financial institution, generally a bank or a building society.

The Council can currently borrow from the PWLB at a "Lower
Quota Rate" which generally bears interest at an eighth percent
less than its normal lending rate. This is because the Council has
no unapplied provision for credit liabilities.

(g) Temporary Borrowing

From time to time the Council will borrow or lend on a temporary
basis. The period for temporary borrowing or lending can vary
from overnight to 364 days. Temporary borrowing or lending is
activated to improve cash flow or to take maximum advantage
from any given set of circumstances. Thus, if during 2002/03
interest rates rise very quickly, and the Council needs to borrow, it
would not necessarily borrow for a long period, but may borrow on
a temporary basis until the interest rate trend had settled down.
Similarly, if the Council foresees a "needs to borrow" situation, it
may well borrow in advance of requirements to guard against a
sudden rise in rates. In these circumstances it would then lend out
on a temporary basis until any cash was needed for its authorised
purpose. During the 2002/03 financial year, the Council will be
involved in the temporary money market both as a borrower and a
lender.

(h) Variable Interest Rate Loans

All the Council's short term borrowing (i.e. for periods of less than
one year) is classified for the purposes of Section 45 of the Local
Government and Housing Act 1989 as variable interest rate loans.
It is also possible to borrow for longer periods at variable rates.
One reason for using variable interest rate loans for long-term
borrowing is to maximise the use of the PWLB quota. For
example when interest rates are high, the Council would normally
borrow "short" and not use the PWLB quota. However, the option
exists to borrow at variable rates from the PWLB thus utilising the
quota and subsequently "fix" the rate when interest rates reduce.
When "fixing" variable interest rate loans, the transaction does not
count against the Council's quota. Thus, variable interest rate
loans are utilised as a flexible measure whenever it is deemed
prudent. Whilst this instrument can prove valuable in times of
economic uncertainty, the disadvantage is that if utilised
excessively and in respect of long term borrowing, it weakens the
stability of the debt portfolio. Long term borrowing, on a variable
interest rate basis, is therefore only used exceptionally, either at a
time when interest rates are considered to be high or it is expected
that short term borrowing rates will remain cheaper than long term
rates for a substantial period of time. It is probable that some
variable rate borrowing will be effected in 2002/03 from the PWLB.

(i) Bank Overdraft Facility

The Council's arrangements with its bankers include the provision
by the bank of an overdraft facility with interest at 0.75% above
base rate. This facility is utilised on a day to day basis to manage
the Council's cash resources effectively. The overdraft limit is
fixed at £1 million.

(j) Leasing

Operating leasing is used to finance the acquisition of vehicles
and items of equipment as it falls outside the scope of the Capital
Control Regulations. Other alternatives for financing include the
use of credit approvals, which would reduce the scope for other
capital expenditure, or from revenue in the year of purchase which
would require a heavy commitment from the Council’s reserves.
The operating lease requirement for 2002/03 is approximately
£2 million.
3.4   STATUTORY REQUIREMENTS

      By virtue of Section 45 of the Local Government and Housing Act
      1989 certain aspects of the Treasury Management function cannot
      be delegated to either a Committee or to an Officer. They can only
      be determined by the full Council. Members will be aware that, as
      part of the Special Council Meeting which determines the annual
      revenue budget, certain elements of the Council's Treasury
      Management functions are submitted for approval. These
      elements are reported to and approved by the Council so as to
      ensure that the Council is fully aware of their importance and that
      the Director of Finance is able to operate only within the limitations
      set by the Council. For 2002/03 the Council has agreed to
      approve the following limitations.

      (a) Overall borrowing limit :                       £ 75M

      This limitation is designed to ensure that the Council does not
      exceed its total borrowing powers.

      (b) Short term borrowing limit :                    £ 25M

      This limitation, which is based on the Director of Finance's
      judgement of the need to borrow temporarily, is to ensure that the
      majority of the Council's total borrowing is stable. Too much
      temporary debt can create instability and could result in the need
      to fund at fixed rates when the climate was unfavourable.
      Temporary borrowing therefore is only used as a management
      tool to increase flexibility in the management of the Council's loan
      debt, to borrow for short periods to fund revenue expenditure
      pending the receipt of revenues, or to await a more favourable
      climate for fixed rate long term borrowing.

      (c) Variable interest rate loans :                  35% limit

      Borrowing at variable interest rates adds to the flexibility
      necessary to manage the loan debt efficiently. However, too much
      variable rate debt may leave the Council vulnerable to sudden
      adverse changes in interest rates. This form of borrowing
      therefore is restricted to that necessary to provide flexibility in the
      short term, and be able to take advantage of favourable fixed
      interest rate long term loans when the interest rate climate is
      deemed to be favourable.

3.5   INVESTMENT STRATEGY

      It is recognised that an element of risk is involved where large
      sums of money are invested. The overriding principle adopted is
      to avoid risk; i.e. maintaining capital invested, rather than
      maximise return. A list of Banks, Building Societies and Local
      Authorities is maintained to whom investments can be made. The
      criteria for inclusion on the list for Banks and Building Societies is
      an Organisation with a short term rating equivalent to F1 or above
      with one or more of the three leading credit rating agencies. The
      list is updated each month and may also be further restricted by
      any criteria which may be imposed by the Treasury Management
      Group, comprising the Director and senior members of staff from
      the Finance Department together with the Director of Legal and
      Administrative Services and the Chief Executive.

      A maximum limit of £5 million may be invested with any one
      borrower meeting the highest criteria, in order to spread, and
      hence minimise, investment risk. The limit is reduced to £3 million
      and £1 million for Banks/Building Societies who meet lower
      criteria. Investment periods are also limited depending on the
      rating of the Bank/Building Society from a maximum of 364 days
      for those that meet the highest criteria to one month for those
      meeting lower criteria.

3.6   SUMMARY OF TREASURY MANAGEMENT STRATEGY

a     To so arrange borrowing, that where possible, the need to re-
      borrow in future years does not expose the Council to adverse
      financial implications caused by higher than average interest
      rates.

b     To borrow, as far as can be perceived, at the most beneficial
      occasion in 2002/03 so as to take advantage of any temporary
      reduction in interest rates.

c     To borrow the full quota from the PWLB and to use either
      additional quota (if granted by PWLB) or the Money Market, to
      raise the remainder of the Council's borrowing requirements
      depending on prevailing interest rates and money market
      conditions at the time.

d     To borrow temporarily when the need arises, within the limit
      authorised by the Council resolution of 4th March 2002
      (recommendation up to £25M).

e     To lend temporarily in circumstances dictated by market
      conditions i.e. where borrowing in advance of actual requirements
      is necessary to take advantage of the interest rate structure, or
      when other surplus funds become available for temporary
      investment.

f     To regularly review the list of organisations, including Local
      Authorities, to whom the Council will lend surplus funds.

g     To utilise variable interest rate loans when considered appropriate,
      up to the limit specified in the Council's resolution of 4th March
      2002.
             h      To continue with the existing overdraft limit of £1 million and to
                    utilise this facility as necessary to manage the Council's cash flow
                    effectively.
             i      To re-schedule the Council's loan debt should the opportunity to
                    do so advantageously arise.
             j      To negotiate operating leases, to finance the lease acquisitions
                    approved in the Council’s budget, at the most economically
                    advantageous rates, as recommended by the Council’s Specialist
                    Leasing advisers.

             3.7    CONCLUSION

                    Treasury Management is the detailed day to day management of
                    the Council's cash flows, banking, investments and borrowing. It
                    is managed by a Treasury Management Group, which meets on a
                    six weekly basis, and its responsibilities include monitoring
                    functions and policies, taking decisions in relation to capital
                    financing and borrowing, and ensuring that the systems which
                    control the functions are developed and observed. The function
                    operates under the powers delegated to the Director of Finance,
                    and the day to day activity is conducted in the Research and
                    Technical section. The policy in relation to borrowing and the
                    investment of cash resources not immediately required is
                    reviewed on a six weekly basis, and advice is obtained from
                    Treasury Management Consultants, whom the Council retains on
                    a fee basis.

4.      RATIONALE
             4.1 As outlined in item 3.

5.      POLICY IMPLICATIONS
             5.1  None.

6.      FINANCIAL IMPLICATIONS
             6.1   Dependent on interest rates.

7.      LEGAL IMPLICATIONS
            7.1   None.

8.      RESOURCE IMPLICATIONS
            8.1  None

9.      CONSULTATIONS
            9.1  None



CONTACT OFFICER:            Colin Crompton, Technical Accountant – Ext 5303

DATE:                       7 March 2002

BACKGROUND PAPER:           Resolution of the Council – 4 March 2002
                            Treasury Management Group Minutes

				
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