SUBJECT Treasury Management and Annual Investment Strategy 200607 by ibt17801

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									                                                                                        AGENDA
                                                                                        ITEM NO.


                                     SOUTH HOLLAND DISTRICT COUNCIL


      REPORT TO:           CABINET 21st FEBRUARY 2006

      BY:                  HEAD OF FINANCE


      SUBJECT:             Treasury Management and Annual Investment Strategy 2006/07

      PURPOSE:             To Adopt a Strategy for 2006/07

      “It is considered that this report will result in the Cabinet submitting recommendations to full Council
      rather than making an executive decision. This is because the action(s) proposed require
      amendment(s) to the approved policy framework or budget. Only the full Council can make
      amendments to the policy framework or budget, and the proposed action(s) therefore cannot be
      undertaken without full Council approval. In view of this call-in procedure will NOT apply.”

1.0   INTRODUCTION

1.1   The Local Government Act 2003 requires the Council to “have regard to” the Prudential Code and to
      set Prudential Indicators for the next 3 years and to ensure that the Council’s capital investment plans
      are affordable, prudent and sustainable.

1.2   The Act therefore requires the Council to set out its treasury strategy for borrowing and to prepare an
      Annual Investment Strategy; this sets out the Council’s policies for managing its investments and for
      giving priority to the security and liquidity of those investments.

1.3   The Prudential Indicators, Treasury Management Strategy and Annual Investment Strategy have
      been combined into one document the “Treasury Management and Annual Investment Strategy”; this
      has been prepared in the corporate format and is attached at Appendix A.

1.4   The Council adopted the CIPFA Code of Practice on Treasury Management on the 14th May 2003.

2.0   PRUDENTIAL INDICATORS

      In setting the Prudential Indicators consideration must be given to:

                           Affordability, e.g. implications for council tax and rent levels
                           Prudence and sustainability e.g. implications for external borrowing
                           Value for money e.g. options appraisal
                           Stewardship of assets e.g. asset management planning
                           Service objectives e.g. strategic planning for the authority
                           Practicality e.g. achievability of the forward plan

      A fundamental aspect of the prudential system is the integration of capital, revenue and treasury
      management decisions at a local level.

3.0   ALTERNATIVE OPTIONS

      There are no alternative options presented.


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4.0 REASON FOR RECOMMENDATION

      To comply with the legislative requirements under the Local Government Act 2003

5.0   RECOMMENDATION

5.1   It is recommended to Council that:

           The Treasury Management and Annual Investment Strategy as attached are submitted for
           approval.


              Background Papers:-     (a) Sector Briefings




                        Local Government (Access to Information) Act 1985

                     Please contact Elizabeth Jones, the Head of Finance, if you
                     want more information about this report or the background
                     papers.

                     You can contact her:
                          by post at the Council Offices, Priory Road, Spalding,
                           Lincolnshire, PE11 2XE
                          by phone on 01775 761161
                          by email at info@sholland.gov.uk




      File Ref:
      Appendices:    Appendix A: Treasury Management and Annual Investment Strategy




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APPENDIX A

STRATEGY TITLE


Treasury Management and Annual Investment Strategy 2006/07


REVISION DATE

To apply from 1st April 2006


REPLACES POLICY

Treasury Management and Annual Investment Strategy 2005/06


POLICY NUMBER

0053

POLICY AIM
The Local Government Act 2003 requires the Council to ‘have regard to’ the Prudential Code and
to set Prudential Indicators for the next three years to ensure that the Council’s capital investment
programme is affordable, prudent and sustainable. The Act therefore requires the Council to set
out its treasury strategy for borrowing and to prepare an Annual Investment Strategy; this sets out
the Council’s policies for managing its investments and for giving priority to the security and
liquidity of those investments.

EXECUTIVE SUMMARY
The strategy for 2006/07 is based upon the Authority’s view on interest rates, supplemented with
leading market forecasts provided by the Council’s treasury advisor Sector Treasury Services Ltd.
The strategy covers:

      Treasury limits
      Prudential Indicators for 2006/07 to 2008/09
      Prospects for interest rates
      The borrowing requirement
      The investment strategy
      The current treasury position
      Any extraordinary treasury issues

The strategy sets the ground rules to ensure the effective management of cash flows, borrowings
and investments of the authority’s own funds; and ensuring the effective management of
associated risks; and the pursuit of optimum performance or return consistent with those risks.

It also ensures that the authority maintains a prudential financial framework and keeps its
commitments in balance with available resources. Monitoring income and expenditure levels to
ensure that this balance is maintained and taking corrective action taken when necessary.
Through the Treasury Management Practices the authority puts in place effective internal financial
controls covering codified guidance, budgetary systems, supervision, management review and


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monitoring, physical safeguards, segregation of duties, accounting procedures, information
systems, risk assessments, authorisation and approval processes.


POLICY STATEMENT
This policy has been developed to reflect the requirements of the Local Government Act 2003 and
in accordance with the Council’s approved Treasury policy.

The Council defines the policies and objectives of its treasury management activities as follows: -

1. This organisation defines its treasury management activities as:
   “The management of the 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”.


2. This organisation 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.

3. This organisation 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 best value in treasury management, and to employing
   suitable performance measurement techniques, within the context of effective risk
   management.”

1.0 TREASURY LIMITS FOR 2006/07 TO 2008/09

It is a statutory duty under Section 3 of the Local Government Act 2003 and supporting regulations,
for the Council to determine and keep under review how much it can afford to borrow. The amount
so determined is termed the “Affordable Borrowing Limit” within the Act and is the equivalent of the
‘Authorised limit’ as set out below.

The Council must have regard to the Prudential Code when setting the Affordable Borrowing Limit,
which essentially requires it to ensure that total capital investment remains within sustainable limits
and, in particular, that the impact upon its future council tax and council rent levels is ‘acceptable’.

Whilst termed an “Affordable Borrowing Limit”, the capital programme to be considered for
inclusion incorporate financing by both external borrowing and other forms of liability, such as
credit arrangements. The affordable borrowing limit is to be set, on a rolling basis, for the
forthcoming financial year and two successive financial years.




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2.0 PRUDENTIAL INDICATORS FOR 2006/07 – 2008/09

Prudential Indicators are used to provide performance measurement in managing and controlling
the impact of capital investment decisions. They must be set by each local authority for the
forthcoming year and the following 2 financial years.

There are 5 key Prudential Indicator headings as set out below. They are, however, interrelated
and should not be looked at in isolation.

                                           2004/05      2005/06       2006/07      2007/08      2008/09
 1. AFFORDABILITY                           actual      probable      estimate     estimate     estimate
                                                         outturn
                                             £’000        £’000         £’000        £’000        £’000
 1a. Net Financing Costs
     Non – HRA                               -613         -859          -575         -569         -571
     HRA                                     2,044        2,035         2,168        2,207        2,386
 Total Financing Costs                       1,431        1,176         1,593        1,638        1,815

 1b. Ratio of financing costs to net
     revenue stream                            %            %             %            %               %

     Non – HRA                               -5.9          -7.8          -4.8         -4.6         -4.4
     HRA                                     19.7          19.0          19.8         18.8         19.3

 1c. Estimates of the incremental            £3.34        £3.43         £2.08        £0.75        £0.72
     impact of capital investment
     decisions on the Council Tax

 1d. Estimates of the incremental            £0.90        £1.18         £1.67        £1.43        £1.30
     impact of capital investment
     decisions on Housing Rents


These indicators compare the cost of all the authority’s external borrowing with its overall revenue
expenditure. They also identify the increase in Council Tax that will result from any additional
borrowing.

Note:1b – The non-HRA ratio of financing costs to net revenue stream is negative due to the high
level of investment income and the authority having no requirement to borrow up to 2008/09.



This measure is designed to ensure that medium term borrowing is only used for capital purposes.

                                          2004/05      2005/06     2006/07       2007/08       2008/09
2. PRUDENCE                                actual      probable    estimate      Estimate      estimate
                                                        outturn
                                           £'000         £'000        £'000        £'000         £'000
2a. Net borrowing (negative figure        -12,931       -18,400      -9,200       -8,100        -7,300
    represents investments)

2b. Capital financing requirement          1,692        2,178        2,658        3,172          3,701



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Where net external borrowing exceeds the capital financing requirement, this would imply that net
external borrowing is funding the day to day operational cost of the authority.

Note:
2a/2b The figures for 2006/07 show that investments are estimated at £9,200k which is in excess
of the capital financing requirement, but investments are diminishing over the 3 year forecast to
£7,300k.


                                           2004/05       2005/06     2006/07       2007/08       2008/09
 3. CAPITAL EXPENDITURE                     actual       probable    estimate      estimate      estimate
                                                          outturn
                                            £'000          £'000       £'000        £'000         £'000
 3a. Capital Expenditure
     Non – HRA                              1,284         3,459        2,850          620           608
     HRA                                    2,956         5,727        3,824        3,704         3,359
     TOTAL                                  4,240         9,186        6,674        4,324         3,967

 3b. Capital Financing Requirement
     Non - HRA                              2,087         2,053        2,025        1,992         1,961
     HRA                                     -395           125          633        1,180         1,740
     TOTAL                                  1,692         2,178        2,658        3,172         3,701

The capital financing requirement is calculated from the council’s balance sheet and the Prudential
Code specifies which items should be included and excluded. The capital financing requirement
will include the cumulative effect of capital payments and commitments in previous years and the
following and subsequent financial years. This reflects the council’s underlying need to use
external borrowing.

                                           2004/05       2005/06    2006/07        2007/08       2008/09
 4. EXTERNAL DEBT                           actual       probable   estimate       estimate      estimate
                                                          outturn
                                            £'000          £'000      £'000         £'000         £'000
4a. Authorised limit for external
    debt -
    Borrowing                               3,000           3,500        3,500        3,500           3,500
    other long term liabilities -
    (deferred credit re                        45              37             25            19            14
    council house mortgages)
    TOTAL                                   3,045           3,537        3,525        3,519           3,514

 4b. Operational boundary for
      external debt -
     borrowing                                 1,692        2,178        2,658        3,172           3,701
     other long term liabilities –
     (deferred credit re                            45         37           25              19            14
     council house mortgages)
    TOTAL                                      1,737        2,215        2,683        3,191           3,715

 Actual external debt                               45         37             25            19            14




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These indicators set out the limits for external borrowing. The authorised limit reflects a level of
borrowing which, while not desired, could be afforded but may not be sustainable. It is set at this
level to cover potential short term debit positions in the unlikely event of an investment not being
returned on the maturity date or date requested for no notice funds.

The operational limit acts as a warning indicator. There may be occasional (but not sustained)
breaches of the operational boundary due to cash-flow variations. Sustained breaches would give
an indication that the authority may be in danger of stepping beyond the prudential boundaries it
has set itself. This is reflected by current capital and revenue estimates.

                                           2004/05     2005/06       2006/07       2007/08       2008/09
5. TREASURY MANAGEMENT                      actual     probable      estimate      estimate      estimate
                                                        outturn
                                              %            %           £’000         £’000         £’000
5a. Adoption of the CIPFA Code for           yes          yes           yes           yes           Yes
   Treasury Management

5b. Upper limit for fixed interest           20%         20%           3,701         3,701         3,701
    rate exposure

   Upper limit for variable rate            100%         100%           925            925             925
   exposure

5c. Upper and lower limits for the           N/a          N/a           N/a           N/a              N/a
    maturity
    structure of borrowing

5d. Prudential limit for total               20%         20%           50%            50%              50%
    principal sums invested for
    longer than 364 days



The adoption of the CIPFA Code is important and provides for prudential financial management of
the council. The purpose of these indicators is to ensure that a balanced portfolio of debt and
investment is provided, to limit exposure to risk associated with changes in interest rates and to
ensure there is a balance between long and short term cashflow requirements.

Note:
5b. An investment placed for less than 365 days is classed as variable rate exposure, over one
year is classed as fixed rate exposure.
5c. This would be reviewed if borrowing was undertaken.




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3.0 CURRENT TREASURY POSITION

                                          £’000s

Fixed Rate Borrowing                        0
Variable Rate Borrowing                     0
Other Long Term Liabilities                37

Total Debt                                37

Investments                         18,400           4.65% average rate
S106 Investments                     1,092

Total Investments                   19,492

Anticipated position at 31st March 2006

4.0 PROSPECTS FOR INTEREST RATES
The Council has appointed Sector Treasury Services as treasury adviser to the Council and part of
their service is to assist the Council to formulate a view on interest rates. Appendix A draws
together a number of current City forecasts for short term or variable (the base rate or repo rate)
and longer fixed interest rates. The following table gives the Sector central view.

Sector View: Interest rate forecast – 18.10.05

          Q/E4    Q/E1    Q/E2     Q/E3     Q/E4      Q/E1   Q/E2    Q/E3    Q/E4
          2005    2006    2006     2006     2006      2007   2007    2007    2007

 Base
         4.50%    4.50%   4.25%   4.25%     4.00%    4.25%   4.50%   4.75%   4.75%
 Rate

 5 yr
 Gilt    4.25%    4.00%   4.00%   4.25%     4.50%    4.75%   4.75%   4.75%   4.75%
 Yield
 10 yr
 PWLB    4.50%    4.25%   4.50%   4.75%     4.75%    4.75%   4.75%   4.75%   4.75%
 Rate
 25 yr
 PWLB    4.50%    4.50%   4.50%   4.50%     4.75%    4.75%   4.75%   5.00%   5.00%
 Rate

Sector’s current interest rate view is that the base rate will:-
    Remain on hold at 4.5% until the end of Q1 2006
    Fall to 4% by the end of Q4 2006
    Edge up by 0.25% in Q1, Q2 and Q3 of 2007 to end the year at 4.75%

The risk to this forecast is to the downside in as much as the cuts in rates could occur earlier than
our forecast suggest, although this will not necessarily affect the timing of the first upward move in
Q1 2007.



Economic background



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UK
 UK now in the downswing of the economic cycle. GDP growth to weaken from 3.2% in 2004 to
   about 1.7% in 2005 before rising to about 2% in 2006
 Slowdown in household spending and rise in unemployment during 2005
 House price inflation fallen to very low levels and may now stabilise
 Rise in inflation concerns; high oil prices have pushed inflation up over target – but this is a one
   off effect which will fall out even if oil prices remain at current levels
 Increasing concerns that the public sector deficit will exceed targets significantly and lead to
   increases in taxation


International
 Boom in world commodity prices driven by strong growth in China and India; potential for
    further increases in prices but supply side increases and improvements in technology are likely
    to reduce prices in the medium term
 Inability of oil producers to spend their huge cash surpluses and reluctance of Asian economies
    to run current account deficits will suppress world demand and dampen world growth
 US – continuation of measured rate raising by the Fed coupled with concerns about rising
    inflation. Fed rate may now peak at 4.5%
 US GDP growth expected to weaken from 4.4% 2004 to 3.4% 2005 and 2.5% 2006
 ECB had held repo rate at 2.00% since June 2003; increase in December to 2.25% but “this
    was not the first of a series of increases”
 European consumers lack confidence to increase their spending; GDP growth expected to rise
    weakly and to continue to under perform the UK and US economies




5.0 BORROWING REQUIREMENT
As reflected in the current 5 year capital programme it is expected that there will be no capital
borrowings required during 2006/07, 2007/08 or 2008/09.


6.0 ANNUAL INVESTMENT STRATEGY

Investment Policy
The Council will have regard to the ODPM’s Guidance on Local Government Investments (“the
Guidance”) issued in March 2004 and CIPFA’s Treasury Management in Public Services Code of
Practice and Cross Sectoral Guidance Notes (“the CIPFA TM Code”). The Council’s investment
priorities are the security of capital and the liquidity of its investments.

The Council will also aim to achieve the optimum return on its investments commensurate with
proper levels of security and liquidity.

The borrowing of monies purely to invest or on-lend and make a return is unlawful and this Council
will not engage in such activity.

Counterparty limits, list and maximum term
The Council uses Fitch ratings together with Sectors’ investment matrix to establish its
counterparty list and the maximum term for investments. See Appendix B and C

We have a 2 tier limit to reflect the creditworthiness of an institution. This would give a limit of
£3,000,000 for institutions with a long-term rating of AA- or better, and reducing the limit to




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£2,000,000 for those with a long-term rating of A or A+. Where institutions reside within a group the
group limit will be £500,000 more than the single institution limits.

With regards to the term of investment the matrix makes a division between 3 months and 12
months only. Sector has confirmed that it is intended to be used as a guide. The Head of Finance
has discretion to extend the 3 month term to 6 or 9 months for certain institutions if the cashflow
forecast and rate of return dictate that this was the preferred term. The criteria for extending the
term will be laid down in the Treasury Management Practices and Schedules.

The Treasury management practices state that investments may be made for a period of up to 2
years. We have amended our practices so that investments can be made for a period of up to 5
years with counterparties that have a minimum long term rating of AA-. This matches Sectors’
matrix for lending longer that 364 days and would allow our investments to take advantage of
interest rate cycles. The credit ratings used to assess the suitability of a counterparty are valid for a
term of 5 years.

The credit rating of a counterparty is checked on the day the funds are invested. The councils’ list
is registered with Sectors’ on line creditworthiness service and the Council is alerted to changes in
Fitch ratings via e-mail. If a downgrade results in the counterparty/investment scheme no longer
meeting the Council’s minimum criteria, its further use as a new investment will be withdrawn
immediately. Similarly if an upgrade results in an institution meeting our criteria then the name may
be added to our list at the discretion of the Head of Finance. We have expanded our counterparties
list to include overseas banks, the same credit ratings apply to these organisations as our current
counterparties.

Dealing Direct
We will also seek better rates and investment options through dealing direct with institutions. We
have a list of financial institutions that we could deal directly with, If they meet with our criteria as
set out above we will make contact and use them directly if the rate, amount and term are more
advantageous than dealing through our brokers.

Investment Instruments
Investment instruments identified for use in the financial year are listed below under the ‘Specified’
and ‘Non-Specified’ Investments categories.

Specified Investments
A specified investment is one which offers high security and high liquidity, and authorities are free
to rely on such investments with minimal procedural formalities. All such investments must be in
sterling and with a maturity of less than one year.

                                                     Minimum ‘High’ Credit                  Use
                                                             Criteria
     Term deposits – UK government                              n/a                      In-house
     Term deposits – other LAs                                  n/a                      In-house
     Term deposits – banks and building            Short-term F1, Long-term A,           In-house
     societies                                       Individual C, Support 2
     Money Market Funds                                       AAA                        In-house

   Non specified Investments:
   Non-Specified Investments have a greater potential risk and must set a limit to the overall
   amount that may be held in such an investment at any time in the year. We have set our
   maximum exposure in Non specified investments at 50% of total investments. This is to allow
   greater benefits in following interest rate cycles. We will expand our list of Non specified
   Investments to include, Multilateral development bank bonds and sovereign bonds which are
   both AAA rated investments. These additional types of investment are not currently



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   advantageous, however if excluded from our strategy could limit opportunities should market
   conditions change.


                                        Minimum Credit          Use         Max % of        Max.
                                            Criteria                          total       maturity
                                                                          investments      period
    Term deposits – UK n/a                                 In-house       50%            5 years
    government(with maturities
    in excess of 1 year)
    Term deposits – other LAs n/a                          In-house       50%            5 years
    (with maturities in excess
    of 1 year)
    Term deposits – banks and          * Short-term F1+,   In-house       50%            5 years
    building societies (with           Long-term AA-,
    maturities in excess of 1 year)    Individual B/C,
                                       Support 2
    Certificates of deposits issued    * Short-term F1+,   In-house       50%            5 years
    by     banks     and    building   Long-term AA-,      (with advice
    societies                          Individual B/C,     from Sector)
                                       Support 2
    UK Government Gilts with            AAA                In-house       50%            5 years
    maturities in excess of 1 year                         (with advice
                                                           from Sector)
    Multilateral development bank      AAA                 In-house       50%            5 years
    bonds and sovereign bonds                              (with advice
                                                           from Sector)


Investment Strategy
All the councils’ funds are managed in house with reference to a detailed cash flow forecast on a
daily basis for the current year and extending for 5 years on a monthly basis. A proportion of the
portfolio, which is considered to be core cash, is invested for longer periods up to a maximum of
five years with reference to cash flow requirements and the outlook for interest rates.

To cover smaller short term movements Lloyds TSB Treasury Call account is used daily as
required. In view of the lower rate on this type of account the balance is kept in the region of
£250,000. Business Reserve accounts are used to secure better rates for funds required within the
month, without losing instant access to the funds, hence minimising liquidity risk and maximising
returns. A minimum balance of £1,000,000 is required with the Bank of Scotland Reserve account
to earn a return equivalent to base rate and £500,000 with the Abbey Business Reserve to earn an
annual return of base rate. We have also opened a Bank of Scotland base plus account. This
account requires a 7 day notice period which reduces liquidity however provides a higher return of
approx 0.07% above base rate. The additional risk of liquidity will be controlled by our detailed
cashflow forecast.




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Cash balances at the 1st April 2005 amounted to £15.5m and have steadily increased
during the year peaking in January 2006 at £22.5m. The average daily balance for the
year is expected to be in the region of £19.8m and the current forecast estimates the
closing balance for the year to be around £18.4m. The Table below shows our investment
portfolio at the 31st December 2005.


      Investment Counterparty                 Amount           Rate              Matures
                                               £’000            %
   Dexia BIL                                        1,000       4.84             05/01/06
   Bradford & Bingley                               2,000       4.55             01/02/06
   Bristol & West Building Society                    500       4.55             20/02/06
   Dexia BIL                                        1,000       5.10             28/02/06
   Skipton Building Society                         1,000       4.54             01/03/06
   Nationwide Building Society                      1,000       5.11             06/03/06
   Bank of Scotland                                 2,000       4.84             12/05/06
   Bristol & West Building Society                  2,000       4.65             02/06/06
   Irish Intercontinental Bank Ltd                  2,000       4.65             02/06/06
   Nationwide Building Society                      2,000       4.64             02/06/06
   Dexia BIL                                        1,000       4.40             06/10/06
   Northern Rock plc                                2,000      4.655             15/11/06
   Bank of Scotland Reserve Account                 1,000       4.50
   Abbey National Reserve Account                       0       4.50

   S106 Investments                        Amount £’000        Rate               Matures
   Escrow – Spalding Energy                         660
   Lloyds TSB – Thornfields                         462         4.39             16/01/06

Interest Rate Outlook and resulting strategy
Our treasury advisor is forecasting base rates to be on a falling trend from 4.50% to reach 4.00% in
Q4 2006 but to rise again to end 2007 at 4.25%. We should therefore seek to lock in longer period
investments at higher rates before this fall starts for some element of their investment portfolio
which represents their core balances. Some investment should be aimed to mature during Q1
2007 when the interest rate cycle turns up and the Market yield curve should have turned positive.
This will enable the council to lock into higher yielding investments with their maturing deposits. For
2006/07 Sector have advised clients should budget for a cautious investment return of 4.0%. For
our 2006/07 budgets we have used 4.5% to reflect the level of forward dealing we have been able
to undertake.

For its cash flow generated balances, the Council will seek to utilise its business reserve accounts
and short-dated deposits (1-3 months) in order to benefit from re-investing interest earned.

End of year Investment Report
At the end of the financial year, the Council will report on its investment activity as part of its
Annual Treasury Report.


7.0 OTHER ISSUES
Reduction in RTB including pooling requirement

With effect from 1 April 2004, the procedures for accounting for housing capital receipts changed.
Prior to this date the whole of the receipt was retained by the Authority, although a proportion was
required to be ‘set aside’ for debt repayments. After 1 April an amount equivalent to the ‘set aside’
was required to be paid over (pooled) to the Office of the Deputy Prime Minister (ODPM). The


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amounts pooled with the ODPM are equivalent to 75% of net sales receipts for Right to Buy (RTB)
sales and 50% of net receipts in respect of HRA land sales, although the latter is waived where
receipts are earmarked for affordable housing. ODPM have allowed transitional arrangements in
respect of pooling for Authorities who were ‘Debt Free’ as at 1 April by reducing the requirement to
pool receipts by 75% in 2004/05, 50% in 2005-06 and 25% in 2006-07. The council took the
opportunity to become ‘Debt Free’ in March 2004, and therefore is able to retain 81.25% of its RTB
receipts in 2004-05, 62.5% in 2005-06 and 43.75% in 2006-07.




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IMPLEMENTATION

R – Responsible – Head of Finance is responsible for making sure things actually
    happen.
A – Accountable – Chief Accountant and senior Treasury Officer will be making the day to day
    decisions.
C – Consulted – Sector Treasury Services will be asked for their input and to conduct an annual
    review.
I – Informed – the treasury team will be made aware of the new policy and what will change
    as a result


MONITORING
The policy will be monitored in the following ways:

MONITORING ACTIVITY                                   PERSON RESPONSIBLE
Quarterly monitoring of Prudential Indicators         Head of Finance

Current Treasury position, cashflow monitoring Chief Accountant and Senior Treasury Officer
including investment income
Economic Forecasts                             Chief Accountant and Senior Treasury Officer
Treasury Health Check                          Sector
Treasury Function                              Audit / HOF
Key Performance Indicators                     Senior Treasury Officer
                                               Deputy Chief Accountant

POLICY CONSULTATION
The Strategy is part of the Council’s budget and policy framework.


POLICY APPROVAL
Full Council


RELATED POLICIES & STRATEGIES
Treasury Management Practices and Schedules

TMP 1 :  Treasury Risk Management
TMP 2 :  Best value and Performance Measurement
TMP 3 :  Decision–making and Analysis
TMP 4 :  Approved instruments, methods and techniques
TMP 5 :  Organisation, clarity and segregation of responsibilities, and dealing
         arrangements
TMP 6 : Reporting requirements and management information arrangements
TMP 7 : Budgeting, accounting and audit arrangements
TMP 8 : Cash and cash flow management
TMP 9 : Money laundering
TMP 10 : Staff training and qualifications
TMP 11 : Use of external service providers
TMP 12 : Corporate governance



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   Medium Term Financial Strategy
   Financial Plan
   Treasury Policy March 2002
   Constitution
   Anti-Fraud Policy and Anti-Fraud and Corruption Strategy
   Corporate Debt Policy
   Corporate Charging Policy




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INTEREST RATE FORECASTS
The data below shows a variety of forecasts published by a number of institutions. The first three
are individual forecasts including those of Sector, UBS and Capital Economics (an independent
forecasting consultancy). The final one represents summarised figures drawn from the population
of all major City banks and academic institutions.

The forecast within this strategy statement has been drawn from these diverse sources and
officers’ own views.


1. INDIVIDUAL FORECASTS

Sector View interest rate forecast – 18 October 2005


                    Q/E4    Q/E1    Q/E2    Q/E3      Q/E4    Q/E1    Q/E2    Q/E3    Q/E4
                    2005    2006    2006    2006      2006    2007    2007    2007    2007

Base Rate           4.50%   4.50%   4.25%   4.25%     4.00%   4.25%   4.50%   4.75%   4.75%


5yr Gilt Yield      4.25%   4.00%   4.00%   4.25%     4.50%   4.75%   4.75%   4.75%   4.75%


10 yr PWLB                                                                            4.75%
                    4.50%   4.25%   4.50%   4.75%     4.75%   4.75%   4.75%   4.75%
rate

25 yr PWLB                                                                            5.00%
                    4.50%   4.50%   4.50%   4.50%     4.75%   4.75%   4.75%   5.00%
rate


Capital Economics interest rate forecast – 22 December 2005

                 Q/E4   Q/E1    Q/E2    Q/E3      Q/E4     Q/E1    Q/E2    Q/E3    Q/E4
                 2005   2006    2006    2006      2006     2007    2007    2007    2007

Base Rate    4.50%      4.25%   4.00%   4.00%    4.00%     4.00%   4.00%   4.00%   4.00%


5yr gilt
             4.20%      4.10%   4.00%   3.90%    3.80%     4.00%   4.10%   4.30%   4.40%
yield
10 yr
PWLB         4.35%      4.25%   4.15%   4.25%    4.35%     4.15%   4.75%   4.85%   4.75%
rate
25 yr
PWLB         4.35%      4.25%   4.25%   4.35%    4.45%     4.45%   4.55%   4.65%   4.65%
rate




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UBS Economic interest rate forecast (for quarter ends) – October 2005

               Q/E4   Q/E1      Q/E2    Q/E3     Q/E4     Q/E1
               2005   2006      2006    2006     2006     2007

Base Rate   4.50%     4.50%    4.50%   4.75%    4.75%     4.75%

10 yr
PWLB        4.67%     4.70%    4.80%   4.85%    4.90%       -
rate
25 yr
PWLB        4.78%     4.85%    4.87%   4.95%    5.00%       -
rate



2. SURVEY OF ECONOMIC FORECASTS

HM Treasury – December 2005 summary of forecasts of 26 City and 14 academic analysts for Q4
2005 and 2006. (2007 – 2009 are as at November 2005 but are based on 18 forecasts)

                                                  annual average repo
                  Repo        Quarter ended
                                                          rate
                               Q4       Q4       ave.     ave.    ave.
                              2005     2006      2007    2008     2009
Indep.
forecasters
                  4.50%       4.49%    4.29%    4.39%     4.54%   4.60%
BoE Base
Rate
Highest base
                  4.50%       4.55%    5.00%    5.40%     5.90%   6.20%
rate
Lowest base
                  4.50%       4.20%    3.50%    3.75%     3.75%   3.75%
rate




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                                                                                       APPENDIX B


Lending up to 364 days to banks and building societies

Based on Fitch ratings

Short-term rating F1+
Long-term rating : AAA, AA+, AA, AA-

Individual                                         Support
                  1                  2                 3                   4
       A
      A/B
       B
      B/C
       C
      C/D
       D


Short-term rating F1
Long-term rating : A+, A

Individual                                         Support
                          1                  2                  3                  4
       A
      A/B
       B
      B/C
       C
      C/D
       D


Banks


364 days           3 months

Note: An institution’s fitch rating in each of the four areas – short term, long term, individual and
support is matched with the matrix. If the box is shaded this dictates that they may be included on
our counterparty list and the type of shading recommends the maximum term for the investment.




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                                                                        APPENDIX C


Lending longer than 364 days (where permitted)

Short-term rating F1+
Long-term rating : AAA, AA+, AA

Individual                                        Support
                  1                  2                3         4
       A
      A/B
       B
      B/C
       C
      C/D
       D


Short-term rating F1+
Long-term rating : AA-

Individual                                        Support
                          1                  2              3       4
       A
      A/B
       B
      B/C
       C
      C/D
       D




Between 1 and 2 years, between 1 and 5 yrs




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Rating definitions

International Long – Term Credit           AAA    Highest credit quality
Rating
                                           AA     Very high credit quality
                                           A      High credit quality
Rating Outlook                             +      Rating is likely to move upwards over
                                                  a 1 or 2 year period
                                           -      Rating is likely to move downwards
                                                  over a 1 or 2 year period
                                           None   Rating is likely to remain stable over a
                                                  1 or 2 year period
International Short-term Credit Rating     F1     Highest credit quality. “+” may be
– Emphasis on liquidity and ability to            added to denote an exceptionally
meet financial commitments within 12              strong credit feature
months
Individual Rating – assesses how a         A      A Very strong bank probably with
bank would be viewed if it were entirely          outstanding profitability and balance
independent and could not rely on                 sheet integrity
external support taking into account its
exposure to, and appetite for
management of risk
                                           B      A strong bank, with no major concerns
                                           C      An adequate bank, which possess one
                                                  or more troublesome aspects
Support Ratings                            1      A bank with extremely high probability
                                                  of external support. The potential
                                                  supplier of support is very highly rated
                                                  in its own right.
                                           2      A bank for which there is a high
                                                  probability of external support. The
                                                  potential supplier of support is highly
                                                  rated in its own right.
                                           3      A bank for which there is a moderate
                                                  probability of support because of
                                                  uncertainties about the ability or
                                                  propensity of the potential provider of
                                                  support to do so.




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