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APPENDIX A
Treasury Management Strategy Statement
and Investment Strategy 2009-10 to 2011-12
Contents
1. Background
2. The Treasury Position
3. Outlook for Interest Rates
4. Borrowing Requirement and Strategy
5. Debt Rescheduling
6 Investment Policy and Strategy
7. Balanced Budget Requirement
8. Annual MRP Statement
9. Delegated Powers
10. Reporting
11. Organisation and Segregation of Duties
12. Other Items – CIPFA Review of the Prudential Code
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Treasury Management Strategy Statement
and Investment Strategy 2009-10 to 2011-12
1. Background
1.1 The Chartered Institute of Public Finance and Accountancy‟s Code of Practice for
Treasury Management in Public Services (the “CIPFA TM Code”) requires local
authorities to set the Treasury Management Strategy Statement (TMSS) for
borrowing each financial year.
1.2 CIPFA has defined Treasury Management as:
“the management of the organisation’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.”
The Council 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. Treasury management risks are identified in the Council‟s approved
Treasury Management Practices; the main risks to the Council‟s treasury activities are:
liquidity risk (Inadequate cash resources);
market or interest rate risk (fluctuations in interest rate levels and thereby in the
value of investment returns);
inflation risks (exposure to inflation);
credit and counterparty risk (security of investments);
refinancing risks (Impact of debt maturing in future years); and
legal & regulatory risk (i.e. non-compliance with statutory and regulatory
requirements, risk of fraud).
1.4 The strategy also takes into account the outlook for interest rates, the Council‟s
current treasury position and its approved Prudential Indicators. The Prudential
Indicators relevant to the treasury management strategy are set out below:
2008-09 2008-09 2009-10 2010-11 2011-12
Approved Revised Estimate Estimate Estimate
Authorised Limit for External
£75.59m £37.82m £37.82m £87.82m £91.42m
Debt
Operational Boundary for
£75.29m £37.52m £37.52m £87.52m £91.12m
External Debt
Upper Limit for Fixed
£75.29m £37.52m £37.52m £87.52m £91.12m
Interest Rate Exposure
Upper Limit for Variable
-£62.60m -£23.52m -£23.52m -£10.69m -£10.77m
Rate Exposure
Upper Limit for total
principal sums invested nil nil nil nil nil
over 364 days
Maturity structure of fixed rate borrowing : Lower Limit % Upper Limit %
under 12 months 0 20
12 months and within 24 months 0 20
24 months and within 5 years 0 50
5 years and within 10 years 0 75
10 years and above 25 100
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Treasury Management Strategy Statement
and Investment Strategy 2009-10 to 2011-12
2. The Treasury Position
2.1 The estimated treasury position for 31/3/2009 and for the following financial years
is set out below:
31/3/2009 31/3/2010 31/3/2011 31/3/2012
Estimate Estimate Estimate Estimate
£m % £m £m £m
External borrowing:
Fixed rate – PWLB 37.51 100 37.51 87.51 91.11
Fixed rate - Market 0 0 0 0 0
Variable rate - PWLB 0 0 0 0 0
Variable rate - Market 0 0 0 0 0
Other long-term liabilities 0 0 0 0
Total external debt 37.51 100 37.51 87.51 91.11
Investments:
Managed in-house
- Short-term deposits 23.20 99.7 10.19 10.14 10.17
- Long-term deposits 0.08 0.3 0.08 0.08 0.08
- Supranational bonds 0 0 0 0 0
- Corporate bonds 0 0 0 0 0
Total Investments 23.28 100 10.27 10.22 10.25
2.2 The estimate for interest payments in 2009-10 is £1,700k and for interest receipts is
£340k.
3. Outlook for Interest Rates
The economic interest rate outlook provided by the Council‟s treasury advisor,
Arlingclose Ltd, is attached at Appendix B. Arlingclose‟s forecast for the UK Bank
Rate (December 2008) is set out below:
The probability or zero or near zero interest rates, unthinkable just a few months ago
is now very high. The economic outlook provides both opportunities and challenges
for the Council‟s treasury strategy in the coming year.
4. Borrowing Requirement and Strategy
4.1 The Council‟s underlying need to borrow for capital purposes is measured by
reference to its Capital Financing Requirement (CFR). The CFR will determine the
Council‟s requirement to make a Minimum Revenue Provision for Debt Repayment
(MRP) from within its Revenue budget. Physical borrowing may be greater or less
than the CFR.
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Treasury Management Strategy Statement
and Investment Strategy 2009-10 to 2011-12
31/3/2009 31/3/2009 31/3/2010 31/3/2011 31/3/2012
Capital Financing Requirement Approved Revised Estimate Estimate Estimate
£k £k £k £k £k
Non-HRA 31,866 23,558 36,666 85,839 88,422
HRA 10,106 10,447 10,245 10,047 9,849
Total CFR 41,972 34,005 46,911 95,886 98,271
4.2 In accordance with the Prudential Code, the Council will ensure that net external
borrowing does not, except in the short term, exceed the CFR in the preceding year
plus the estimates of any additional CFR for the current and next two financial years.
4.3 Capital expenditure not financed from internal resources (i.e.Capital Receipts,
Capital Grants and Contributions, Revenue or Reserves) will produce an increase in
the CFR (the underlying need to borrow) and may in turn produce an increased
requirement to charge MRP in the Revenue Account.
4.4 The cumulative estimate of the long-term borrowing requirement calculated as
follows:
31/3/2009 31/3/2010 31/3/2011 31/3/2012
Estimate Estimate Estimate Estimate
£k £k £k £k
Cumulative Capital Financing Requirement 34,005 46,911 95,886 98,271
Less:
Existing Profile of Borrowing and 27,512 34,005 46,911 95,886
Other Long Term Liabilities
Borrowing Requirement 6,493 12,906 48,975 2,385
4.5 The Council prefers to maintain maximum control over its borrowing activities as well
as flexibility on its loans portfolio. Capital expenditure levels, market conditions and
interest rate levels will be monitored during the year in order to minimise borrowing
costs over the medium to longer term. A prudent and pragmatic approach to
borrowing will be maintained to minimise borrowing costs without compromising the
longer-term stability of the portfolio, consistent with the Council‟s Prudential
Indicators.
4.6 In conjunction with advice received, the Council will keep under review the options it
has in borrowing from the PWLB, the market and other sources identified in the
Treasury Management Policy Statement and Practices Review – May 2006 up to the
available capacity within its Authorised Limit.
5. Debt Rescheduling
5.1 The Council will continue to maintain a flexible policy for debt rescheduling.
Market volatility may provide opportunities for rescheduling debt from time to time.
The rationale for rescheduling would be one or more of the following:
savings in interest costs with minimal risk;
balancing the volatility profile (i.e. the ratio of fixed to variable rate debt) of the
debt portfolio; and
amending the profile of maturing debt to reduce any inherent refinancing risks.
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Treasury Management Strategy Statement
and Investment Strategy 2009-10 to 2011-12
5.2 The rescheduling of PWLB debt since the introduction of its repayment rates on 1st
November 2007 has not ceased, but has become undoubtedly harder and places
greater emphasis on the timing and type of new borrowing. PWLB rates exhibited
a fair degree of volatility during 2008-09. Should a similar pattern emerge in 2009-
10, this could provide the Council with some rescheduling opportunities.
6. Investment Policy and Strategy
Background
6.1 Guidance from DCLG on Local Government Investments in England requires,
similarly, that an Annual Investment Strategy (AIS) be set. The Guidance permits
the TMSS and the AIS to be combined into one document.
Investment Policy
6.2 The Council‟s general policy objective is to invest its surplus funds prudently. The
Council‟s investment priorities are:
security of the invested capital;
liquidity of the invested capital; and
an optimum yield which is commensurate with security and liquidity.
The speculative procedure of borrowing purely in order to invest is unlawful.
6.3 Investments are categorised as „Specified‟ or „Non Specified‟ investments based on
the criteria in the guidance. Potential instruments for the Council‟s use within its
investment strategy are contained in Appendix C.
6.4 The credit crisis has refocused attention on the treasury management priority of
security of capital monies invested. The Council will continue to maintain a
counterparty list based on its established criteria and will monitor and update the
credit standing of the institutions on a regular basis. This assessment will include
credit ratings and other alternative assessments of credit strength (for example,
statements of potential government support). The Council will also take into account
information on corporate developments of and market sentiment towards investment
counterparties.
6.5 The counterparty list is currently restricted to the following organisations;
Abbey National plc
Bank of Scotland plc
Barclays plc
HSBC
Lloyds TSB plc
Nationwide Building Society
Royal Bank of Scotland
and the Building Societies numbered two to five in the Building Societies Association
Guide.
Investment is restricted to no more than £5m with each counterparty.
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Treasury Management Strategy Statement
and Investment Strategy 2009-10 to 2011-12
Investment Strategy
6.6 Income from investments is a key support in the Council‟s budget. It is expected that
the Bank Rate currently at 1.5%, the lowest ever, may fall further in 2009-10, short-
term money market rates will continue to fall to very low levels, which will have a
significant impact on investment income. The Council‟s strategy is geared towards
this development whilst adhering to the principal objective of security of invested
monies.
6.8 The Director of Resources, under delegated powers, will undertake the most
appropriate form of investments in keeping with the investment objectives, income
and risk management requirements and Prudential Indicators.
Investments managed in-house:
6.9 The Council‟s shorter-term cash flow investments are made with reference to the
outlook for the UK Bank Rate and money market rates. For these monies, the
Council will mainly invest in:
the Debt Management Agency Deposit Facility The rates of interest from the
DMADF are below equivalent money market rates. However, the returns are an
acceptable trade-off for the guarantee that the Council‟s capital is secure;
AAA-rated Money Market Funds with a Constant Net Asset Value (Constant
NAV) investing predominantly in government securities;
AAA-rated Money Market Funds with a Constant Net Asset Value (Constant
NAV) investing in instruments issued primarily by financial institutions;
deposits with other local authorities;
business reserve accounts;
term deposits; and
certificates of deposit.
7. Balanced Budget Requirement
7.1 The Council complies with the provisions of S32 of the Local Government Finance
Act 1992 to set a balanced budget.
8. Annual Minimum Revenue Provision (MRP) Statement
8.1 The Local Authority Regulations place a duty on councils to make a prudent
provision for debt repayment, referred to as MRP. There four MRP options
available are:
Option 1: Regulatory Method
Option 2: CFR Method
Option 3: Asset Life Method
Option 4: Depreciation Method
8.2 From 2009/10: Options 1 and 2 may be used only for supported expenditure.
Methods of making prudent provision for self financed expenditure include Options 3
and 4, which may also be used for supported expenditure if the Council chooses.
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Treasury Management Strategy Statement
and Investment Strategy 2009-10 to 2011-12
8.3 The Council will apply Option 1 in respect of supported capital expenditure and
Option 3 in respect of unsupported capital expenditure. The MRP Statement will be
submitted to Council before the start of the 2009-10 financial year. If it is ever
proposed to vary the terms of the original MRP Statement during the year, a revised
statement should be put to Council at that time.
9. Delegated Powers
Cabinet
9.1 The Cabinet has full powers in relation to all borrowing and investment matters,
except for the setting of borrowing limits that requires an annual resolution by full
Council.
Director of Resources with 151Responsibility
9.2 The Director of Resources has the following delegated authority:
(a) Borrowing
- borrow temporary loans up to the maximum permitted;
- issue negotiable bonds subject to Council authority having been granted and
rates being acceptable;
- borrow up to the maximum PWLB quota;
- repay PWLB loans prematurely where it is in the Council‟s interest to do so;
- borrow money market deposits where appropriate;
- ensure compliance with the Code of Borrowing Practice;
- ensure all documentation is properly dealt with; and
- manage the Council‟s borrowing portfolio in the light of the Council‟s Strategy.
(b) Leasing
To accept the lowest competitive tender for leasing requirements and sign all
documentation.
(c ) Investment
To manage the investment of surplus funds in the light of the Council‟s approved
investment strategy.
10. Reporting on the Treasury Outturn
10.1 The Director of Resources will report on treasury management activity and
performance as follows:
(a) quarterly against the strategy approved for the year; and
(b) annually to Full Council, on its treasury activity no later than 30th September after
the financial year-end.
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Treasury Management Strategy Statement
and Investment Strategy 2009-10 to 2011-12
11. Organisation and Segregation of Duties
11.1 The Council considers it essential, for the purposes of the effective control and
monitoring of its treasury management activities, for the reduction of fraud and error
and for the pursuit of optimum performance that these activities are structured and
managed in a fully integrated manner, and that there is at all times a clarity of
treasury management responsibilities.
11.2 The principle on which this is based is a clear distinction between those charged with
setting treasury management policies and those charged with implementing and
controlling these policies, particularly with regard to the execution and transmission
of funds, the recording and administering of treasury management decisions and the
audit and review of the treasury management function.
Staff Training and Qualifications
11.3 The Council recognises the importance that all staff involved with the treasury
management function are fully equipped to undertake the duties and responsibilities
allocated to them. It will therefore seek to appoint individuals who are capable and
experienced and will provide training for staff to enable them to acquire and maintain
an appropriate level of expertise, knowledge and skills.
12. Other items
CIPFA review of the Prudential Code.
12.1 In early 2008 CIPFA undertook a consultation exercise to review the
implementation and ongoing use of the Prudential Code. CIPFA has yet to publish
its conclusions arising from the consultation process. Any relevant amendments to
the Code will be reflected in the Treasury Management and Investment Strategy
documentation.
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Treasury Management Strategy Statement
and Investment Strategy 2009-10 to 2011-12
APPENDIX B
Arlingclose‟s Forecast for Interest Rates (December 2008)
The inflationary threats of 2008 turn into the deflationary reality of 2009. Central
Banks are under pressure to reduce rates decisively, even to zero or near-zero, to
avoid the perils of a destructive and prolonged recession.
The downturn in the UK gathers pace and the economy contracts for much of
2009. Prospects for Bank of England “Quantitative easing” increasingly likely.
Pension, hedge and insurance fund values struggle and lead to enhanced demand
for longer dated gilts.
Underlying assumptions
Despite central bank intervention to raise bank capital and improve liquidity,
conditions in money and credit markets remain very difficult as banks‟ lending
behaviour changes fundamentally.
Consumer spending and business investment stall, hampered by the credit drought.
Falling house prices compel households to review savings levels and repair balance
sheets (where possible).
Commodity prices continue to fall. CPI is projected to fall below the MPC‟s 1% lower
threshold in 2009, providing some relief for the overstretched consumer, but eroding
debt burdens more slowly.
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Treasury Management Strategy Statement
and Investment Strategy 2009-10 to 2011-12
Fear of rising unemployment dampens confidence and any prospect of sizeable
wage demands.
UK public finances are in horrid shape and will worsen as the recession bites,
resulting in a slew of gilt issuance in 2009. This will ultimately push gilt yields higher,
although not aggressively so.
Global growth and activity continue to weaken. The Federal Reserve has already
cut rates to a range between 0% and 0.25% and has engaged in „quantitative
easing‟. The ECB could bring rates down to 2% as European economies struggle
with falling domestic and international demand.
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Treasury Management Strategy Statement
and Investment Strategy 2009-10 to 2011-12
APPENDIX C
Specified and Non Specified Investments
Specified Investments identified for use by the Council
Specified Investments will be those that meet the criteria in the Guidance, i.e. the
investment:
is sterling denominated;
has a maximum maturity of 1 year;
meets the “high” credit criteria as determined by the Council or is made with the UK
government or is made with a local authority in England, Wales and Scotland; and
the making of which is not defined as capital expenditure under section 25(1)(d) in SI
2003 No 3146 (i.e. the investment is not loan capital or share capital in a body
corporate).
“Specified” Investments identified for the Council‟s use are:
Deposits in the DMO‟s Debt Management Account Deposit Facility;
Deposits with UK local authorities;
Deposits with banks and building societies;
*Gilts : (bonds issued by the UK government);
*Bonds issued by multilateral development banks;
AAA-rated Money Market Funds with a Constant Net Asset Value (Constant NAV)
investing predominantly in government securities;
AAA-rated Money Market Funds with a Constant Net Asset Value (Constant NAV)
investing in instruments issued primarily by financial institutions; and
Other Money Market Funds and Collective Investment Schemes– i.e. credit rated
funds which meet the definition of a collective investment scheme as defined in SI
2004 No 534 and SI 2007 No 573.
* Investments in these instruments will be on advice from the Council’s treasury advisor.
For credit rated counterparties, the minimum criteria will be the short-term / long-term
ratings assigned by one or more of the following agencies:
Moody‟s Investors Services, Standard & Poor‟s, Fitch Ratings
Long-term minimum : A/A2 (Fitch/Moody‟s)
Short-term : F1/P1 (Fitch/Moody‟s)
The Council will also take into account information on corporate developments of and
market sentiment towards investment counterparties.
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Treasury Management Strategy Statement
and Investment Strategy 2009-10 to 2011-12
Non-Specified Investments determined for use by the Council
Having considered the rationale and risk associated with Non-Specified Investments, the
following have been determined for the Council‟s use:
In- Maximum Max % of Capital
house maturity portfolio expenditure?
use
Deposits with banks and
building societies 3 years 60% No
Certificates of deposit with in
aggregate
banks and building societies
Gilts and bonds
Gilts
Bonds issued by multilateral
development banks
Bonds issued by financial (on
75%
advice from
institutions guaranteed by the treasury
10 years in No
UK government aggregate
advisor)
Sterling denominated bonds
by non-UK sovereign
governments
Money Market Funds and
Collective Investment These
Schemes funds do
(pooled funds which meet the (on not have a
advice from defined
definition of a collective treasury maturity 50%
No
investment scheme as defined advisor) date
in SI 2004 No 534 and SI 2007
No 573) but which are not
credit rated
Government guaranteed
bonds and debt instruments
5 years 50% Yes
(e.g. floating rate notes) issued
by corporate bodies
In determining the period to maturity of an investment, the investment should be regarded
as commencing on the date of the commitment of the investment rather than the date on
which funds are paid over to the counterparty.
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