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									                                                                 AGENDA ITEM

        STAFFORDSHIRE MOORLANDS DISTRICT COUNCIL

                             Report to Cabinet

                           15th September 2009

          TITLE:       Treasury Management – Governance and
                       Scrutiny Arrangements

          PORTFOLIO:   Finance and Resources

          OFFICER:     Executive Director and Chief Finance
                       Officer

          WARD:        Non-Specific


1.    Recommendations

1.1   That members adopt the emerging principles from the Revised CIPFA
      Treasury Management Code; and

1.2   That members give approval to the Audit and Accounts Committee being
      given delegated responsibility for scrutinising the treasury management
      function, which would include approving the annual Treasury Management
      Strategy and receiving and scrutinising all operational treasury management
      reports, including an Annual Report (Note - decisions made would still be
      reported to full Council)

Reason for Recommendations – In order to comply with contemporary good
practice in treasury management as specified in the Revised CIPFA Treasury
Management Code in the light of the Icelandic banking collapse and its impact on
local authorities


2.    Executive Summary

2.1   Local authorities manage surplus cash as part of their broader treasury
      management responsibilities. They operate within a national investment
      framework in which CIPFA describes the practices that define good treasury
      management. Local authorities are currently expected to:

       Define local investment limits and guidelines in an annual investment
        strategy prior to the start of each financial year and ensure that it is
        approved by full Council
       Prepare an annual treasury management strategy and plan prior to the
        start of each financial year; and
       Prepare an annual report after the year-end.
                                      - 1 -
2.2    Staffordshire Moorlands District Council has – in the normal course of
       business – surplus cash, from which it seeks a return through investment; it is
       a valuable source of income, which helps reduce the Council Tax burden.

2.3    In terms of governance and scrutiny, the Council has always complied with
       the national framework and (CIPFA) recommended practice. Current
       arrangements include:

        Treasury Management Strategy (TMS) – the annual TMS, which sets out
         the planned treasury management approach for the forthcoming year is
         presented to, and approved by, full Council in February each year (i.e. in
         advance of the financial year); and
        Annual Treasury Management Report (ATMR) – the ATMR, which sets out
         the treasury management activity and performance undertaken and
         achieved during the year is presented to, and approved by, Cabinet in May
         each year (i.e. at the end of the financial year).

2.4    Treasury management activity and performance is also incorporate within the
       Quarterly Financial Review reports presented to Cabinet and scrutinised by
       the Services Overview and Scrutiny Panel. In addition, ad hoc reports are
       reported to Cabinet for approval as necessary.

2.5    The world has been experiencing an economic downturn of exceptional
       proportions in which the origins can be traced back to the US and the sale of
       risky mortgages. However, by Summer 2007, the problem spread around the
       world, eventually leading to the collapse of the Icelandic banking system.

2.6    At the time, 127 English local authorities had funds in one or more of the
       Icelandic banks, with deposits totalling more than £954 million.

2.7    Many other local authorities – including this Council – did not have any funds
       invested in Icelandic banks at the time of their collapse. However, the
       repercussions of the collapse of Icelandic banks raised questions about the
       stewardship of funds held by local authorities.

2.8    In response to the Icelandic banking collapse, the Audit Commission carried
       out an urgent investigation, which examined local authorities’ arrangements
       for placing and managing cash on deposit. This led to the publication of a
       national report in March 2009.

2.9    One of the key messages highlighted in the Audit Commission’s report was
       that local treasury management arrangements vary and (nationally) the
       governance and scrutiny of treasury management arrangements specifically is
       generally poor.

2.10   A key recommendation within the Audit Commission’s report was that CIPFA
       should revise and tighten its Treasury Management Code to take account of
       the findings in their report.




                                        - 2 -
2.11   Consequently, CIPFA are currently consulting upon a revised Treasury
       Management Code and guidance notes. The key changes to that Code are as
       follows:

        Enhancement of the role of scrutiny of treasury management strategies
         and procedures. It will be the Council’s responsibility to identify an
         appropriate body or individual to have responsibility for the scrutiny
         function, which may be a committee such as a finance committee or audit
         committee.
        Currently, full Council must approve the Treasury Management Strategy.
         The revised Code will allow approval from a relevant committee. Where
         approval is not by full Council, the decisions made must be reported to full
         Council.
        The revised Code will require Treasury Management training to be
         available for relevant Council members with responsibility for treasury
         management; and
        The existing Code requires the Treasury Management Strategy to be
         approved prior to the start of the financial year and a report presented after
         the end of the financial year. The revised Code will also require an interim
         or mid-year operational report.

2.12   Many of the concerns raised in the Audit Commission’s report did not apply to
       this Council. Most notably of course, our approach protected the Council from
       unnecessary exposure to the Icelandic banking collapse. Nevertheless a
       number of adjustments have been made to our Treasury Management
       Strategy in response to the Icelandic incident and emerging good practice.

2.13   It should also be emphasised that the Council’s current treasury management
       arrangements meet (indeed exceed) the requirements of CIPFA’s existing
       Treasury Management Code. However, it is clear that existing arrangements
       will not fully comply with the proposed amendments in the Revised Treasury
       Management Code.

2.14   Although much of the emerging detail has already been, or is being,
       addressed, existing governance and scrutiny arrangements are still deficient
       in some areas highlighted by the Revised Code. In order to address this gap,
       it is recommended that:

        The Council’s Audit and Accounts Committee assumes responsibility for
          scrutinising the treasury management function. That role should extend to
          approving the annual Treasury Management Strategy and receiving and
          scrutinising all operational treasury management reports, including an
          Annual Report.


3.     Evaluation of Options
3.1    Continue with existing treasury management governance and scrutiny
       arrangements. This is NOT RECOMMENDED, as it would not comply with the
       Revised CIPFA Treasury Management Code and could potentially increase
       the Council’s exposure to financial risk; or


                                        - 3 -
3.2    Delegate primary responsibility for scrutinising the Council’s treasury
       management function to the Audit and Accounts Committee. This is
       RECOMMENDED, as it would comply with the Revised CIPFA Treasury
       Management Code (recommended best practice) and help minimise the
       Council’s exposure to financial risk.


4.     Implications
4.1    Community Safety:               None

4.2    Employees:                      None

4.3    Equalities:                     This report has been prepared in accordance with
                                       the Council's Equal Opportunities policy.

4.4    Financial:                      There are no direct financial implications
                                       (although the cost of system failure – if it emerged
                                       – could be substantial).

4.5    Legal:                          None

4.6    Sustainability:                 None


                                ANDREW P STOKES
                     Executive Director and Chief Finance Officer

Background Papers                 Location                    Contacts
“Risk and Return: English local   Finance and Revenues        Chris Hartgrove
authorities and the Icelandic                                 Head of Finance & Revenues
banks”                                                        Tel. 01538 395400 Ext. 4195
(Audit Commission – March
2009)
“Revised Treasury Management
Code Consultation”
(CIPFA – July 2009)


Decision:


Reason:


Interests Declared:




                                             - 4 -
5.    Background

5.1   Local authorities manage surplus cash as part of their broader treasury
      management responsibilities. However, they have restricted freedoms with
      regard to the investment of surplus funds. The rules are prescribed by statute
      and are laid out under Section 15(1)(a) of the Local Government Act 2003.
      Local authorities are also required to have regard to supplementary guidance
      provided by the Department for Communities and Local Government (DCLG)
      and by the Chartered Institute of Public Finance and Accountancy (CIPFA).

5.2   In summary, local authorities operate within a national investment framework
      and CIPFA describes the practices that define good treasury management.
      Local authorities are expected to:

       Define local investment limits and guidelines in an annual investment
         strategy prior to the start of each financial year and ensure that it is
         approved by Full Council

       Prepare an annual treasury management strategy and plan prior to the
         start of each financial year; and

       Prepare an annual report after the year-end.

6.    Introduction

6.1   In common with all local authorities, Staffordshire Moorlands District Council
      has – in the normal course of business – surplus cash, from which it seeks a
      return through investment; it is a valuable source of income, which helps
      reduce the burden on Council Tax payers. In recent years, the amount of cash
      available for investment has been boosted following the sale of the Council
      housing stock in 2001, which generated a large capital receipt.

6.2   The Council has an in-house treasury management function, which is
      operated with support provided by external advisors, Sector. In terms of
      governance and scrutiny, the Council has always complied with the national
      framework and (CIPFA) recommended practice. Current arrangements
      include:

       Treasury Management Strategy (TMS) – the annual TMS, which sets out
         the planned treasury management approach for the forthcoming year is
         presented to, and approved by, full Council in February each year (i.e. in
         advance of the financial year); and

       Annual Treasury Management Report (ATMR) – the ATMR, which sets out
         the treasury management activity and performance undertaken and
         achieved during the year is presented to, and approved by, Cabinet in May
         each year (i.e. at the end of the financial year).




                                        - 5 -
6.3   In addition, in accordance with the Council’s Financial Management
      Framework (FMF), treasury management activity and performance is
      incorporate within the Quarterly Financial Review reports presented to
      Cabinet and scrutinised by the Services Overview and Scrutiny Panel. Ad hoc
      reports are also reported to Cabinet for approval as necessary.

6.4   The Council also complies with existing recommended practice in all other
      aspects of treasury management.


7.    The emergence of the Icelandic banking collapse

7.1   The world has been experiencing an economic downturn of exceptional
      proportions. The origins of the credit and manufacturing crunch can be traced
      back to the US and the sale of risky mortgages, as well as the creation of ever
      more complex financial products, designed by the international banks to
      package and sell on debt and risk.

7.2   In February 2007, several large American commercial banks, including
      Citibank, Merrill Lynch and Morgan Stanley, reported losses associated with
      mortgage defaults. By Summer 2007, what had previously been seen as
      America’s problem became international, as banks around the world began to
      realise that they too, had bought debt and risk associated with the American
      sub-prime mortgage market. The banks began to restrict new lending as they
      wrote off billions of dollars of losses.

7.3   The banking crisis deepened during late 2007 and 2008 with a number of high
      profile casualties (e.g. Northern Rock and Lehman Brothers). Eventually,
      Iceland became the first country to see the collapse of its entire banking
      sector. In early October 2008, Iceland’s three largest commercial banks,
      Glitnir Bank hf, Kaupthing Bank hf and Landsbanki Islands hf, together with
      their UK registered subsidiaries, Heritable Bank plc and Kaupthing, Singer
      and Friedlander Ltd, went into administration.

7.4   At the time, 127 English local authorities were among the many UK public
      sector institutions that had funds in one or more of the Icelandic banks.
      Between them, those 127 local authorities had deposits totalling more than
      £954 million. Deposits made by those local authorities were not covered by
      any central government guarantee scheme.

7.5   Many other local authorities – including this Council – did not have any funds
      invested in Icelandic banks at the time of their collapse. However,
      understandably, the repercussions of the collapse of Icelandic banks raised
      questions about the stewardship of funds held by local authorities. Indeed,
      with the benefit of hindsight, we now know that the risk of a banking failure
      was perhaps greater than most people had anticipated.




                                       - 6 -
8.    The aftermath of the Icelandic banking collapse

8.1   In response to the Icelandic banking collapse and the serious impact on a
      large number of local authorities, the Audit Commission carried out an urgent
      investigation. They examined local authorities’ arrangements for placing and
      managing cash on deposit, which led to the publication of its report “Risk and
      Return: English local authorities and the Icelandic banks” in March 2009.

8.2   One of the key messages highlighted in the Audit Commission’s report was
      that local treasury management arrangements vary. The best organisations
      balance risk and reward and arrangements include: regular review and
      scrutiny of policy and procedure; appropriately trained staff and engaged
      elected members; and the use of a wide range of information including, but
      not limited to, credit ratings.

8.3   With regard to governance and scrutiny, the Audit Commission found that
      while officers from the best local authorities tend to be proactive in seeking
      feedback on treasury management policy and compliance, the governance
      and scrutiny of treasury management arrangements is generally poor.

8.4   To quote the report…”the national framework requires that treasury
      management arrangements are considered annually at a meeting of the full
      council or equivalent. However, such meetings generally afford little time for
      discussion and debate and the contribution of elected members is weak. Full
      Council meetings are, therefore, unlikely to be the best place for a detailed
      review of policy and performance. Other bodies, particularly audit committees,
      should, therefore, play a more prominent role providing an oversight of
      treasury management policy and practice. In addition, a backward-looking,
      annual review of policy is not sufficient to ensure that treasury management
      arrangements are functioning effectively”.

8.5   A key recommendation within the Audit Commission’s report was that CIPFA
      should revise and tighten its Treasury Management Code to take account of
      the findings in their report.

8.6   CIPFA accepted, and have acted upon, that recommendation. They are
      currently consulting upon a revised Treasury Management Code and
      guidance notes. The key changes to that Code are as follows:

       Enhancement of the role of scrutiny of treasury management strategies
         and procedures. It will be a the Council’s responsibility to identify an
         appropriate body or individual to have responsibility for the scrutiny
         function, which may be a committee such as a finance committee or audit
         committee

       Currently the Treasury Management Strategy must be approved by full
         Council, which is typically done as part of the approval of the budget. The
         revised Code will allow approval from a relevant committee. Where
         approval is not by full Council, the decisions made must be reported to full
         Council. This ensures that treasury management is considered away from
         the focus of the budget


                                       - 7 -
       The requirement for ensuring that staff are appropriately qualified and
         trained is already contained within the existing Code. The revised Code
         will require training to be available for relevant Council members with
         responsibility for treasury management. This is to ensure that all those
         responsible for treasury management are aware of their responsibilities
         and have access to suitable training; and

       The existing Code requires the Treasury Management Strategy to be
         approved prior to the start of the financial year and a report presented after
         the end of the financial year detailing operational activity throughout the
         year. The revised Code will also require an interim or mid-year operational
         report.


9.    The way forward

9.1   Many of the concerns raised in the Audit Commission’s report did not apply to
      this Council. Most notably of course, our approach protected the Council from
      unnecessary exposure to the Icelandic banking collapse. Nevertheless a
      number of adjustments have been made to our Treasury Management
      Strategy in response to the Icelandic incident and emerging good practice.
      For example, the Strategy was most recently amended in May 2009, to reflect
      emerging guidance on “creditworthiness”. This further-widened the key
      investment criteria used beyond simple credit ratings, which was a concern
      raised by the Audit Commission.

9.2   It should also be emphasised that the Council’s current treasury management
      arrangements meet (indeed exceed) the requirements of CIPFA’s existing
      Treasury Management Code. However, it is clear that existing arrangements
      will not fully comply with the proposed amendments in the Revised Treasury
      Management Code.

9.3   Although much of the emerging detail has already been, or is being,
      addressed (e.g. Treasury Management training for members was undertaken
      on 8th September 2009), existing governance and scrutiny arrangements are
      still deficient in some areas highlighted by the Revised Code. In order to
      address this gap, it is recommended that:

       The Council’s Audit and Accounts Committee assumes responsibility for
         scrutinising the treasury management function. That role should extend to
         approving the annual Treasury Management Strategy and receiving and
         scrutinising all operational treasury management reports, including an
         Annual Report (Note - decisions made would still be reported to full
         Council).




                                       - 8 -

								
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