Annual Treasury Management and
Investment Strategy 2008/09
Treasury Management Strategy 2008/09 – 2010/11
- The treasury management service is an
important part of the overall financial management of the Council’s
affairs. The prudential indicators in Appendix A consider the
afordability and impact of capital expenditure decisions, and set
out the Council’s overall capital framework. The treasury
service considers the effective funding of these decisions.
Together they form part of the process which ensures the Council
meets balanced budget requirement under the Local Government
Finance Act 1992. There are specific treasury prudential
indicators included in this strategy which require approval.
- The Council’s treasury activities are
strictly regulated by statutory requirements and a professional
code of practice (the CIPFA Code of Practice on Treasury
Management). This Council adopted the Code of Practice on
Treasury Management, and as a result adopted a Treasury Management
Policy Statement on 21 August 2003. This adoption meets the
requirements of the first of the treasury prudential
indicators.
- The policy require an annual strategy to be
reported to Cabinet outlining the expected treasury activity for
the forthcoming 3 years. A key requirement of this report is
to explain both the risks, and the management of the risks,
associated with the treasury service. A further treasury
report is produced after the year-end to report on actual activity
for the year.
- This strategy covers:
- The Council’s debt and investment
projections;
- The expected movement in interest
rates;
- The Council’s borrowing and investment
strategies;
- Treasury performance indicators;
- Specific limits on treasury
activities;
Debt and Investment
Projections 2008/09 – 2010/11
5. The
borrowing requirement comprises the expected movement in the CFR
and any maturing debt which will need to be re-financed. The
table below shows this effect on the treasury position over the
next three years. It also highlights the expected change in
investment balances.
|
External Debt
|
2007/08
Revised
£m
|
2008/09
Estimated
£m
|
2009/10
Estimated
£m
|
2010/11
Estimated
£m
|
|
Debt at 1 April
|
22.6
|
30.6
|
30.6
|
34.6
|
|
Expected change in debt
|
8.0
|
0
|
4.0
|
0
|
|
Debt at 31 March
|
30.6
|
30.6
|
34.6
|
34.6
|
|
Operational Boundary
|
31.6
|
35.6
|
35.6
|
35.6
|
|
Investments
|
|
Total Investments at 31 March
|
15.0
|
10.0
|
9.0
|
8.0
|
|
Investment change
|
4.1
|
(5.0)
|
(1.0)
|
(1.0)
|
6. The related
impact of the above movements on the revenue budget are:
|
Revenue Budgets
|
2007/08
Revised
£m
|
2008/09
Estimated
£m
|
2009/10
Estimated
£m
|
2010/11
Estimated
£m
|
|
Interest on Borrowing
|
2.028
|
2.331
|
2.210
|
1.811
|
|
Related HRA Charge
|
1.408
|
1.454
|
1.477
|
1.290
|
|
Net General Fund Borrowing Cost
|
0.620
|
0.877
|
0.738
|
0.521
|
|
Investment income
|
0.850
|
0.720
|
0.700
|
0.713
|
Expected Movement in Interest
Rates
Medium-Term Rate Forecasts
(averages)
|
|
Bank
Rate
|
1-year
LIBOR
|
5-year
Gilt
|
20-yr
Gilt
|
50-yr
Gilt
|
|
2006/07
|
4.8
|
5.3
|
4.9
|
4.4
|
4.0
|
|
2007/08
|
5.6
|
6.0
|
5.3
|
4.9
|
4.5
|
|
2008/09
|
4.8
|
4.7
|
4.7
|
4.8
|
4.6
|
|
2009/10
|
4.8
|
4.8
|
4.8
|
4.7
|
4.6
|
|
2010/11
|
5.0
|
5.3
|
4.9
|
4.8
|
4.8
|
|
2011/12
|
5.2
|
5.5
|
5.3
|
5.2
|
5.1
|
7.
Short Term Interest Rates - While the December cut
in Bank Rate ultimately came as no great surprise to the financial
markets it did reflect the Monetary Policy Committee’s growing
unease about the state of the domestic economy.
8. The
November Inflation Report highlighted the threat of a comparatively
steep decline in economic activity in 2008. However, until then
there had been few decisive signals that this process had commenced
in earnest. More recently, the economic data has been transmitting
an increasing amount of evidence that this may indeed be the
case.
9. The cooling
in the housing market has been noted for some time although it is
only in the past few months that the two key indicators on this
front (the Nationwide & Halifax Indices) have moved down in
unison. The deciding factors behind the MPC’s decision were
probably the November Chartered Institute of Purchasing and Supply
(CIPS) surveys of the manufacturing and service sectors.
10. Both these indicators pointed
towards a marked deceleration in activity on a broad front and may
well have been interpreted by the more optimistic economists as a
sure sign that the effects of the credit squeeze is beginning to
spread beyond the confines of the financial markets.
11. The squeeze on credit represents a
sharp and involuntary tightening of domestic monetary policy. The
fact that it is likely to take some time to evaporate suggests that
consumers’ expenditure (which has still to see the full effects of
the adjustment of discounted, fixed-rate mortgages) will eventually
respond through a marked contraction.
This, along with an easing of capacity
constraints as the economy slows down, is expected to reduce
inflation pressures and ensure Consumer Price Index (CPI )growth
reverts to the 2% central target rate over the medium
term.
Nevertheless, the Bank of England does note
that the upside risks to inflation remain. Many of the current
pressures are externally generated (oil, food, commodity
prices etc) and will not respond to UK interest rate policy.
Hopes rest upon the anticipated deceleration
in international activity reversing at least some of these
trends. In the mean time, the MPC is hoping that domestic
inflation expectations do not deteriorate and that
weakening household consumption prevents companies passing
cost increases on to the retail level. The outcome of this
“central case” scenario will not be known for some time.
12. Longer Term Interest
Rates – Bond markets (which underpin the Council’s
borrowing rates) will remain aware of the risks policy makers are
taking with inflation for the sake of engineering a gradual and
moderate dip in economic activity. Concerns about the health of the
financial sector will persist for some time and these will maintain
the downward bias to bond yields in the near term. However,
investors may be unsettled by the risks central banks are
taking with long-term inflation control in their attempts to
shore up faltering activity. Worries about inflation prospects
in the medium to long term are expected drive yields higher through
2008/09 and beyond.
Borrowing Strategy 2008/09 –
2010/11
13. The uncertainty over future
interest rates increases the risks associated with treasury
activity. As a result the Council will take a cautious
approach to its treasury strategy.
14. Long-term fixed interest rates are
expected to be higher over the medium term. The Section 151
Officer, under delegated powers, will take the most appropriate
form of borrowing depending on the prevailing interest rates at the
time, taking into account the risks shown in the forecast
above. Interest rates are now considered to be favourable and
a sum of £4m is planned to be borrowed during 2008/09 for cash flow
purposes.
15. The Section 151 Officer and
treasury consultants will monitor prevailing interest to consider
debt restructuring, but the penalties that would be incurred for
early repayment of debt currently are currently too severe to make
this a viable option.
16. A key change in the options for
borrowing and rescheduling occurred on 1 November 2007 when the
PWLB changed its interest rate structure to a more sensitive
pricing method and also increased the relative cost of repaying
debt. This will prompt a more cautionary approach to both
borrowing and rescheduling.
Investment Counterparty and
Liquidity Framework
17. The primary principle governing
the Council’s investment criteria is the security of its
investments, although the yield or return on the investment is also
a key consideration. After this main principle the Council
will ensure:
- It has sufficient liquidity in its
investments. For this purpose it will set out procedures for
determining the maximum periods for which funds may prudently be
committed. These procedures also apply to the Council’s
prudential indicators covering the maximum principal sums
invested.
- It maintains a policy covering both the
categories of investment types it will invest in, criteria for
choosing investment counterparties with adequate security, and
monitoring their security. This is set out in the Specified
and Non-Specified investment sections below.
18. The Section 151 Officer will
maintain a counterparty list in compliance with the following
criteria and will revise the criteria and submit them to Council
for approval as necessary. This criteria is separate to that
which chooses Specified and Non-Specified investments as it selects
which counterparties the Council will choose rather than defining
what its investments are.
Banks – the Council will
use banks which have at least the following Fitch ratings (or
equivalent):
|
Investment Type
|
Fitch Rating (or
equivalent)
|
|
Short Term
|
F1
|
|
Long Term
|
A
|
|
Individual / Financial Strength
|
C (Fitch / Moody’s only)
|
|
Support
|
3 (Fitch only)
|
|
Bank Subsidiary and Treasury Operations
|
the Council will use these where the parent
bank has the necessary ratings outlined above.
|
|
Building Societies
|
the Council will use all Societies that
meet the ratings for banks outlined above.
|
19. The time limits for institutions
on the Council’s Counterparty List are as follows (these will cover
both Specified and Non-Specified Investments):
|
|
Fitch
|
Moody
|
Standard &
Poor
|
Money
Limit
|
Time Limit
|
|
Upper Limit
|
F1+
|
P1
|
A1+
|
£4m
|
364 days
|
|
Middle Limit
|
F1
|
P1
|
A1
|
£3m
|
6 mths
|
20. The proposed criteria for Specified and
Non-Specified investments are shown on the final 2 pages of
this annex, for approval.
21. In the normal course of the Council’s
cash flow operations it is expected that both Specified and
Non-Specified investments will be utilised for the control
of liquidity as both categories allow for short term
investments.
22. The use of longer term instruments
(greater than one year from inception to repayment) will fall
in the Non-specified investment category.
These instruments will only be used where the Council’s
liquidity requirements are safeguarded. This will also be
limited by the investment prudential indicator below.
Investment Strategy 2008/09 –
2010/11
23. The Council’s investment decisions are
based on comparisons between the rises priced into market
rates against the Council’s and its advisers
own forecasts. It is likely that investment
decisions will be made for longer periods with
fixed investments rates to lock in good value and security of
return if opportunities arise, subject to over riding
credit counterparty security. The Section 151 Officer, under
delegated powers, will undertake the most appropriate form
of investments depending on the prevailing interest rates
at the time, taking into account the risks shown in the
forecast above.
Treasury Management Prudential
Indicators and Limits on Activity
24. There are four further treasury
prudential indicators. The purpose of these prudential
indicators is to contain the activity of the treasury function
within certain limits, thereby managing risk and reducing the
impact of an adverse movement
in interest rates. However if these are set to be too
restrictive they will impair the opportunities to reduce
costs. The indicators are:
- Upper limits on variable interest
rate exposure – This indicator identifies a maximum limit
for variable interest rates based upon the debt position net of
investments
- Upper limits on fixed interest rate
exposure – Similar to the previous indicator this covers a
maximum limit on fixed interest rates.
- Maturity structures of
borrowing – These gross limits are set to reduce the
Council’s exposure to large fixed rate sums falling due for
refinancing, and are required for upper and lower
limits.
- Total principal funds invested for
greater than 364 days – These limits are set to reduce the
need for early sale of an investment, and are based on the
availability of funds after each year-end.
25. The Council is asked to approve the
following prudential indicators:
|
|
2008/09
£m
|
2009/10
£m
|
2010/11
£m
|
|
Interest rate Exposures
|
|
|
Upper
|
Upper
|
Upper
|
|
Limits on fixed interest rates based on net
debt
|
100%
|
100%
|
100%
|
|
Limits on variable interest rates based on
net debt
|
20%
|
20%
|
20%
|
|
Maturity Structure of fixed interest
rate borrowing 2008/09
|
|
|
Lower
|
Upper
|
|
Under 12 months
|
0%
|
20%
|
|
12 months to 2 years
|
0%
|
25%
|
|
2 years to 5 years
|
0%
|
80%
|
|
5 years to 10 years
|
0%
|
90%
|
|
10 years and above
|
0%
|
95%
|
|
Maximum principal sums invested >
364 days
|
|
Principal sums invested > 364 days
|
£2m
|
£2m
|
£2m
|
| |
|
|
|
|
|
Performance Indicators
26. The Code of Practice on Treasury
Management requires the Council to set performance indicators
to assess the adequacy of the treasury function over the
year. These are distinct historic indicators, as opposed to
the prudential indicators, which are predominantly forward
looking. Examples of performance indicators often used
for the treasury function are:
- Debt – Borrowing - Average rate of
borrowing for the year compared to average available
- Debt – Average rate movement year on
year
- Investments – Internal returns above the 7
day LIBID rate
- Investments – External fund managers -
returns 110% above 7 day compounded LIBID.
The results of these indicators will be
reported in the Treasury Annual Report for 2007/08.
Treasury Management Practice (TMP)
1 (5) – Credit and Counterparty Risk Management
(The comprehensive set of TMPs
were approved at Cabinet Feb 2007. The list is not reproduced in
this report as annual approval is not required).
The Office of the Deputy Prime Minister (now
CLG) issued Investment Guidance on 12th March 2004, and
this forms the structure of the Council’s policy below.
These guidelines do not apply to either trust funds or pension
funds which are under a different regulatory regime.
The key intention of the Guidance is to
maintain the current requirement for Councils to invest prudently,
and that priority is given to security and liquidity before
yield. In order to facilitate this objective the guidance
requires this Council to have regard to the CIPFA publication
Treasury Management in the Public Services: Code of Practice and
Cross-Sectoral Guidance Notes. This Council has adopted the
Code will apply its principles to all investment activity. In
accordance with the Code, the Section 151 Officer has produced its
treasury management practices. This part, TMP 1(5), covering
investment counterparty policy requires approval each year.
Annual Investment Strategy -
The key requirements of both the Code and the investment guidance
are to set an annual investment strategy, as part of its annual
treasury strategy for the following year, covering the
identification and approval of following:
- The strategy guidelines for decision making
on investments, particularly non-specified investments.
- The principles to be used to determine the
maximum periods for which funds can be committed.
- Specified investments the Council will
use. These are high security (i.e. high credit rating,
although this is defined by the Council, and no guidelines are
given), and high liquidity investments in sterling and with a
maturity of no more than a year.
- Non-specified investments, clarifying the
greater risk implications, identifying the general types of
investment that may be used and a limit to the overall amount of
various categories that can be held at any time.
This strategy is to be approved by full
Council.
The investment policy proposed for the
Council is:
Strategy Guidelines – The
main strategy guidelines are contained in the body of the treasury
strategy statement.
Specified Investments – These
investments are sterling investments of not more than one-year
maturity, or those which could be for a longer period but where the
Council has the right to be repaid within 12 months if it
wishes. These are low risk assets where the possibility of
loss of principal or investment income is small. These would
include investments with:
1. An investment
scheme that has been awarded a high credit rating by a credit
rating agency
2. A body that
has been awarded a high credit rating by a credit rating agency
For category 1 this covers a money market fund
rated by Standard and Poor’s, Moody’s or Fitch rating
agencies.
For category 2 this covers bodies with a
minimum rating of F1 (or the equivalent) as rated by Standard and
Poor’s, Moody’s or Fitch rating agencies.
Non-Specified Investments –
Non-specified investments are any other type of investment (i.e.
not defined as Specified above). The identification and
rationale supporting the selection of these other investments and
the maximum limits to be applied are set out below.
Non-specified investments would include any sterling investments
with:
|
|
Non Specified Investment
Category
|
Limit
|
|
a.
|
Building societies not meeting the
basic security requirements under the specified
investments. The operation of some building
societies does not require a credit rating, although in every other
respect the security of the society would match similarly sized
societies with ratings. The council may use such Building
Societies which have a minimum asset size of £500m, but will
restrict these type of investments to six months.
|
5% of gross investments
|
|
b.
|
Any bank or building society
that has a minimum long-term credit rating of AA, for deposits with
a maturity of greater than one year (including forward deals in
excess of one year from inception to repayment).
|
10% of gross investments
|
|
c.
|
Any non-rated subsidiary of a
credit rated institution included in the specified investment
category. These institutions will be included as an
investment category subject to guarantee from the parent company
and the maximum period of investment will be restricted to three
months.
|
15% of gross investments
|
The Monitoring of Investment
Counterparties - The credit rating of counterparties will
be monitored regularly. The Council receives credit rating
advice from its advisers, Butlers, on a daily basis and as and when
ratings change, and counterparties are checked promptly. On
occasion ratings may be downgraded when an investment has already
been made. The criteria used are such that a minor
downgrading should not affect the full receipt of the principal and
interest. Any counterparty failing to meet the criteria will
be removed from the list immediately by the Section 151 Officer,
and if required new counterparties which meet the criteria will be
added to the list.
Use of External Fund
Managers
The Council do not currently use external
fund managers. However, consideration will be given to their use
where gains could reasonably be expected.