Meeting documents

1 THE ISSUE

1.1 In January 2002, the Council adopted the CIPFA Treasury Management in Public services Code of Practice, which requires the Council to approve a Treasury Management Strategy before the start of each financial year.

1.2 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 plans are affordable, prudent and sustainable.

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

2 RECOMMENDATION

The Cabinet agrees to:

2.1 submit the actions proposed within the Treasury Management Strategy Statement (Appendix 1) to February Council for approval.

2.2 submit the borrowing and debt rescheduling strategy as detailed in Appendix 1 to February Council for approval.

2.3 submit the Investment Strategy as detailed in Appendix 2 to February Council for approval.

2.4 submit the changes to the authorised lending lists detailed in Appendix 2 and highlighted in Appendix 3 to February Council for approval.

2.5 request that February Council approve the adoption of CIPFA's revised Code of Practice on Treasury Management, as detailed in 5.5.

The Cabinet is also asked to:

2.6 Note the Prudential Indicators detailed in Appendix 1 and delegate authority for updating the indicators prior to approval at Full Council on 16^th February 2010 to the Divisional Director - Finance and Cabinet Member for Resources, in light of any changes to the recommended budget as set out in the Budget Report.

3 FINANCIAL IMPLICATIONS

3.1 Included in the report and appendices.

4 CORPORATE PRIORITIES

4.1 This report is of a corporate and technical nature and therefore does not directly contribute to individual Corporate Priorities.

5 THE REPORT

Background

5.1 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 plans are affordable, prudent and sustainable.

5.2 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.

5.3 The suggested strategy for 2010/11 in respect of the following aspects of the treasury management function is based on the Treasury Officers' views on interest rates, supplemented with leading market forecasts provided by the Council's treasury advisor.

The strategy covers:

5.4 It is a statutory requirement under Section 33 of the Local Government Finance Act 1992, for the Council to produce a balanced budget. In particular, Section 32 requires a local authority to calculate its budget requirement for each financial year to include the revenue costs that flow from capital financing decisions. This, therefore, means that increases in capital expenditure must be limited to a level whereby increases in charges to revenue from: -

1. increases in interest charges caused by increased borrowing to finance additional capital expenditure, and

2. any increases in running costs from new capital projects , and

3. increases in the Minimum Revenue Provision for capital expenditure

are limited to a level which is affordable within the projected income of the Council for the foreseeable future

5.5 Following a report by Parliament's Communities and Local Government Select Committee in May 2009, CIPFA published a revised Code of Practice on Treasury Management in November 2009. The changes required by the Code have been incorporated into this report, and it is proposed that the revised Code of Practice is formally adopted by Council. This requires the Treasury Management Strategy and policies to be scrutinised by an individual / group of individuals or committee. It is proposed that this report be scrutinised by the Corporate Audit Committee at the 4^th May 2010 meeting, following which any recommendations will be reported back to Cabinet and Full Council.

2010/11 Treasury Management & Annual Investment Strategy

5.6 The Prudential Code was introduced for the first time in 2004/05. The Strategy Statement for 2009/10 set Prudential Indicators for 2009/10 - 2011/12, which included a total borrowing requirement at the end of 2009/10 of £80million (including supported and unsupported borrowing). At the end of December 2009, external borrowing was at £80million, with no further borrowing planned in the 2009/10 financial year.

5.7 The proposed Treasury Management Strategy is attached at Appendix 1 and includes the Prudential Indicators required by the Prudential Code. The Prudential Indicators contained within this report are currently draft and could be affected by changes made to the capital programme, following decisions on the budget report which is also on the agenda for this meeting. It is therefore requested that the Cabinet grant delegated authority to the Divisional Director - Finance and the Cabinet Member for Resources to agree any changes to the indicators prior to reporting for approval at Full Council on the 16^th February 2010.

5.8 Although the Prudential Indicators provide for a maximum level of total (supported and unsupported) borrowing, this should by no means be taken as a recommended level of borrowing as each year affordability needs to be taken into account together with other changes in circumstances, for example revenue pressures, levels and timing of capital receipts, changes to capital projects spend profiles, and levels of internal cash balances.

5.9 The Annual Investment Strategy is attached at Appendix 2. This sets `outer limits' for treasury management operations. While the strategy uses credit ratings in a "mechanistic" way to rule out counterparties, in operating within the policy Officers complement this with the use of other financial information when making investment decisions, for example Credit Default Swap (CDS) Prices, Individual Ratings, financial press. This has been the case in recent years, which protected the Council against losses of investment in Icelandic banks.

5.10 The Counterparty listing in Appendix 3 now includes credit ratings from three agencies, as well as a sovereign rating for each country. Those countries with a higher sovereign rating meeting the Council's minimum criteria (AA ) have been added to the list. These, along with individual counterparties who now meet the minimum criteria as recommended in Appendix 2, are highlighted in bold in the listing in Appendix 3.

5.11 The Investment Strategy in Appendix 2 also permits making short term investments with UK Building Societies that have been issued a certificate of eligibility under the UK Government's 2008 Credit Guarantee Scheme. This approach has been suggested by our external advisers.

5.12 In respect of UK banks with high credit ratings that have either already or are likely to receive support from the UK Government should they experience financial difficulties, the credit rating matrix as set out in the Treasury Management Practices will be amended to that shown in Appendix 3.

5.13 Interest rate forecasts from the Council's Treasury advisors are included in Appendix 1.

6 RISK MANAGEMENT

6.1 The report author and Lead Executive member have fully reviewed the risk assessment related to the issue and recommendations, in compliance with the Council's decision making risk management guidance.

6.2 The Council's lending & borrowing list has been regularly reviewed over the past year and credit ratings are monitored throughout the year. All lending/borrowing transactions are within approved limits and with approved institutions. Investment & Borrowing advice is provided by our Treasury Management Advisers Sterling.

7 EQUALITIES

7.1 This report provides information about the Council's Treasury Management Strategy and therefore no specific equalities impact assessment was carried out.

8 RATIONALE

8.1 This report is a statutory requirement.

9 OTHER OPTIONS CONSIDERED

9.1 None.

10 CONSULTATION

10.1 Consultation has been carried out with the Deputy Leader of The Council & Cabinet Member for Resources, Section 151 Finance Officer, Chief Executive and Monitoring Officer.

11 ISSUES TO CONSIDER IN REACHING THE DECISION

11.1 This report deals with issues of a corporate nature.

12 ADVICE SOUGHT

12.1 The Council's Monitoring Officer (Council Solicitor) and Section 151 Officer will have had the opportunity to input to this report and have cleared it for publication.