Meeting documents

1 THE ISSUE

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 three years 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 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

2.1 Approve the actions proposed within the Treasury Management Strategy Statement (Appendix 1).

2.2 Approve the borrowing and debt rescheduling strategy as detailed in Appendix 1.

2.3 Approve the investment strategy as detailed in Appendix 2.

2.4 Approve the changes to the authorised lending lists detailed in Appendix 2 and highlighted in Appendix 4.

2.5 Approve the proposed policy on Minimum Revenue Provision and depreciation of assets as detailed in Appendix 1, noting that it is the same as the approved 2008/09 policy.

2.6 Note the Prudential Indicators detailed in Appendix 1 and delegate authority for updating the indicators prior to approval at Full Council on 17^th February 2009 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

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 2009/10 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: -

5.5 The Prudential Code was introduced for the first time in 2004/05. The Strategy Statement for 2008/09 set Prudential Indicators for 2008/09 - 2010/11, which included a total borrowing requirement at the end of 2008/09 of £100million (including supported and unsupported borrowing). At the end of December 2008 external borrowing was £80million, with no further borrowing planned in the 2008/09 financial year. The lower amount borrowed is due to various factors affecting cashflow: re-phased capital spend including the cash backed capital contingency, favourable capital grant profiles, and an increased reserves position following the 2007/08 Outturn, including the large VAT refund.

5.6 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 17^th February 2009.

5.7 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.

5.8 The Annual Investment Strategy is attached at Appendix 2. This sets `outer limits' for treasury management operations. In times of exceptional market uncertainty, Council Officers will operate in a more restrictive manner than the policy allows, as has been the case during the last year. 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. It is likely that the current practice of operating on a restrictive basis will continue.

5.9 It is proposed to add to the Council's full authorised lending list to include foreign banks in Sweden, UAE, Singapore, Hong Kong and Spain. These proposals are detailed in the authorised lending list attached as Appendix 4(i), and the proposed additions to this list are in bold.

5.10 The Council has taken a pro-active risk management approach to its investment decisions over the past year due to the volatility of the financial markets and banking sector. This approach included the following actions:

a) March 2008 - All new fixed term investments were placed with the UK Governments Debt Management Office (AAA rated);

b) May 2008 - reinstated fixed term lending to banks on the approved lending list that had a long term rating of at least AA- (but placing funds with the highest rated counterparties available) with investments limited to 3 months;

c) October 2008 - A report was taken to Group Leaders explaining the current investment policy and approval was given to increase the counterparty limits from £10m to £20m for UK banks with high credit ratings, on the basis that they either had already or were likely to receive support from the UK Government should they experience financial difficulties. The temporary three month investment period limit was removed for these banks to enable some mitigation against projected falls in the base rate.

5.11 In line with the approach in 5.10 c), it is now proposed that, 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 be amended to that shown in Appendix 4 (ii). The effect of this is to allow for the £20M counterparty limit where it would otherwise be £10M and a £10M counterparty limit where it would otherwise have been £5M. It is also proposed that where a UK bank has majority Government ownership and/or has had significant capital injection, Officers should have discretion to not be constrained by banks' individual ratings. This is in line with the Council's treasury advisor's advice.

5.12 The current temporary restricted lending list is attached as Appendix 4 (ii) for information. The additions to this list that would result from the changes in paragraph 5.9 and detailed in Appendix 2 are also shown in Appendix 4(i).

5.13 Interest rate forecasts from the Council's Treasury advisors are attached as Appendix 3.

5.14 The 2008/09 Treasury Management Strategy report included a Minimum Revenue Provision (MRP) and Depreciation Policy for the Council following the introduction of new regulations. These set out options for calculating MRP.

5.15 No change is proposed to the Minimum Revenue Provision and Depreciation Policy from that agreed last February.

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. As part of a pro-active risk management approach a restricted lending list was introduced in March 2008 as detailed in paragraph 5.9. All lending/borrowing transactions are within approved limits and with approved institutions. Investment & Borrowing advice is provided by our Treasury Management consultants 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.