Agenda item

The Divisional Director – Finance presented the report. He explained that the strategies set out the rules that would govern the Council’s investment and borrowing during the next financial year. If significant changes in market conditions required the strategies to be amended the financial year, they would need to be resubmitted to Council.

He said that in accordance with CIPFA’s Code of Practice on Treasury Management in the Public Services, adopted by the Council in February 2010, the Council was required to approve a Treasury Management Statement for each financial year. The draft Treasury Management Strategy 2012/13 was attached as Appendix 1 the report. Page 8 specified borrowing limits for 2012/13 in terms of Authorised Limits and an Operational Boundary.

The Investment Strategy was Appendix 2 to the report. There were two kinds of investment: “specified” (as defined in CLG Guidance) and “non-specified” (those falling outside the definition of specified investments). The table on page 14 set out in broad terms the type of institution in which the Council would make specified investments, the minimum credit rating required and the maximum monetary limits for these investments. Possible non-specified investments were listed on page 17. As stated on page 15, the Council did not intend to make the following non-specified investments during the coming financial year:

• those denominated in foreign currencies
• in bodies with low credit ratings
• those defined as capital expenditure in any legislation, e.g. company shares

The minimum credit ratings and time limits for non-specified investments were listed in the table on page 15.

Concluding his introduction to the report, he said that the Council’s capital programme was included in the Financial Plan 2012/13-2014/15, which would be considered by Cabinet the following day.

Councillor Sandry asked whether, given that inflation was currently higher than interest rates on deposits, investment in company shares could be a means of protecting the value of the Council’s reserves. The Divisional Director – Finance replied that there were difficulties with this. If shares fell, the Council would lose capital, which could impact on services. In addition, the value of shareholdings would have to be stated as at 31^st March each year in the Council’s accounts, so the fluctuating value of shares would increase the volatility of the Council’s balance sheet. Councillor Sandry remained concerned that in current conditions inflation was eroding the value of the Council’s cash holdings, and suggested that means should be sought to mitigate this. The Divisional Director – Finance replied that reserves were committed over the next three years for various items, i.e. redundancy payments, and that if this money was invested in shares it would be subject to the risk of falls in market value. Councillor Sandry suggested that the remainder of the reserves might be used. The Divisional Director – Finance said that the highest priority was not to put the Council’s capital at risk; however, he understood the Member’s concern, and assured him that the possibility of finding a low-risk option for mitigating the impact of inflation would be kept under review.

In response to a question from John Barker, the Divisional Director – Finance explained that the Avon Pension Fund set its own Treasury Management Strategy and Investment Strategy. Regulations had been changed a couple of years ago to require Pension Fund cash to be separated from the Council’s. Pension Fund cash was still managed by the Treasury Management team, but in accordance with the Pension Fund’s policies.

Councillor Charles Gerrish (Vice-Chair of the Avon Pension Fund Committee and Chair of the Avon Pension Fund Committee Investment Panel) said that the Avon Pension Fund had made a decision to increase its investment in corporate bonds because of current market conditions, and asked whether it might be appropriate for the Council to invest in them. The Divisional Director – Finance noted that corporate bonds were listed as possible non-specified investments on page 17 of the Investment Strategy. However the risks of investing in corporate bonds were the same as for shares: possible loss of capital and increased volatility of the balance sheet. Council Sandry suggested that it might be an appropriate time for the Council to accept a higher level of risk in order to try to protect the value of its cash. The Divisional Director – Finance said that one means of maximising the value of cash holdings was already being employed: using the cash balances instead of borrowing money for the capital programme at interest rates which were higher than inflation; it was hoped to do this to a greater extent in future for Keynsham regeneration. The current Strategy was admittedly cautious, but a higher level of risk could be incorporated, if that was what the Council wanted.

It was moved by Councillor Macrae and seconded by Councillor Brian Simmons and RESOLVED

1. To recommend the Council to approve the actions proposed within the Treasury Management Strategy Statement (Appendix 1).

2. To recommend the Council to approve the Investment Strategy as detailed in Appendix 2.

3. To recommend the Council to approve the changes to authorised lending lists detailed in Appendix 2 and highlighted in Appendix 3.

4. To recommend the Council to adopt CIPFA’s revised Code of Practice on Treasury Management as detailed in paragraph 5.5 of the report.

5. To recommend the Council to approve the revised Treasury Management Policy Statement as detailed in Appendix 4.

To note the Treasury Management Indicators detailed in Appendix 1 and note that Cabinet are recommended to delegate authority for updating the indicators prior to approval at Full Council on 14^th February 2012 to the Divisional Director – Finance and the Cabinet Member for Community Resources, in light of any changes to the recommended budget as set out in the Budget Report elsewhere on the agenda at 8^th February Cabinet.