Hertfordshire County Council s8

INTEGRATED PLAN PART C

THE PRUDENTIAL CODE FOR CAPITAL FINANCE AND TREASURY MANAGEMENT STRATEGY

CONTENTS OF THE REPORT

Section 1: Background 2

Section 2: Capital Expenditure and Capital Financing 2 Requirement

Section 3: Context for the Treasury Management Strategy 5

Section 4: Treasury Management Strategy 6

Section 5: Policy on Use of Financial Derivatives 8

Section 6: Treasury Management Prudential Indicators 9

Section 7: Financial Implications and Sensitivity to 12 Interest Rates

Section 8: Treasury Management Training and Advice 13

Section 9: Performance Indicators and Reporting 14

Appendix 1: Treasury Management Policy Statement 16

Appendix 2: 2012/13 Lending Policy 18

Appendix 3: Prudential Indicators Summary 22

1 1. Background

1.1The CIPFA Prudential Code for Capital Finance in Local Authorities (Prudential Code) requires the Council to agree and monitor a number of prudential indicators to facilitate the decision making process and support capital spending decisions. The indicators cover affordability, prudence, capital expenditure, and treasury management. These indicators also form the basis of in-year monitoring.

1.2 The Council is also required to agree the Minimum Revenue Provision Policy (MRP) on an annual basis. This determines the basis upon which the cost of borrowing is reflected in the revenue budget.

1.3CIPFA’s Treasury Management in the Public Services: Code of Practice Fully Revised Second Edition 2009 (the CIPFA Code) also requires the Council to adopt the CIPFA Code and to approve a treasury management strategy in advance of each financial year. The Department for Communities and Local Government (CLG) has also published guidance on local authority investments in March 2010 that requires the Council to approve an investment strategy in advance of each financial year.

1.4 The 2009 edition of the CIPFA Code was adopted by the Council on 23 February 2010. A revised edition of the CIPFA Code was subsequently published in November 2011 to reflect the additional financial freedoms available to local authorities in the Localism Act 2011. This necessitates amendments to the Council’s Treasury Management Policy Statement and formal adoption of the 2011 edition of the CIPFA Code.

1.5 The Council is therefore asked to formally adopt the Treasury Management in the Public Services: Code of Practice 2011 Edition and the revised Treasury Management Policy Statement detailed in Appendix 1.

1.6 This report fulfils the Council’s legal obligation under the Local Government Act 2003 to have regard to both the CIPFA Code and the CLG Guidance.

2. Capital Expenditure and the Capital Financing Requirement

2.1 Capital expenditure plans will be partially financed by resources such as capital receipts and capital grants. The remaining element which can not be immediately financed from other sources will impact on the Council’s underlying need to finance (the Capital Financing Requirement, or CFR). The summary capital expenditure, financing and the impact on the CFR are shown in Table 2. This forms one of the required prudential indicators.

2.2 There are two main limiting factors on the Council’s ability to undertake financing for capital expenditure:

 Whether revenue resource is available to support in full the implications of capital expenditure, both borrowing costs and running costs.

2  The Government may seek to ensure that either the total of all councils’ plans do not jeopardise national economic policies or may assess that local plans are unaffordable for a specific council and implement a control to limit its capital expenditure plans. No such control was implemented during 2011/12.

2.3 It is noted that a key risk of the plan is that some of the estimates for other sources of funding, particularly grants and capital receipts, may be subject to change over time.

2.4 Taking this key risk into consideration, the Council is asked to approve the capital expenditure projections in Table 1 that reflect the recommended capital programme.

Table 1 Capital expenditure 2010/11 2011/12 2012/13 2013/14 2014/15 Actual Revised Estimated Estimated Estimated £000s £000s £000s £000s £000s Total expenditure 165,881 200,115 251,548 151,484 154,068

Capital receipts 33,866 13,093 20,000 30,000 25,000 Capital grants 91,913 116,645 155,782 93,075 113,717 Revenue 18,788 37,788 44,661 7,130 7,130 Other contributions 20,385 28,970 8,093 5,347 1,383 Net capital 929 3,619 23,012 15,932 6,838 requirement

2.5 The net capital expenditure will impact directly on the CFR. The Council is asked to approve the capital expenditure and CFR projections in Table 2 that support the recommended capital programme. The Council sets aside each year an amount for debt repayment known as the MRP, after deducting the estimated borrowing for future years this has resulted in a net reduction in the Council’s capital financing debt position illustrated in Table 2 below.

Table 2 Capital Financing Requirement 2010/11 2011/12 2012/13 2013/14 2014/15 Actual Revised Estimated Estimated Estimated £000s £000s £000s £000s £000s Total CFR 596,225 574,396 572,683 563,914 546,171 Net movement in (21,829) (1,713) (8,769) (17,743) CFR Movement in CFR represented by: Net capital 3,619 23,012 15,932 6,838 requirement less MRP* (25,446) (24,725) (24,702) (24,581) Total Movement (21,827) (1,713) (8,770) (17,743)

* MRP is the minimum revenue provision, which represents the revenue charge for the repayment of debt

3 2.6 Local Government and Public Involvement in Health Act 2007 regulations require an annual statement of the MRP policy to be approved by full Council. The MRP policy statement for capital expenditure for the financial year 2012/13 is as follows:

For capital expenditure incurred before 1 April 2008, the policy is:

 Based on Capital Financing Requirement – this is a continuation of current practice.

From 1 April 2008 for all unsupported borrowing, the policy is:

 Asset Life Method – this method spreads the cost over the estimated life of an asset.

2.7 The Prudential Code requires the Council to assess the affordability of its capital spending plans. This is done through the setting and monitoring of two prudential indicators. These provide an indication of the impact of the capital spending plans on the overall Council finances. The Council is asked to approve the following indicators:

 Actual and estimates of the ratio of financing costs to net revenue stream – This indicator identifies the trend in the cost of capital (borrowing costs net of lending income) against the net revenue stream.

Table 3 Ratio of financing costs to net revenue stream 2010/11 2011/12 2012/13 2013/14 2014/15 Actual Comparator Estimate Estimate Estimate Ratio 1.72% 1.64% 1.70% 1.85% 1.90%

The estimates of financing costs include current commitments and the proposals in this budget report.

 Estimates of the incremental impact of capital spending decisions on the Council Tax – This indicator identifies the trend in the cost of proposed changes in the three year capital programme recommended in this budget report compared to the Council’s existing commitments and current plans. The forward projections are based on the assumptions included in the budget, but will invariably include some areas, such as the level of government support, which is not published over a three year period.

Table 4 shows the incremental impact of additional capital spending proposed in part B of this report for 2012/13 to 2014/15. This relates to spending over and above the levels included in the capital programme agreed in July 2011 for 2011/12 to 2014/15.

4 Table 4 Incremental impact of capital spending decisions on Band D Council Tax for 2012/13 Proposed Forward Forward Budget Projection Projection 2012/13 2013/14 2014/15 Council Tax Impact - Band D £0.03 £(0.15) £0.01

3. Context for the Treasury Management Strategy

3.1The UK economy is continuing its weak recovery from the 2008/09 recession, with GDP growth forecast to be around just 1.0% in 2011 and to remain slow throughout much of 2012. Government spending cuts, rising unemployment and uncertain export markets are conspiring to keep demand low. Consumer price inflation, which peaked at 5.2% in September, is expected to fall sharply as one-off factors such as the 2010 VAT increase and fuel price rises fall out of the annual comparison.

3.2In these circumstances, it is anticipated that the Bank of England will not raise the Bank Rate for several months. However, once a more robust recovery appears to be taking root, it is anticipated that the Bank would prefer to gradually raise interest rates earlier, rather than waiting too late and needing to make a sharp correction.

3.3The Eurozone sovereign debt crisis remains a major driver of market sentiment and with the UK seen as a safe haven, gilt yields and hence PWLB rates have fallen markedly this year. Once a resolution to the crisis is agreed, long term rates are expected to increase to more normal levels.

3.4A second UK recession or a European sovereign default would see short and long term interest rates remaining lower for longer, while a faster economic recovery and a bold solution to the Eurozone crisis could, potentially, see rates rise more quickly.

3.5 The Council’s treasury advisors, Sterling Consultancy Services, forecast the Bank Rate remaining at 0.50% for the majority of 2012 rising to 0.75% in the last quarter. Longer term rates are forecasted to rise slowly as the economic situation improves as shown in Table 5.

Table 5 Sterling Consultancy Services central interest rate forecast – November 2011

Base Rate – Annual Average % 2011/12 0.50 2012/13 0.56 2013/14 1.25 2014/15 2.25

5 3.6 Tables 6a and 6b show the treasury position at 31 March 2011 and the estimated position at 31 March 2012. No additional long term borrowing has been taken in 2011/12 and so cash balances have been used to fund capital and therefore have been maintained at a low level during 2011/12. The authority has agreed early repayment of LOBO loans totalling £27m in April 2012, this is highlighted in the movement in Table 6a under borrowing maturing in under 2 years for 2011/12.

Table 6a Treasury position for borrowing

2010/11 Sources of 2011/12 Sources of

Actual Borrowing Estimated Borrowing £000s PWLB 1 LOBO 2 £000s PWLB 1 LOBO 2

Borrowing at 31 March 285,780 103,280 182,500 285,780 103,280 182,500 Analysed as: Maturing in under 2 years 1 1 0 27,001 1 27,000 Maturing in 2 to 10 years 3,145 3,145 0 3,145 3,145 0 Maturing in 10 to 30 years 48,233 48,233 0 48,233 48,233 0 Maturing in 30 years or later 234,401 51,901 182,500 207,401 51,901 155,500 1 PWLB = Borrowing sourced from the government’s Public Works and Loans Board 2 LOBO = Borrowing sourced from commercial banks

Table 6b Treasury Position for Lending 2010/11 2011/12 Actual Estimated £000s £000s Lending at 31 March 83,207 13,108 Iceland Investments 22,307 11,108 Maturing in 2011/12 58,900 0 Maturing in 2012/13 2,000 2,000 Maturing in 2013/14 0 0 Maturing in 2014/15 0 0

4. Treasury Management Strategy

4.1 It is proposed that in the light of the economic context described in section 3 above, the Council’s approach to treasury management in 2012/13 continues to reflect the on-going risks in the wider economy and banking institutions.

4.2 The primary consideration for the Treasury Management Strategy is security of the Council’s funds. The secondary consideration is liquidity, ensuring that sufficient funds are available to meet the Council’s forecasted cashflow requirements. Only once both of these matters have been taken into account will the yield be considered.

4.3The Council’s cash balances for investment purposes reduced during 2011/12 as schools’ balances, previously co-mingled with the Council’s balances, were separated from the Council’s cash balances on 1 April 2011. In addition, no

6 new borrowing was taken to fund the capital programme further reducing cash balances.

4.4During 2012/13, it is proposed that cash balances are maintained at low levels, borrowing long term only when absolutely necessary to avoid a prolonged short term overdraft. This strategy meets the primary aim of security by limiting the value of surplus cash available for deposits. Additionally, this means that the Council will not undertake any borrowing in advance of need and will only invest for short periods of less than 364 days.

Borrowing

4.5 Long term borrowing will be undertaken only for a capital purpose or when it is necessary to avoid a prolonged short term overdraft position. The Director of Resources and Performance, in consultation with the Council’s treasury management advisers, will take the most appropriate form of borrowing depending on prevailing interest rates. The maturity profile of the borrowing portfolio will also be taken into consideration when deciding the duration of borrowing to ensure an even spread of loans. This will minimise the risk of refinancing during periods of high interest rates.

4.6The borrowing portfolio will be continually monitored in consultation with the Council’s treasury management advisers to identify rescheduling opportunities which could reduce interest costs. With long term rates set to increase further, opportunities may arise to switch from long term to shorter term loans. The potential refinancing and interest rate risks arising from rescheduling would be considered at the same time to determine whether it is appropriate for the Council.

4.7The approved sources of long term and short term borrowing will be:

 Public Works Loan Board;  any institution approved for investments in the Lending Policy (see Appendix 2);  any other bank or building society approved by the Financial Services Authority;  capital market bond investors; and  special purpose companies created to enable joint local authority bond issues.

Lending

4.8 It is proposed that the 2012/13 Treasury Management Strategy is modelled on the 2011/12 Treasury Management Strategy approved by County Council on 23 February 2010 and revised on 24 November 2011. Full details are provided in the proposed Lending Policy in Appendix 2.

4.9 Investment regulations require the Council to determine what specified and non-specified investments it will use. Specified investments are defined as investments denominated in sterling with the UK government, a UK local

7 authority or an institution of high credit quality and with a maturity of no more than a year.

4.10 A non-specified investment is an investment not meeting the definition of a specified investment and can be a sterling denominated or a foreign currency denominated investment. It is proposed not to make any non-specified investments due to the long term nature of this type of investment and the risk of principal losses through exchange rate movements. The only exception to this would be if the Council’s bank no longer had sufficient credit ratings to be a specified investment, small balances may be deposited with them when it is uneconomic to invest elsewhere.

4.11 The Council understands that credit ratings are a good predictor of investment default but are rating agencies’ expressed opinions and not a perfect indicator. Therefore, Officers will use other sources of information to determine the credit quality of an organisation. These are detailed in the section 4 of the proposed Lending Policy in Appendix 2.

4.12 No investments will be made with an organisation if there are substantive doubts about its credit quality even though it may meet the Lending Policy criteria. This means the Lending Policy applied operationally may at times be more restrictive than it formally allows.

4.13 When deteriorating financial market conditions affect the creditworthiness of all organisations but these are not generally reflected in credit ratings, then the Council will restrict its investments in those organisations to maintain the required level of security. These restrictions may mean that insufficient commercial organisations of “high credit quality” are available for investment and so any cash surplus will be deposited with the government’s Debt Management Office or with other local authorities. This may cause a reduction in the level of investment income earned but will protect the principal sums invested.

4.14 The proposed 2012/13 Treasury Management Strategy has considered a full range of risks and Officers will apply the strategy to ensure that security of deposits is the prime consideration. However, in agreeing the proposed strategy, Members should be aware that there is always a risk of default of counterparties other than the Debt Management Office which is guaranteed by the government.

5. Policy on Use of Financial Derivatives

5.1The 2011 CIPFA Code requires authorities to clearly detail their policy on the use of derivatives in the annual strategy.

5.2Local authorities have previously made use of financial derivatives embedded into loans and investments both to reduce interest rate risk (e.g. interest rate collars and forward deals) and to reduce costs or increase income at the expense of greater risk (e.g. LOBO loans).

8 5.3The Council will only use standalone financial derivatives (such as swaps, forwards, futures and options) to manage specific risks such as currency risk or where they can be clearly demonstrated to reduce the overall level of the financial risks that the Council is exposed to. Additional risks presented, through entering into such contracts, such as credit exposure to derivative counterparties, will be taken into account when determining the overall level of risk. Officers will seek external advice/opinion before entering into any such form of contract.

5.4 Financial derivative transactions that are arranged will only be with organisations that meets the Council’s approved investment criteria. The current value of any amount due from a derivative counterparty will count against the counterparty credit limit and the relevant foreign country limit.

6. Treasury Management Prudential Indicators

6.1 The Prudential Code and Treasury Management Code of Practice require the Council to set a range of prudential indicators relating to borrowing and lending activities. The purpose of these prudential indicators is to contain the activity of the treasury function within certain limits, thereby reducing the risk or likelihood of an adverse movement in interest rates or borrowing decisions impacting negatively on the Council’s overall financial position.

6.2 These indicators reflect the proposed strategy set out in section 4. Firstly, the Council needs to ensure that net external borrowing does not, except in the short term, exceed the total of the CFR in the preceding year plus the estimates of any additional CFR for 2012/13 and next two financial years.

Table 7 Limits to borrowing activity 2010/11 2011/12 2012/13 2013/14 2014/15 Comparator Estimate Estimate Estimate Estimate £000s £000s £000s £000s £000s Gross Borrowing 285,780 285,780 355,000 370,000 375,000 Lending 83,207 13,108 16,000 7,000 6,000 Net Borrowing 202,573 272,672 339,000 363,000 369,000 CFR 596,225 574,396 572,683 563,914 546,171

6.3 The Council complied with the prudential indicator requirement to keep net borrowing below the relevant CFR in 2011/12, and no difficulties are envisaged for the current or future years. This view takes into account current commitments, existing plans, and the proposals in the budget report. This also reflects the borrowing strategy set out in section 4 and an allowance for potential short term borrowing to cover temporary overdrafts.

6.4 A further two prudential indicators control the overall level of borrowing. These are:

9  The authorised limit This represents the limit beyond which borrowing is prohibited, and needs to be set and revised by Members. It reflects the level of borrowing which, while not desired, could be afforded in the short term, but is not sustainable. It is the expected maximum borrowing need with some headroom for unexpected movements. This is the statutory limit determined under section 3 (1) of the Local Government Act 2003.

 The operational boundary This indicator is based on the probable external debt during the course of the year; it is not a limit and actual borrowing could vary around this boundary for short times during the year. It should act as an indicator to ensure the authorised limit is not breached.

6.5 The proposed limits In Table 8 reflect the capital programme and the borrowing strategy, including the potential for a temporary overdraft situation.

Table 8 Authorised and operational limits 2011/12 2012/13 2013/14 2014/15 Authorised limit for £000 £000 £000 £000 external debt Comparator Estimate Estimate Estimate Borrowing 411,000 385,000 400,000 405,000 Other long term liabilities 30,000 30,000 30,000 30,000 Total 441,000 415,000 430,000 435,000 2011/12 2012/13 2013/14 2014/15 Operational boundary £000 £000 £000 £000 for external debt Comparator Estimate Estimate Estimate Borrowing 381,000 355,000 370,000 375,000 Other long term liabilities 30,000 30,000 30,000 30,000 Total 411,000 385,000 400,000 405,000

6.6 The next indicator is the upper limit on fixed and variable rate exposure. Table 9 shows the proposed indicator, which is a continuation of current practice, that fixed lending or borrowing could be up to 100% of the portfolio, but borrowing or lending at variable rates can only be up to 30% of the portfolio. The Code requires that monetary amounts are provided, and the percentages are shown in addition to provide clarity.

Table 9 Fixed and variable rate exposure 2011/12* 2012/13 2013/14 2014/15 Upper Upper Upper Upper £000s £000s £000s £000s 381,000 355,000 370,000 375,000 Limits on fixed interest rates 100% 100% 100% 100% 114,300 106,500 111,000 112,500 Limits on variable interest rates 30% 30% 30% 30% * Original indicators

10 6.7 The next indicator is the maturity structure of borrowing. The gross limits are set to reduce the Council’s exposure to large fixed rate sums falling due for refinancing in the same period known as maturity risk. The proposed upper and lower limits in Table 10 are the same as previous years. The indicators are set relatively high to provide sufficient flexibility to respond to opportunities to repay or reschedule debt during the financial year, while remaining within the parameters set by the indicators.

Table 10 Maturity structure of fixed interest rate borrowing

2011/12 2012/13 2013/14 2014/15 Lower Upper Lower Upper Lower Upper Lower Upper Under 12 0% 25% 0% 25% 0% 25% 0% 25% months 12 months 0% 40% 0% 40% 0% 40% 0% 40% to 2 years 2 years to 5 0% 60% 0% 60% 0% 60% 0% 60% years 5 years to 0% 80% 0% 80% 0% 80% 0% 80% 10 years 10 years to 0% 85% 0% 85% 0% 85% 0% 85% 20 years 20 years to 0% 90% 0% 90% 0% 90% 0% 90% 30 years 30 years 0% 100% 0% 100% 0% 100% 0% 100% and above

6.8 The next indicator is the total principal funds invested for greater than 364 days. As discussed in the Treasury Management Strategy in section 4, it is proposed not to lend any new funds for more than 364 days during 2012/13. However, the indicator needs to reflect the deposits already placed, which mature more than 364 days after 31 March 2012, including those at risk in Iceland.

Table 11 Investments greater than 364 days

2011/12* 2012/13 2013/14 2014/15 £000’s £000’s £000’s £000’s Maximum principal sums 25,000 16,000 7,000 6,000 invested > 364 days * Original indicators

6.9 The final indicator is the upper limit on net debt indicator which was introduced in 2011 and is intended to highlight where the Council is borrowing in advance of need. Further guidance is awaited from CIPFA to clarify the application of this indicator where net debt does not change when loans are borrowed and re-invested. In the meantime, the Council’s treasury advisers recommend that a deliberately high limit is set for 2012/13.

11 Table 12 Gross and net debt

2012/13 2013/14 2014/15

Upper limit on net debt 100% 100% 100%

6.10 All the prudential indicators will be monitored throughout the year as part of the quarterly revenue and capital budget monitor reports to Cabinet. A full summary statement of all the indicators is shown in Appendix 3.

7. Financial Implications and Sensitivity to Interest Rates

7.1 The financial implications of treasury management activity are included in the Capital Financing and Interest on Balances budget which is part of the Council’s overall budget being considered elsewhere on this agenda. This section highlights the financial implications of the Treasury Management Strategy described in section 4.

7.2 Table 13 shows forecasts of interest payable on long term borrowing split between existing commitments and a forecast of additional interest expected to be paid as a result of the proposed new borrowing set out in section 2.

Table 13 Forecasts of interest payable on borrowing 2011/12 2012/13 2013/14 2014/15 Comparator Estimate Estimate Estimate £000’s £000’s £000’s £000’s Additional 45,232* 23,012 15,932 6,838 borrowing Interest already committed as at 13,750 13,062 12,945 12,945 end of 2010/11 Estimated interest from new 5,498* 719 1,665 2,241 borrowing Total estimated interest payable 19,248 13,781 14,610 15,186

* The additional borrowing and interest figures are estimates based on the capital programme approved by Council in February 2011 and revised in July 2011.

7.3 Table 14 shows the interest the Council expects to pay over the short term in the coming three financial years. The Council will continue to diversify the risk of managing an investment portfolio by maintaining low investment balances. Cashflow will be maintained on a short term basis to meet known cash outflows in the next month, plus a contingency to cover unexpected cashflows over the same period. The cashflow forecast for the financial year 2012/13 indicates a net short term borrowing position over the year although there will be occasions when surplus cash will be invested for short term periods. The

12 table below is a projection of the net interest that will be paid on a short term basis over the three year forecast period.

Table 14 Forecasts of short term Interest 2011/12 2012/13 2013/14 2014/15 Comparator Estimate Estimate Estimate £000’s £000’s £000’s £000’s Forecast Average (25,000) 38,226 38,226 38,226 Balance Forecast Interest 1.00% 0.4% 0.9% 1.9% Rate Earned Interest 165 37 0 0 committed Net Interest to be (290) 114 351 731 paid in year Total Interest forecast – earned / (125) 151 351 731 (paid)

7.4 Changes to interest rates have an impact on treasury management activity. Table 15 demonstrates the impact of a 1% rise or fall in interest rates.

Table 15 Sensitivity to a 1% increase/decrease in interest rates 2012/13 2012/13 estimated +1% estimated -1% Impact £000’s Impact £000’s Cost / (Saving) Cost / (Saving) Interest on borrowing 2,015 (674) Investment income (286) 114 Total impact on treasury 1,729 (560)

7.5 The Council seeks to minimise the interest rate risk by agreeing fixed rates for long term borrowing in the majority of cases. This is demonstrated by the prudential indicator in Table 9 which states that no more than 30% of the Council’s long term borrowing portfolio will have a variable rate of interest. In setting the budget for short term interest earned or paid the Council takes advice about the likely pattern of interest rates over the coming financial year and models the impact of a change in rates as shown in Table 15 above to ensure members understand the risk. If the interest rate forecast changes during the year, this will be reported to Members.

8. Treasury Management Training and Advice

8.1 CLG investment guidance requires the Council to note the following matters each year as part of the annual strategy:

13  Treasury management advisers The Council contracts with Sterling Consultancy Services to provide advice and information relating to its investment and borrowing activities. The services provided are: - Advice and guidance on relevant policies, strategies and reports - Advice on investment decisions - Notification of credit ratings and changes - Other information on credit quality - Advice on debt management decisions - Technical accounting advice - Reports on treasury performance - Forecasts of interest rates; and - Training courses.

The quality of service is reviewed through quarterly meetings and the contract re-tendered every 3 years.

 Investment training Training on treasury management will be provided in 2012/13 by the Council’s treasury advisors Sterling. Training will be provided to induct new members and to ensure that Members continuing in their roles in relation to treasury management, keep their knowledge and skills up to date. All treasury management Officers are required to attend an introductory course run by Sterling before they are able to transact. Officers new to treasury management are shadowed by more experienced Officers until they are judged to be competent to undertake transactions themselves and demonstrate a good understanding of the Council’s treasury policies. In order to keep Officers’ knowledge up to date, the Council is a member of the CIPFA Treasury Management Forum which provides information and training to its members. In addition the Council’s advisers provide continuous guidance, updates and training.

9. Performance Indicators and Reporting

9.1 The CIPFA Treasury Management Code of Practice requires the Council to set performance indicators to assess the treasury function over the year. These are reported on a quarterly basis as part of the revenue budget monitoring report. The indicators that will be measured are:

Security, Liquidity and Yield Indicators  Weighted average long term credit rating of the portfolio  Weighted average maturity of the portfolio  Return on lending compared to the 7 day LIBID rate  Average rate payable on the borrowing portfolio

Operational Indicators  Any breaches of the Lending Policy  Number of transactions carried out

14  Number of counterparties used 9.2 Officers report to Cabinet on a quarterly basis on treasury management as part of the revenue budget monitoring process. The County Council and the Audit Committee will receive a mid year report and a report at the end of the financial year on treasury management activities and performance.

9.3 The Treasury Management Strategy set out in this report is expected to be relevant throughout 2012/13. However, there may be a need to review it during the year where there are significant changes to the economic background, interest rate or changes to government guidance or best practice. If required, proposed revisions will be reported to full Council for Members’ consideration in accordance with the Code of Practice.

15 APPENDIX 1 TREASURY MANAGEMENT POLICY STATEMENT

The Council’s financial regulations require it to create and maintain a Treasury Management Policy statement, stating the policies, objectives and approach to risk management of its treasury activities, as a cornerstone for effective treasury management.

1. Definition The Council defines its treasury management activities as the:

 management of the Council’s investments and cashflows, its banking, money market and capital market transactions;  effective control of the risks associated with those activities; and  pursuit of optimum performance consistent with those risks.

2. Risk management The Council regards the successful identification, monitoring and control of risk to be the prime criteria by which the effectiveness of its treasury management activities will be measured. Accordingly, the analysis and reporting of treasury management activities will focus on their risk implications for the organisation, and any financial instruments entered into to manage these risks.

3. Value for money The Council acknowledges that effective treasury management will provide support towards the achievement of its business and service objectives. It is therefore committed to the principles of achieving value for money in treasury management, and to employing suitable comprehensive performance measurement techniques, within the context of effective risk management.

4. Borrowing policy The Council values revenue budget stability and will therefore borrow the majority of its long term funding needs at long term fixed rates of interest. Short term and variable rate loans will only be borrowed to the extent that they either offset short term and variable rate investments or can be shown to produce revenue savings.

The Council will set an affordable borrowing limit each year in compliance with the Local Government Act 2003, and will have regard to the CIPFA Prudential Code for Capital Finance in Local Authorities when setting that limit. It will also set limits on its exposure to changes in interest rates and limits on the maturity structure of its borrowing in the Treasury Management Strategy report each year.

16 5. Investment Policy The Council’s primary objectives for the investment of its surplus funds are to protect the principal sums invested from loss, and to ensure adequate liquidity so that funds are available for expenditure when needed. The generation of investment income to support the provision of local authority services is an important, but secondary, objective.

The Council will have regard to the Communities and Local Government Guidance on Local Government Investments and will approve an investment strategy each year as part of the Treasury Management Strategy. The strategy will set criteria to determine suitable organisations with which cash may be invested, limits on the maximum duration of such investments and limits on the amount of cash that may be invested with any one organisation.

17 APPENDIX 2 2012/13 LENDING POLICY

1. Policy for determining which institutions should be on the lending list The Council will lend to the following types of institutions:  Debt Management Account Deposit Facility (DMADF)  Local Authorities  UK Banks and UK Building Societies meeting the credit rating criteria set out below.  Banks domiciled in other countries or their subsidiaries domiciled in the UK, providing the country has a sovereign rating of at least AAA from each of the three credit rating agencies and the bank meets the credit rating criteria set out below. Sovereign credit rating criteria and foreign country limits will not apply to investments in multilateral development banks (e.g. the European Investment Bank and the World Bank) or other supranational organisations (e.g. the European Union).  AAA rated Money Market Funds  The Council’s bank if it does not meet the descriptions of institutions above. To be used for small balances up to £1m which it is uneconomic to invest elsewhere. This is the only occasion when a non-specified investment will be made.

Minimum credit rating criteria for banks and building societies

Standard Fitch Moody’s and Poor’s

Short term F1 P-1 A-1

Long term A A2 A

Individual / Viability bbb C N/A

Support 1 N/A N/A

When determining whether the Council should lend to a bank or building society, it must have at least the minimum credit rating shown above from each of the agencies which provides a rating on it. The lowest available credit rating will be used to determine credit quality. If an agency removes one of the set of ratings it issues for a bank or building society, the institution will be removed from the list.

If the ratings of a parent bank fall below the minimum criteria, no lending will be undertaken with its subsidiaries even if their ratings continue to meet the minimum criteria.

18 2. Policy for determining limits for deposits a Time  Deposits will be made for a maximum of 364 days.  Deposits to institutions not based in the UK will be limited to a maximum of 3 months. b Monetary limits  Debt Management Account Deposit Facility – No limit  AAA rated Money Market Funds – A limit of £15m per Fund Manager.  Local Authorities – a £10m limit per authority  UK Banks, UK Building Societies and Overseas Banks – limits as set out in the following tables:

Upper Limit £30m

Short term F1+ P-1 A-1

Long term AA- Aa3 AA-

Individual / Viability a B N/A

Support 1 N/A N/A

Lower Limit £20m

Short term F1 P-1 A-1

Long term A A2 A

Individual / Viability bbb C N/A

Support 1 N/A N/A c Banking Group Limit Where a number of banks are owned by a single institution, a group limit of £35m will be applied. The limit for each bank within the group will apply according to the credit rating table above. d Country Limits Limits are placed on the percentage of the portfolio which can be invested in institutions, according to the country in which they are domiciled. For the avoidance of doubt a UK based subsidiary with an overseas parent will be

19 considered to be domiciled in the country of the parent. These limits will apply at the point of investment.

Maximum percentage of portfolio permitted to be in UK 100% institutions Maximum percentage of portfolio permitted to be in non UK 40% institutions Maximum percentage of portfolio permitted to be in any one 10% country, other than UK e Sector Limits A limit is placed on the percentage of the portfolio which can be invested in Building Societies as a sector. This is to ensure the Council is not heavily exposed to institutions with a common risk factor – in this case the property market.

Maximum percentage of portfolio permitted to be invested with 40% Building Societies

3 Policy to be followed when credit ratings change Negative Watch A status that credit rating agencies apply while they are deciding whether to lower that organisation's credit rating.  If an institution is on a £20m limit when it is put on negative rating watch, it will be removed from the list.  If an institution is on a £30m limit when it is put on negative rating watch, the limit will be reduced to £20m.

Downgrading  If an institution is downgraded below the minimum credit rating criteria, then it will be removed from the list with immediate effect, along with any subsidiaries.  If the downgrade reduces the upper monetary limit of £30m to the lower monetary limit of £20m, then the monetary limit will be reduced with immediate effect.  If funds are on call with an institution when a downgrade happens, they will be withdrawn or the balance reduced as appropriate, at the earliest possible opportunity, which may be the following working day.  If there are outstanding fixed term deposits with an institution which has been removed from the list, terms for repayment will be sought and, if offered, fully considered and documented by Officers.  Downgradings and the action taken will be reported in the weekly treasury management meetings and quarterly reports to members.

4 Other matters to be considered by Officers In applying the policy set out above, Officers will refer to the following sources of market information on a regular basis:

20  Credit Default Swap Rates  Equity Prices  Economic data  Outlook reports from credit agencies  Financial Times and other news sources

A meeting of all Officers involved in the dealing function plus either the Head of Specialist Accounting or the Assistant Director of Finance, will be held on a weekly basis to review all relevant information and take decisions within the policy about how to react to it. By its very nature the information will not be definitive and therefore although Officers will do all they can to react to these sources of information with the primary objective of security. The frequency of these meetings will be kept under review and will be altered where appropriate.

Officers maintain an overview of prevailing market rates in their regular contact with brokers. When considering fixed term deposits, Officers will receive a minimum of 3 quotes from brokers for a range of periods before making decisions. The maximum deposit size when placing funds for fixed terms is £10m in order to spread risk. The only exceptions to this are deposits with the DMADF and movements in and out of call accounts and Money Market Funds.

21 APPENDIX 3 PRUDENTIAL INDICATORS SUMMARY

2012/13 2013/14 2014/15 Table 1 Capital expenditure 251,631 151,484 154,068 Table 2 Capital Financing Requirement 572,683 563,914 546,171 (CFR) Table 7 Treasury position Borrowing 355,000 370,000 375,000 Investments 16,000 7,000 6,000 Net borrowing 339,000 363,000 369,000 Table 4 Net borrowing less than CFR    Table 5 Authorised limit (against 385,000 400,000 405,000 maximum position) Table 8 Operational boundary 355,000 370,000 375,000 Table 3 Ratio of financing costs to net 1.70% 1.85% 1.90% revenue stream Table 9 Upper limits on fixed interest 100% 100% 100% rates (against maximum position) Table 9 Upper limits on variable interest 30% 30% 30% rates (against maximum position) Table 9 Limits on fixed interest rates 355,000 370,000 375,000 Limits on variable interest rates 106,500 111,000 112,500 Table 10 Maturity structure of fixed rate borrowing (against maximum position) Under 12 months 25% 25% 25% 12 months to 2 years 40% 40% 40% 2 years to 5 years 60% 60% 60% 5 years to 10 years 80% 80% 80% 10 years to 20 years 85% 85% 85% 20 years to 30 years 90% 90% 90% 30 years and above 100% 100% 100% Table 11 Investments greater than 364 16,000 7,000 6,000 days (maximum limit) Table 12 Upper limit on net debt 100% 100% 100%