To
Audit Committee
On
1 February 2013
TREASURY MANAGEMENT STRATEGY STATEMENT 2013/2014
1. SUMMARY
1.1 This report seeks approval for the Treasury Management Strategy, including Annual Investment Strategy to be adopted for 2013/2014 together with the Prudential Indicators for the next three years (2013/2014 to 2015/2016).
Key Decision - This report is included on the Forward Plan for submission to Council, and is a key decision because it involves revenue expenditure in excess of £50,000 and capital expenditure in excess of £250,000.
2. RECOMMENDATION
To be recommended to Council:
(i) That the proposed Treasury Management Strategy 2013/2014, including Prudential and Treasury Indicators, be approved
(ii) That the Treasury Management Practices, as detailed in Appendix 1 be approved
3. BACKGROUND
3.1 The Council is required to operate a balanced budget, which broadly means that cash raised during the year will meet cash expenditure. Part of the Treasury Management operation is to ensure that this cash flow is adequately planned, with cash being available when it is needed. Surplus monies are invested in low risk counterparties commensurate with the Council’s low risk appetite, providing adequate liquidity initially before considering investment return.
3.2 The second main function of the Treasury Management service is the funding of the Council’s capital plans. These capital plans provide a guide to the borrowing need of the Council, essentially the longer term cash flow planning to ensure that the Council can meet its capital spending obligations. This management of longer term cash may involve arranging long or short term loans, or using longer term cash flow surpluses. On occasion any debt previously drawn may be restructured to meet Council risk or cost objectives.
3.3 The Chartered Institute of Public Finance and Accountancy (CIPFA) defines treasury management as:
“The management of the local authority’s investments and cash flows, its banking, money market and capital market transactions; the effective control of the risks associated with those activities; and the pursuit of optimum performance consistent with those risks.”
3.4 Reporting requirements
3.4.1 The Council is required to approve the recommendations of the Audit Committee in respect of their consideration of the two reports below.
3.4.2 The two reports include:
Prudential and Treasury Indicators and Treasury Strategy (This report) – Which covers:
· Capital plans (prudential indicators);
· Treasury Management Strategy, inluding how the investments and borrowings are to be organised (treasury indicators)
· Investment strategy, including the parameters on how investments are to be managed
An Annual Treasury Report – This provides details of actual prudential and treasury indicators and actual treasury operations compared to the estimates within the strategy approved.
3.4.3 In addition to the above two reports, the Audit Committee receives quarterly progress reports which provides Members with information regarding the performance of the Treasury Management function and operations during the year.
3.4.4 The Treasury Management Strategy for 2013/2014 covers two main areas:
1. Capital Issues:
· the capital plans and the prudential indicators
2. Treasury Management Issues:
· the current treasury position
· treasury indicators which will limit the treasury risk and activities of the Council
· prospects for interest rates
· the borrowing strategy
· policy on borrowing in advance of need
· debt rescheduling
· the investment strategy
· creditworthiness policy
· policy on use of external service providers
3.4.5 These elements outlined above cover the requirements of the Local Government Act 2003, the Chartered Institution of Public Finance and Accountancy (CIPFA) Prudential Code, the CIPFA Treasury Management Code and the CLG Investment Guidance.
3.5 Treasury Management Consultants
3.5.1 The Council uses Sector as its external Treasury Management Advisors.
3.5.2 The Council recognises that responsibility for Treasury Management decisions remains with the Council at all times and will ensure that undue reliance is not placed upon our external advisors
3.5.3 It is also recognised that there is a value in employing external providers of Treasury Management services in order to access to specialist skills and resources. The Council will ensure that the terms of their appointment and methods by which their value will be assessed are properly agreed and documented, and subject to regular review.
3.6 The Capital Prudential Indicators 2012/13 – 2014/15
3.6.1 The Council’s capital expenditure plans are the key driver of Treasury Management activity. The output of the capital expenditure plans are reflected in its prudential indicators, which are designed to assist Members overview and confirm the Council’s capital expenditure plans.
3.6.2 Capital Expenditure
3.6.2.1This prudential Indicator, as set out in Table 1, is a summary of the Council’s capital expenditure plans, both those agreed previously, and those forming part of this budget cycle.
Table 1
General Fund
Environment / 0.42 / 0.66 / 0.24 / 0.84 / 1.00
Housing Strategy / 1.51 / 2.80 / 2.66 / 0.00 / 0.00
Regeneration / 1.19 / 4.08 / 1.44 / 0.78 / 0.73
Resources / 0.50 / 1.62 / 0.49 / 0.49 / 0.49
Total General
Fund / 3.62 / 9.16 / 4.83 / 2.11 / 2.22
HRA
HRA / 4.52 / 6.69 / 6.00 / 7.05 / 5.06
Total HRA / 4.52 / 6.69 / 6.00 / 7.05 / 5.06
Total / 8.14 / 15.85 / 10.83 / 9.16 / 7.28
3.6.2.2 The above financing need excludes other long term liabilities, such leasing arrangements which already include borrowing instruments.
3.6.2.3 Table 2 below summarises the above capital expenditure plans and how these plans are being financed by capital or revenue resources. Any shortfall of resources would results in the Council needing to take out additional borrowing.
Table 2
General Fund / 3.62 / 9.16 / 4.83 / 2.11 / 2.22
HRA / 4.52 / 6.69 / 6.00 / 7.05 / 5.06
Total / 8.14 / 15.85 / 10.83 / 9.16 / 7.28
Financed by:
Capital receipts / 0.93 / 3.89 / 1.83 / 0.70 / 0.59
Capital grants and contributions / 2.26 / 4.00 / 0.17 / 0.08 / 0.00
Capital reserves / 0.67 / 1.19 / 2.66 / 0.15 / 0.00
Borrowing / 1.91 / 0.08 / 0.00 / 2.32 / 1.87
Major Repairs Allowance / 1.97 / 5.38 / 5.75 / 5.40 / 4.33
Revenue / 0.40 / 1.31 / 0.42 / 0.51 / 0.49
Total / 8.14 / 15.85 / 10.83 / 9.16 / 7.28
3.6.3 The Council’s Borrowing Need (the Capital Financing Requirement)
3.6.3.1 The second prudential indicator is the Council’s Capital Financing Requirement (CFR). The CFR is simply the total historic outstanding capital expenditure which has not yet been paid for from either revenue or capital resources. It is essentially a measure of the Council’s underlying borrowing need. Any capital expenditure above, which has not immediately been paid for, will increase the CFR.
3.6.3.2 The CFR does not increase indefinitely, as a Minimum Revenue Provision (MRP) is a statutory annual revenue change which broadly reduces the borrowing need in line with each assets life.
3.6.3.3 The CFR includes any other long term liabilities, such as finance leases. Whilst these increase the CFR, and therefore the Council’s borrowing requirement, these types of schemes include a borrowing facility and so the Council is not required to separately borrow for these schemes.
Table 3
Capital Financing Requirement (CFR)
CFR – General
Fund / 16.58 / 15.94 / 15.32 / 15.39 / 15.96
CFR - HRA / 89.50 / 89.58 / 89.58 / 91.24 / 91.97
Total CFR
Movement in CFR / 106.08 / 105.52 / 104.90 / 106.63 / 107.93
Movement in CFR represented by:
Net financing need
for the year
(above) / 54.08 / 0.08 / 0.00 / 2.32 / 1.87
Less MRP/VRP
and other
financing
movements (see
below) / (0.67) / (0.64) / (0.62) / (0.59) / (0.57)
Movement in CFR / 53.41 / (0.56) / (0.62) / 1.73 / 1.30
3.6.4 Minimum Revenue Provision (MRP) Policy Statement
3.6.4.1 The Council is required to pay off an element of the accumulated General Fund capital spend each year (the CFR) through a revenue charge referred to as the Minimum Revenue Provision (MRP), although it is also allowed to undertake additional voluntary payments (VRP).
3.6.4.2 Department for Communities and Local Government (CLG) Regulations have been issued which require full Council to approve an Annual Minimum Revenue Provision (MRP) Strategy in advance of each financial year. A variety of options are provided to councils, so long as there is a prudent provision. A recommendation for the Minimum Revenue Provision Strategy 2012/2013 will be presented to Council on 5 March 2013 prior to the start of the 2013/2014 financial year.
3.6.4.3 There is no requirement on the Housing Revenue Account to make a Minimum Revenue Provision (MRP) but there is a requirement for a charge for depreciation to be made (although there are transitional arrangements in place).
3.6.4.4 For authorities who participate in Local Authority Mortgage Scheme using the cash backed option, the mortgage lenders require a five year deposit from the local authority to match the five year life of the indemnity. The deposit placed with the mortgage lender provides an integral part of the mortgage lending, and is treated as capital expenditure and a loan to a third party. The Capital Financing Requirement (CFR) will increase by the amount of the total indemnity. The deposit is due to be returned in full at maturity, with interest paid either annually or on maturity. Once the deposit matures and funds are returned to the local authority, the returned funds are classed as a capital receipt, and the CFR will reduce accordingly. As this is a temporary (five years) arrangement and the funds will be returned in full, there is no need to set aside prudent provision to repay the debt liability in the interim period, so there is no MRP application.
3.6.5 Core Funds and the Expected Investment Balances
3.6.5.1 The application of resources (such as, capital receipts and reserves) to either finance capital expenditure or other budget decisions to support the revenue budget will have an ongoing impact on investments unless resources are supplemented each year from new sources (such as asset sales).
3.6.5.2 Estimates of the year end balances for each resource and anticipated day to day cash flow balances have been detailed below in Table 4.
Table 4
Year End Resources / 2011/12 Actual (£m) / 2012/13 Estimate (£m) / 2013/14 Estimate (£m) / 2014/15 Estimate (£m) / 2015/16 Estimate (£m)Fund balances /
reserves / 31.88 / 30.88 / 30.88 / 30.88 / 30.88
Capital receipts / 4.02 / 3.02 / 3.02 / 3.02 / 3.02
Provisions / (0.95) / (0.65) / (0.65) / (0.65) / (0.65)
Other / 0.00 / 0.00 / 0.00 / 0.00 / 0.00
Total / 34.95 / 33.25 / 33.25 / 33.25 / 33.25
Working capital / 26.00 / 25.00 / 25.00 / 25.00 / 25.00
Under/over
borrowing / 7.46 / 6.90 / 7.85 / 12.34 / 16.33
Expected
Investments / 26.00 / 25.00 / 25.00 / 25.00 / 25.00
3.6.6 Affordability Prudential Indicators
3.6.6.1 The previous sections cover the overall capital and control of borrowing prudential indicators, but within this framework prudential indicators are required to assess the affordability of the capital investment plans. These provide an indication of the impact of the capital investment plans on the Council’s overall finances.
3.6.7 Ratio of Financing Costs To Net Revenue Stream
3.6.7.1 This indicator, set out in Table 5, identifies the trend in the cost of capital (borrowing and other long term obligation costs net of investment income) against the net revenue stream. The estimates of financing costs include current commitments and the proposals in this budget report.
Table 5
2011/12 Actual (£m) / 2012/13 Estimate (£m) / 2013/14 Estimate (£m) / 2014/15 Estimate (£m) / 2015/16 Estimate (£m)General Fund / 8.12 / 14.63 / 14.60 / 13.60 / 12.41
HRA / (0.86) / (0.50) / (0.64) / (1.19) / (2.39)
3.6.8 Incremental Impact Of Capital Investment Decisions On Council Tax (Band D)
3.6.8.1 This indicator, shown in Table 6, identifies the revenue costs associated with proposed changes to the three year capital programme recommended in this budget report compared to the Council’s existing approved commitments and current plans. The assumptions are based on the budget, but will invariably include some estimates, such as the level of Government support, which are not published over a three year period.
Table 6
2011/12 Actual (£m) / 2012/13 Estimate (£m) / 2013/14 Estimate (£m) / 2014/15 Estimate (£m) / 2015/16 Estimate (£m)Council Tax –
Band D / 0.00 / 0.00 / 0.00 / 0.00 / 0.00
3.6.9 Estimates of the incremental impact of capital investment decisions on housing rent levels.