Appendix 8

The Capital Prudential Indicators 2017/18 to 2021/22

1. Introduction

1.1 The Local Government Act 2003 requires the Council to adopt the CIPFA Prudential Code and produce prudential indicators. Each indicator either summarises the expected capital activity or introduces limits upon that activity, reflecting the outcome of the Council’s underlying capital appraisal systems. This report updates currently approved indicators.

1.2 Within this overall prudential framework there is an impact on the Council’s treasury

management activity – as it will directly impact on borrowing or investment activity. As a consequence the treasury management strategy for 2017/18 to 2021/22 is included as Appendix A to complement these indicators. Some of the prudential indicators are shown in the treasury management strategy to aid understanding.

2. The Capital Expenditure Plans

2.1 The Council’s capital expenditure plans are summarised below and this forms the first of the prudential indicators. Capital expenditure needs to have regard to:

• Service objectives (e.g. strategic planning); • Stewardship of assets (e.g. asset management planning); • Value for money (e.g. option appraisal); • Prudence and sustainability (e.g. implications for external borrowing and whole life

costing); • Affordability (e.g. implications for the council tax and rents); • Practicality (e.g. the achievability of the forward plan).

2.2 The revenue consequences of capital expenditure need to be paid for from the Council’s own resources.

2.3 This capital expenditure can be paid for immediately (by applying capital resources such as

capital receipts, capital grants etc., or revenue resources), but if these resources are insufficient any residual capital expenditure will add to the Council’s borrowing need. The Council however currently has no borrowing need and is not expected to do so over this planning period.

2.4 The key risks to the plans are that the level of Government support and available capital

resources have been estimated and are therefore subject to change. 2.5 The Council is asked to approve the summary capital expenditure projections below. The

revised estimate for 2016/17 is subject to change and will be finalised as part of final accounts. This forms the first prudential indicator:

Table 1: Projected Capital Expenditure £’000 2016/17

Forecast 2017/18

Estimate 2018/19

Estimate 2019/20

Estimate 2020/21

Estimate 2021/22

Estimate

Capital Expenditure 3,011 2,071 598 447 425 366

Financed by:

Capital Grants/ Contributions

961 1,342 280 280 280 280

Capital Reserve 1,437 421 106 97 75 86

Other Reserves 613 308 212 70 70 0

Net Financing Need for the Year Nil Nil Nil Nil Nil Nil

2.6 It should be noted that as the Capital Programme changes, for example as other schemes

come to fruition and business cases are developed, the impact of these on the prudential indicators will be reported via interim reports to both Cabinet and the Audit and Governance Committee.

3. The Council’s Borrowing Need (the Capital Financing Requirement)

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. The capital expenditure above, if not immediately paid for from reserves or revenue contributions, would increase the CFR.

3.2 The CFR includes any other long term liabilities including lease liabilities brought onto the

balance sheet. At 31 March 2017, the Council’s CFR is estimated as a negative £541,000 (meaning surplus capital receipts).

3.3 The Council is asked to approve the CFR projections below: Table 2: CFR Projections

£’000 Opening Balance 2015/16

2016/17 Estimate

2017/18 Estimate

2018/19 Estimate

2019/20 Estimate

2020/21 Estimate

2021/22 Estimate

Capital Financing Requirement

Total CFR -541 -541 -541 -541 -541 -541 -541

Movement in CFR 0 0 0 0 0 0

3.4 DCLG (Department for Communities and Local Government) Regulations have been issued

which require Audit and Governance Committee to consider an MRP (Minimum Revenue Provision) Statement in advance of each year. A variety of options are provided to councils, so long as there is a prudent provision. Members will be aware, given the financial climate that the affordability of the capital programme is under constant review to ensure that it is affordable, prudent and sustainable. The following MRP Statement is recommended.

3.5 Boston Borough Council has fully financed its capital expenditure incurred before 1 April 2012.

In the event of an MRP charge being required, the policy for approval is:

• Asset Life Method – MRP will be based on the estimated life of the assets, in

accordance with the proposed regulations (this option must be applied for any expenditure capitalised under a Capitalisation Direction) (Option 3.; The preferred method of calculation is the ‘annuity method’.

Estimated life periods will be determined under delegated powers. To the extent that expenditure is not on the creation of an asset and is of a type that is subject to estimated life periods that are referred to in the guidance, these periods will generally be adopted by the Council. However, the Council reserves the right to determine useful life periods and prudent MRP in exceptional circumstances where the recommendations of the guidance would not be appropriate.

As some types of capital expenditure incurred by the Council are not capable of being related to an individual asset, asset lives will be assessed on a basis which most reasonably reflects the anticipated period of benefit that arises from the expenditure. Also, whatever type of expenditure is involved, it will be grouped together in a manner which reflects the nature of the main component of expenditure and will only be divided up in cases where there are two or more major components with substantially different useful economic lives.

This option provides for a reduction in the borrowing need over approximately the asset’s life.

4. The Use of the Council’s Resources and the Investment Position

4.1 The application of resources (capital receipts, reserves etc.) 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 (asset sales etc.). Detailed below are estimates of the year end balances for each resource and anticipated day to day cash flow balances. We are mindful of changing cash flow particularly as budget resources change as mentioned in the Council’s report on the budget.

Table 3: Expected Investment Position

Year End Resources

2016/17 Estimate

2017/18 Estimate

2018/19 Estimate

2019/20 Estimate

2020/21 Estimate

2021/22 Estimate

£’000

General Fund 1,653 1,653 1,653 1,653 1,653 1,653

Earmarked Reserves

5,533 6,332 7,064 7,903 8,531 9,153

Total Core Funds 7,186 7,985 8,717 9,556 10,184 10,806

Working Capital

-450 -450 -450 -450 -450 -450

Expected year-end Investments*

6,736 7,535 8,267 9,107 9,736 10,359

Expected Average investments over the year

7,250 8,250 9,000 9,750 10,500 11,000

*balances shown are estimated year end and will fluctuate throughout the year

5. Affordability Prudential Indicators

5.1 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. The Council is asked to approve the following indicators:

5.2 Actual and Estimates of the ratio of financing costs to net revenue stream – This indicator

identifies the trend in the cost of capital (borrowing and other long term obligation costs net of investment income) against the net revenue stream. As borrowing increases then financing costs increase – additionally, given the reducing resources available to the council, this ratio is obviously affected by the change to the net revenue stream.

Table 4: Ratio of Financing Costs to Net Revenue Stream

% 2016/17 Estimate

2017/18 Estimate

2018/19 Estimate

2019/20 Estimate

2020/21 Estimate

2021/22 Estimate

Ratio of financing costs to net revenue

stream

1.35% 1.21% 1.32% 1.35% 1.44% 1.40%

5.3 Estimates of the incremental impact of capital investment decisions on the Council Tax – This

indicator identifies the revenue costs associated with proposed changes to the five year capital programme recommended in the Council’s budget report compared to the Council’s existing approved commitments and current plans. The assumptions are based on the budget and will change as the Capital Programme alters over time. As capital spend increases, unless it is for invest to save projects or grant funded projects, the cost of schemes has an adverse impact on council tax, albeit a relatively small effect given the scale of the likely changes to the capital programme

Table 5: Capital Expenditure– Annual Impact on Council Tax

£ 2016/17 Estimate

2017/18 Estimate

2018/19 Estimate

2019/20 Estimate

2020/21 Estimate

2021/22 Estimate

Impact on Council Tax –

Band D

-3.51 -9.34 -8.37 -6.46 -3.64 1.07

Appendix A

Treasury Management Strategy 2017/18 – 2021/22

1. Introduction

Background 1.1 Treasury Management is defined as:

‘The management of the Council’s 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.’

Statutory and Professional Requirements

1.2 The prudential indicators in Appendix A consider the affordability and impact of capital

expenditure decisions, and set out the Council’s overall capital framework. The treasury service considers the effective funding of these decisions. Together they form part of the process which ensures the Council meets its balanced budget requirement under the Local Government Finance Act 1992. Furthermore the Local Government Act 2003 (the Act) and supporting regulations 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. The Council has gone beyond this requirement, so that Members are fully informed of the implications on the 5 year Medium Term Financial Strategy of its Capital Programme.

1.3 The Act requires the Council to set out its treasury strategy for borrowing and to prepare an

Annual Investment Strategy (as required by Investment Guidance issued subsequent to the Act, included at section 7 of this report); this sets out the Council’s policies for managing its investments and for giving priority to the security and liquidity of those investments, and accords with the CIPFA Treasury Management Code of Practice 2011 (‘the Code’).

1.4 The primary requirements of the Code are as follows:

1. Creation and maintenance of a Treasury Management Policy Statement which sets out the policies and objectives of the Council’s treasury management activities.

2. Creation and maintenance of Treasury Management Practices which set out the manner in which the Council will seek to achieve those policies and objectives.

3. Receipt by the full council of an annual Treasury Management Strategy Statement - including the Annual Investment Strategy and Minimum Revenue Provision Policy - for the year ahead, a Mid-year Review Report and an Annual Report (stewardship report) covering activities during the previous year.

4. Delegation by the Council of responsibilities for implementing and monitoring treasury management policies and practices and for the execution and administration of treasury management decisions.

5. Delegation by the Council of the role of scrutiny of treasury management strategy and policies to a specific named body. For this Council the delegated body is the Audit and Governance Committee

1.5 The suggested strategy for 2017/18 in respect of the following aspects of the treasury management function is based upon the Section 151 Officer’s views on interest rates, supplemented with leading market forecasts provided by the Council’s treasury advisor (Capita).

1.6 The strategy covers:

The current treasury position The current economic climate and prospects for interest rates The Council’s debt and investment projections; The Council’s estimates and limits on future debt levels; The Council’s borrowing and investment strategies; Sensitivity analysis to interest rate movements Specific limits on treasury activities Treasury performance indicators; Any local treasury issues.

2. The Current Treasury Position

2.1 The Council’s treasury portfolio position at 30 November 2016 comprised:

Table 1: Current Treasury Portfolio

Principal Average rate

£m £m %

Fixed rate funding PWLB -

Market 1.0 1.0 11.125

Variable rate funding PWLB -

Market - - -

Other long term liabilities 0

TOTAL DEBT 1.0

TOTAL INVESTMENTS (includes call and current accounts) 13.23

2.2 Members are asked to note that following the Brexit result the Bank of England reduced the

base rate of interest to 0.25% with a corresponding reduction being experienced in interest rates available on the council’s investments. The council has sought out longer term deposits with high street banks and invested £1m in property funds which are longer term investments – distributions from these funds are currently around 3-4% which is considerably more than rates available from high street banks.

2.3 The Council’s portfolio of cash balances held at 30 November 2016 is given in Table 2 below.

Further information is given in Section 7 on the Council’s Investment Strategy.

Table 2: Counterparty List and Cash Balances at 30th November 2016 Financial Institution (All on-call A/c’s unless stated)

Amount Length of investment

Interest Rate

Capita colour rating

£

Bank of Scotland

1,000,000 12 months 1.05%

1,250,000 12 months 1.00%

HSBC

2,215,000 Call 0.18%

Orange – 12 months 15,313 Current account 0.00%

Lloyds

1,000,000 1 year 1.00%

Red – 6 months

750,000 1 year 1.00%

250,000 1 year 1.00%

750,000 1 year 1.00%

Santander

999,970 31 day notice 0.40%

Red – 6 months

2,000,000 95 day notice 0.65%

CCLA 3,000,000 Call Daily variable

N/A

Total 13,230,283

3. The Current Economic Climate and Prospects for Interest Rates

3.1. Clearly when considering any Treasury decisions on whether to borrow or invest the Council must pay due regard to both the current economic climate and expectations going forward. The table below shows Capita’s view on interest and borrowing rates going forward.

Table 3: Expected Movement in Interest Rates

3.2 The balance of risks to economic recovery in the UK is to the downside particularly in view of the uncertainty over the terms of Brexit and the timetable for its implementation. Bank Rate, currently 0.25%, underpins investment returns and is not expected to start increasing until quarter 2 of 2019, which coincides with the expected conclusion of Brexit negotiations. There are also many external influences weighing on the UK.

3.3 The risks to the economic outlook have several key treasury management implications and are as follows:

Geopolitical risks in Europe, the Middle East and Asia, increasing safe haven flows.

UK economic growth turns significantly weaker than currently anticipated.

Weak growth or recession in the UK’s main trading partners - the EU and US.

A resurgence of the Eurozone sovereign debt crisis.

Weak capitalisation of European banks.

Monetary policy action by the central banks of major economies reaching the limits of effectiveness and failing to stimulate sustainable growth

4. Debt and Investment Projections 2017/18 – 2021/22

4.1 The borrowing requirement comprises the expected movement in the CFR and any maturing debt which will need to be re-financed. The table below shows this effect on the treasury position over the next five years. The expected maximum debt position during each year represents the Operational Boundary prudential indicator, and so may be different from the year end position. The table also highlights the expected change in investment balances. As the future proposed capital programme is funded from either reserves, or revenue contributions - further borrowing is not anticipated.

Table 4: Debt and Investment Projections

£’000 2016/17

Estimate 2017/18

Estimate 2018/19

Estimate 2019/20

Estimate 2020/21

Estimate 2021/22

Estimate

External Debt 1,000 1,000 1,000 1,000 1,000 1,000

Debt at 1 April 1,000 1,000 1,000 1,000 1,000 1,000

Expected change in debt 0 0 0 0 0 0

Debt at 31 March 1,000 1,000 1,000 1,000 1,000 1,000

Operational Boundary 1,000 1,000 1,000 1,000 1,000 1,000

Investments

Expected investments at 31 March

6,736 7,535 8,267 9,107 9,736 10,359

Investment change

799 732 840 629 623

* note as the capital programme changes so the amount available to invest will alter.

4.2 The related impact of the above movements and rate changes on the revenue budget are:

Table 5: Budgetary Impact Going Forward

£000 2016/17

Estimate 2017/18

Estimate 2018/19

Estimate 2019/20

Estimate 2020/21

Estimate 2021/22

Estimate

Revenue budgets

Interest on borrowing 111 111 111 111 111 111

Investment income (65) (40) (40) (65) (65) (65)

Total impact on budget 46 71 71 46 46 46

5. Limits to Borrowing Activity

5.1 Within the prudential indicators there are a number of key indicators to ensure the Council operates its activities within well defined limits and demonstrates prudence.

5.2 Under the Prudential Code (2011 Edition) the measure of net borrowing against the CFR has

been replaced by looking at net debt and the CFR. This includes finance lease liabilities so that the indicator reflects, over the medium term, net debt used for a capital purpose. The measure is that net debt (except in the short term) does not exceed the total of the CFR in the preceding year plus the estimates of any additional CFR for the current year and the next two financial years. As we have ‘negative’ net debt and this is well in excess of the negative CFR then this indicator will not be breached. Table 6: CFR versus Net Debt

£’000 2016/17

Estimate 2017/18

Estimate 2018/19

Estimate 2019/20

Estimate 2020/21

Estimate 2021/22

Estimate

Gross Borrowing

1,000 1,000 1,000 1,000 1,000 1,000

Average Investments

(7,250) (8,250) (9,000) (9,750) (10,500) (11,000)

Net Debt (6,250) (7,250) (8,000) (8,750) (9,500) (10,000)

CFR -541 -541 -541 -541 -541 -541

5.3 In November 2012 CIPFA issued a bulletin which indicated that the CFR versus net debt

indicator should be replaced by the indicator of CFR versus gross debt, with gross debt not being higher than the CFR. The rationale for this is to ensure that all liabilities such as leases, PFI schemes and other long terms debt is compared to the underlying need to borrow. As the Council has a negative CFR, and has no underlying need to borrow, it is accepted that the Council will not be able to comply with this indicator and members are asked to note this.

Table 7 CFR versus Gross Debt

£’000 2016/17 Estimate

2017/18 Estimate

2018/19 Estimate

2019/20 Estimate

2020/21 Estimate

2021/22 Estimate

External Debt

Debt at 1 April 1,000 1,000 1,000 1,000 1,000 1,000

Expected change in Debt 0 0 0 0 0 0

Other long-term liabilities (OLTL) 0 0 0 0 0 0

Expected change in OLTL 0 0 0 0 0 0

Actual gross debt at 31 March 1,000 1,000 1,000 1,000 1,000 1,000

The Capital Financing Requirement

-541 -541 -541 -541 -541 -541

Over / (under) borrowing 1,541 1,541 1,541 1,541 1,541 1,541

5.4 The Strategic Director Resources (S151) reports that the Council has complied with this

prudential indicator in the current year and does not envisage difficulties for the future. This view takes into account current commitments, existing plans, and the proposals in this budget report.

5.5 The Authorised Limit for External Debt – A further key prudential indicator represents a control

on the overall level of borrowing. This represents a limit beyond which external debt is prohibited, and this limit needs to be set or revised by Audit and Governance Committee. It reflects the level of external debt which, while not desired, could be afforded in the short term, but is not sustainable in the longer term.

5.6 This is the statutory limit determined under section 3 (1) of the Local Government Act 2003.

The Government retains an option to control either the total of all councils’ plans, or those of a specific council, although no control has yet been exercised.

5.7 The Council is asked to approve the following Authorised Limit:

Table 8: The Authorised Limit (or ‘Affordable Borrowing Limit’)

Note The authorised limit does not alter the underlying finances of the Council, but ensures current activity is within the required limits. Please note it is normal that there is ‘headroom’ between this Limit and the ‘Operational Boundary’ – given at Table 4.

6. Borrowing Strategy 2017/18 – 2021/22

6.1 It is not anticipated that the Council will undertake long term borrowing during the next five years. As the Council is not expected to borrow, it is not expected the Council will need to borrow in advance of need.

6.2 It is worth noting that the borrowing of monies purely to invest and make a return is unlawful

and this Council will not engage in such activity. 6.3 Ordinarily having borrowing would prompt discussion around debt rescheduling and the risks

surrounding this. The Council’s only long term debt currently consists of the market loan which has been subject to separate reports. In 2051 the Council will have to repay the £1m loan.

£’000 2016/17 Estimate

2017/18 Estimate

2018/19 Estimate

2019/20 Estimate

2020/21 Estimate

2021/22 Estimate

Borrowing 1,000 1,000 1,000 1,000 1,000 1,000

Other long term liabilities 0 0 0 0 0 0

Headroom 1,000 1,000 1,000 1,000 1,000 1,000

Total (the Authorised Limit) 2,000 2,000 2,000 2,000 2,000 2,000

7. Investment Strategy 2017/18 – 2021/22

7.1 Key Objectives - the Council’s investment strategy primary objectives are safeguarding the re-payment of the principal and interest of its investments on time, then ensuring adequate liquidity, with the investment return being the final objective. The current investment climate is steadying following the economic crisis. Officers continue to review existing Treasury Management Practice Schedules (TMPS) to ensure they are robust. Given the steadying economic climate (Section 3 refers) the risk appetite of the Council is cautiously optimistic and therefore when making investment decisions the Council is giving consideration to diversifying its portfolio while still ensuring that the main priority is the security of its investments.

7.2 Investment instruments identified for use in the financial year are listed in Annex 1 under the

‘Specified’ and ‘Non-Specified’ Investments categories. 7.3 Counterparty limits are no more than £3m per counterparty and the counterparty group limit is

£5m, with UK registered/domiciled banks, and for a period of no more than one year. The only exception to the £3m individual limit is if due to cash flow reasons all counterparties are being used to their maximum limit then any residual balances will be deposited in the Council’s current bank account (HSBC) which should have a minimal balance. Table 2 earlier in this Strategy gives the currently used Counterparties. Changes to any of the above can be authorised by the Section 151 Officer or the Deputy Section 151 Officer and thereafter will be reported to the Audit and Governance Committee. This is to cover exceptional circumstances so that instant decisions can be made in an environment which is both fluid and subject to high risk.

7.4 To assist in monitoring creditworthiness of counterparties the Council uses the service provided

by its Treasury advisors - Capita. This service has been progressively enhanced over the last year and now uses a sophisticated modelling approach with credit ratings from all three rating agencies - Fitch, Moodys and Standard and Poors, forming the core element using a risk weighted scoring system, which does not give undue prevalence to one agency’s ratings. However, it does not rely solely on the current credit ratings of counterparties but also uses the following as overlays: -

credit watches and credit outlooks from credit rating agencies CDS spreads to give early warning of likely changes in credit ratings sovereign ratings (non-uk only) to select counterparties from only the most creditworthy

countries 7.5 This modelling approach combines credit ratings, credit watches and credit outlooks in a

weighted scoring system which is then combined with an overlay of CDS spreads for which the end product is a series of colour code bands which indicate the relative creditworthiness of counterparties. These colour codes are used by the Council as a guide to determine the duration for investments.

7.6. The selection of counterparties with a high level of creditworthiness will be achieved by

selection of institutions using Capita’s weekly credit list of worldwide potential counterparties. The Council will therefore utilise counterparties with the following durational bands as a guide: -

Blue 1 year (only applies to nationalised or semi-nationalised UK Banks) Orange 1 year Red 6 months Green 100 days No Colour not recommended

7.7 Although implied sovereign support is no longer factored into credit ratings as a result of changes in the regulatory environment some consideration should be given to the strength of the sovereign in an effective creditworthiness methodology. The sovereign rating must meet a minimum credit criteria before the institutions in that particular country can be considered for inclusion on their lending list based on their own, entity-level ratings.

7.8 All credit ratings are monitored on a daily basis. The Council is alerted to changes to ratings of all three agencies through its use of the Capita creditworthiness service.

if a downgrade results in the counterparty/investment scheme no longer meeting the Council’s minimum criteria, its further use as a new investment will be withdrawn immediately.

in addition to the use of Credit Ratings the Council will be advised of information in movements in Credit Default Swap against the iTraxx benchmark and other market data on a weekly basis. Extreme market movements may result in downgrade of an institution or temporary suspension or removal from the Council’s lending list.

7.9 Sole reliance will not be placed on the use of this external service. In addition this Council will

also use market data and market information. 7.10 Market conditions remain unpredictable following the financial crisis and since the Brexit vote.

The Strategic Director Resources (S151) reserves the right to temporarily restrict further investment activity to those counterparties considered of higher credit quality than that stated above should conditions in the market deteriorate. Similarly the time periods for investments could be further restricted or expanded up to one year. Examples of these restrictions would be the use of the Debt Management Deposit Account Facility (DMDAF – a Government body which accepts local authority deposits) or investments with other local authorities. The Council has a money market fund account for Church Charities and Local Authorities which attracts interest at a variable daily rate and has investments with property funds.

7.11 In-house funds: The Council’s investments are mainly cash flow based. Investments will

accordingly be made with reference to the cash flow requirements and the outlook for short-term interest rates (i.e. rates for investments up to 12 months). The Council’s core balance available for investment over the next two years is detailed in Table 4 which takes account of the funding requirements of the capital programme and utilisation of revenue reserves as Council budgets become increasingly constrained by reduced levels of funding.

7.12 Interest rate outlook: Bank Rate changed in August 2016 to 0.25%. Bank Rate is currently

forecast to commence rising in quarter 2 of 2019 and then to rise steadily from thereon (Table 3 refers). There is downside risk to these forecasts if economic growth proves to be weaker and slower than currently expected.

7.13 In the prevailing climate the Council will avoid locking into deals longer than one year while

investment rates are down at historically low levels, unless exceptionally attractive rates are

available utilising investments such as Property Fund related, which make longer term deals worthwhile whilst being mindful of its projected cash flow position.

7.14 For 2017/18 it is suggested that the Council should budget for an investment return of 0.60%

on investments placed during the financial year. 7.15 Investment reporting - At the end of the financial year, the Council will report on its investment

activity as part of its Annual Treasury Report and also will provide a mid-year report to the Audit Committee. Any significant issues on a quarterly basis will be reported as part of the quarterly Finance and Performance reporting to Cabinet and any issues of concern regarding governance (for example risks concerning counterparties) will be reported to the Audit Committee.

8. Sensitivity to Interest Rate Movements

8.1 Future Council accounts will be required to disclose the impact of risks on the Council’s treasury management activity. Whilst most of the risks facing the treasury management service are addressed elsewhere in this report (credit risk, liquidity risk, market risk, maturity profile risk), the impact of interest rate risk is discussed but not quantified. The table below highlights the estimated impact of a 0.25% increase/decrease in all interest rates to the estimated treasury management costs/income for next year. That element of the debt and investment portfolios which are of a longer term, fixed interest rate in nature are less affected by interest rate changes.

Table 9: Interest Rate Sensitivity

£’000 2017/18

Estimated + 0.25%

2017/18 Estimated

- 0.25%

Revenue Budgets

Borrowing cost 0 0

Investment income (- additional income/ + less income) 17 (17)

9. Treasury Management Limits on Activity

9.1 There are three further treasury activity limits, which were previously prudential indicators. The

purpose of these is to contain the activity of the treasury function within certain limits, thereby managing risk and reducing the impact of an adverse movement in interest rates. However if these are set to be too restrictive they will impair the opportunities to reduce costs/improve performance. The indicators and limits which the Council are asked to approve are as follows:

Upper limits on variable interest rate exposure – this identifies a maximum limit for

variable interest rates based upon the debt position and is zero for the duration of the strategy.

Upper limits on fixed interest rate exposure – similar to the previous indicator this covers a maximum limit on fixed interest rates which is 100% for this strategy

Total principal funds invested for greater than 364 days – these limits are set with regard to the Council’s liquidity requirements and to reduce the need for early sale of an investment, and are based on the availability of funds after each year-end.

The Council now has longer term instruments - £1m has been invested in property funds for periods in excess of 1 year.

10. Performance Indicators

10.1 The Code of Practice on Treasury Management requires the Council to set performance indicators to assess the adequacy of the treasury function over the year. These are distinct historic indicators, as opposed to the prudential indicators, which are predominantly forward looking. An example of a performance indicator is:

Investments – Internal returns above the averages provided by our Treasury

management advisors 10.2 The results of this indicator will be reported in the Treasury Annual Report and any update

reports.

11. Other Treasury Issues

Treasury Management Advisors 11.1 The Council uses Capita as its treasury management advisors. The company provides a range

of services which include:

Technical support on treasury matters, capital finance issues and the drafting of Member reports;

Economic and interest rate analysis; Generic investment advice on interest rates, timing and investment instruments; and Credit ratings/market information service comprising the three main credit rating

agencies. 11.2 Whilst the advisors provide support to the internal treasury function, under current market rules

and the CIPFA Code of Practice the final decision on treasury matters remains with the Council. This service is subject to regular review.

Scheme of Delegation

11.3 The table below shows in terms of governance arrangements the various levels of

responsibility with regards to the treasury function.

Table 10: Treasury Management Governance Arrangements

Area of Organisation Responsibilities

1. Full Council 1.1 Approval of the annual TM Strategy and any changes recommended by the Audit and Governance Committee

2. Cabinet 2.1 Budget consideration and approval 2.2 Updates on service and financial performance

3. Overview and Scrutiny - Corporate and Community Committee

3.1 Scrutiny of service and financial performance.

4. Audit and Governance 4.1 Approval of/amendments to the adopted clauses, treasury

Committee management policy statement and treasury management practices 4.2 Reviewing the treasury management policy and procedures and making recommendations to the responsible body 4.3 Approval of the division of responsibilities 4.4 Receiving and reviewing regular monitoring reports and ensuring recommendations are followed-up 4.5 Approving the selection of external service providers and agreeing terms of appointment

Role of the Section 151 Officer

11.4 It is also a requirement of the Guidance Notes supporting the Code to exemplify what the role

of the S151 Officer is. The S151 Officer’s main functions with regards to treasury are to:

recommend clauses, treasury management policy/practices for approval, review the same regularly, and monitor compliance;

submit regular treasury management policy reports; submit budgets and budget variations; receive and review management information reports; review the performance of the treasury management function; ensure the adequacy of treasury management resources and skills, and the effective

division of responsibilities within the treasury management function; ensure the adequacy of internal audit, and liaise with external audit; and recommend the appointment of external service providers.

Member and Officer Training

11.5 The increased Member consideration of treasury management matters and the need to ensure

officers dealing with treasury management are trained and kept up to date requires a suitable training process for Members and officers. This Council has addressed this important issue by:

a. Targeted training course for relevant Members; b. Officer training is identified through the appraisal process and is also supplemented by

targeted training as necessary and technical advice from our treasury management advisors.

Medium Term Financial Strategy

11.6 Treasury Management operations are carried out within the framework of the Medium Term

Financial Strategy.

Annex 1 Specified and Non-specified Investments

Specified Investments:

Specified investments are those investments offering high security and liquidity. All such investments will be in sterling, with maturities up to maximum of 1 year, using the Capita rating criteria as a guide.

Security/ Minimum ‘High’ Credit Criteria

1 Debt Management Office Government secure.

2 Term Deposits with credit rated deposit takers (banks and building societies) with maturities up to one year

- UK nationalised banks - UK part nationalised banks - Non-UK domiciled banks*

Minimum Green colour rating – up to 100 days

3 Local Authorities with maturities up to one year High Security, although Local Authorities are not credit rated.

4 Term deposits Banks and Building Societies Minimum Green colour rating – up to 100 days.

5 Money Market Funds (CCLA) Minimum AAA rated by one of the rating agencies.

6 Business Reserve Accounts and Deposit Accounts with credit rated deposit takers (banks and building societies)

Minimum Green colour rating – up to 100 days

* A maximum of 20% of the total portfolio will be invested in non-UK domiciled banks operating in countries with a minimum sovereign rating of AA+.

Non-Specified Investments

Non-specified investments are all sterling denominated, with maturities in excess of one year.

Minimum Credit Criteria

Term Deposits with credit rated deposit takers (UK banks and building societies).

Minimum Orange or blue colour rating –in excess of 1 year.

Callable Deposits with credit rated deposit takers (UK banks and building societies) with maturities greater than one year.

Minimum Orange or blue colour rating –in excess of 1 year.

Forward deals with credit rated deposit takers (UK banks and building societies)

Minimum Orange or blue colour rating –in excess of 1 year.

Property funds – up to five years* N/a – see comment below

*Selection to be based on the size of the fund, number and range of investors in the fund, portfolio range (area, type, diversification) – appropriate due diligence would be undertaken prior to an investment in a fund of this type.