APPENDIX D

 

TREASURY STRATEGY 2004-2005

 

1.                  TREASURY POLICY

 

1.1       This Strategy is pursuant to the Treasury Policy and in accordance with CIPFA’s revised Code of Practice for Treasury Management in Local Authorities, and Treasury Management Practices (TMP) as adopted in February 2003.

 

2.               TREASURY MANAGEMENT

 

2.1.      The Council’s Treasury Management activities may include the following activities:

 

1)            Cash Flow (daily balances and longer term forecasting)

2)      Investing surplus funds

3)            Borrowing to finance day to day cash fluctuations

4)            Funding of capital payments through borrowing, capital receipts, grants or     leasing

5)            Management of debt (including restructuring and monitoring an even maturity profile)

6)            Interest rate exposure management

7)            Dealing procedures with brokers, bank and Public Works Loan Board (PWLB).

 

3.                  OBJECTIVES

 

The major objectives to be followed in 2004-2005 are:

 

3.1.      BORROWING

 

a)         To minimise the revenue costs of debt

 

b)         To manage the Council’s debt maturity profile, i.e. to leave no one future year with a high level of repayments that could cause problems in re-borrowing

 

      c)         To affect funding in any one year at the cheapest cost commensurate with future risk

 

d)         To forecast average future interest rates and borrow accordingly (i.e. short term and/or variable when rates are “high”, long term and fixed when rates are “low”).  Similarly maturity loans can be taken when rates are relatively low, to lock in the principal for the maximum period, and possibly annuity loans or equal installments of principal loans when rates are considered higher.

 

e)         To monitor and review the level of variable interest rate loans in order to take advantage of interest rate movements.

 

f)          To restructure debt in order to take advantage of potential savings as interest rates change.

 

3.2.      INVESTMENT

 

1.    To invest such monies as are temporarily surplus to requirements

2.                   To maintain capital security

3.                  To achieve a level of return equal to or greater than would be secured by internal investment

4.                  To maintain policy flexibility.

 

5.         The Council is estimated to have investments of £27.5 million as at 31st March 2004.  This represents the investment of reserves, temporary surpluses on cash flow, and any advance drawdown of loans to finance the capital programme.

 

4.         FORECAST OF INTEREST RATES FOR 2004-2005

 

Bank base rate had remained at 4.0% since 8th November 2001, (the longest incidence of no movement in base rate for some decades)  before falling to a low of 3.5% in July 2003. Base Rate moved back up to 3.75% in November 2003 and commentators are expecting further rises throughout 2004, with a full 1% increase by the end of the year.

 

5.         STRATEGY

 

5.1.      CAPITAL FINANCE

 

To maximise the use of Supported Capital Expenditure, to maximise the use of capital grants and to utilise available capital receipts and leasing to finance a capital programme consistent with the Council’s revenue budget.

 

5.2.      BORROWING

 

The strategy will in general be:

 

i           to borrow long term when interest rates are relatively low and to borrow short term when interest rates are judged to be high.

 

ii          to keep a reasonable balance between short term and long term loans so that

 

o                    there is not an unreasonable exposure to short term loans with corresponding risk of increased interest charges; or

o                    over reliance on long term loans which could restrict flexibility in renewing debt at advantageous interest rates.

 

iii          to aim generally to be in a net day to day borrowing position so that the need for investment of temporary excess funds is avoided as far as possible.

 

This will be subject to variation in order to take advantage where appropriate of prevailing market conditions.

  

For 2004-2005 the strategy will be to continue to borrow medium to long term at fixed interest rates, having regard to the low interest rates that are currently available.

 

5.3.      TEMPORARY INVESTMENTS

 

To invest funds temporarily surplus so as to produce the maximum return.

 

5.4.      DEBT RESTRUCTURING

 

To use available PWLB quota to take advantage of opportunities to redeem PWLB debt or convert from fixed to variable rates or vice versa and replace debt so as to smooth the pattern of debt repayment and/or minimise overall long term capital financing costs.  Consideration will be given to the availability and attractiveness of loans other than PWLB for debt restructuring purposes.

 

6.         RAISING CAPITAL FINANCE

 

6.1.      The following list specifies which borrowing instruments, on and off-balance sheet, can be adopted.  Only those marked  a are currently used by the Council.

 

Fixed         Variable

            PWLB                                                                      a                a 

            Market Long-term                                                     a                a

            Market Pooled Funds                                              a                 a

            Market Temporary                                                    a                a         

            Local Bonds                                                                     

            Overdraft                                                                                      a

            Negotiable Bonds                                                            

            Stock Issues                                                                               

                Internal (capital receipts and revenue balances)     a                       a           

            Leasing                                                                     a                a

            Bills                                                                           

 

7.               SOURCES OF FINANCING

 

The following list specifies which borrowing instruments the Council may adopt.

 

7.1.      PUBLIC WORKS LOAN BOARD (PWLB)

 

1)         The main source of longer term borrowing for the Council for many years has been from the Government through the Public Works Loan Board.

 

            2)         It is still likely that the PWLB will remain the major source of the Council’s long term borrowing requirements.  The 2004-2005 quota for the Council is estimated to be £17.7 million, excluding the sums for Undercliff Drive and Ryde Interchange.

 

3)         Forecasts are that interest rates on long-term loans (including long term PWLB loans) will rise in the near future, and the timing of borrowing will therefore take account of this forecast.

 

7.2.      MONEY MARKET LOANS - LONG TERM AND POOLED FUNDS

 

The availability of PWLB loans has become easier and their rates of interest are expected to remain competitive.  Loans are also available through the London money market in particular longer term loans (40 years) which carry a low initial period of interest, but where the lender has the option to raise the rate after this period.  If that option is taken, the Council is free to repay if it so chooses without penalty.  These Lenders Option: Borrowers Option (LOBO) loans carry the necessary security ratings and can be an effective complement to PWLB borrowing in structuring the loan portfolio and debt rescheduling.

 

7.3.      MONEY MARKET LOANS -TEMPORARY (LOANS UP TO 364 DAYS)

 

Short term loans are used to avoid any unforeseen overdrawn position with the bank.

 

7.4.      OVERDRAFT

 

An overdraft limit of £3m is available with the Council’s bankers.  This facility will be used on occasions when temporary borrowing is difficult, or for amounts of under £250,000 wherever the transaction costs outweigh any benefits from using the money market.

 

7.5.      INTERNAL

 

Internal funds include “reserved” or “set-aside” capital receipts which are to be used to repay debt as a substitute for new borrowing.  There is no provision in legislation to compel authorities to use such receipts in the year they are received, and those funds are normally used internally thereby reducing the need for external borrowing but they could be externalised and new borrowing taken up if conditions merit such an approach.

 

7.6.      LEASING

 

This form of finance will be used where appropriate and economically viable (eg for the purchase of equipment and vehicles), and where the transaction costs are within available resources and show no material cost over that of borrowing.

 

8.                  BORROWING

 

8.1.      The Council will have an estimated borrowing requirements in 2004-2005 of  £17.7 million, in order to finance supported capital expenditure.

 

The estimated requirements of  £17.7m may be met as follows:                               £M

Total Requirement                                                                                                      17.7

Less: movement in amounts set aside                                                                        4.6

Minimum External Borrowing Requirement                                                               13.1

 

9.         APPROVED ORGANISATIONS FOR INVESTMENT

 

9.1.      The current policy is that the investment of surplus funds is limited to:

 

Major British Clearing Banks and Subsidiaries

Larger Merchant Banks

Top Building Societies

Other Local Authorities

 

9.2.      The Council will also use Pooled money resources that may become available through the auspices of approved organisations for Investment, as contained above and to include H M Treasury.  The limit of such investment to be placed at £8 million per each approved source and varied at the discretion of the Chief Financial Officer.  The exercise of such discretion to be reported to the Executive as part of the Annual Reporting requirement as contained under TMP6.

           

9.3.      There may be exceptions to this approved list from time to time depending on individual circumstances, and with the agreement of the Portfolio holder for Resources.  The list of above organisations is continually reviewed having regard to their credit ratings.

 

Apart from the Council’s own bank not more than £8 million may be loaned to any single institution on one date.  Not more than £3 million may be loaned to any subsidiary of one of the clearing banks and no such loan may exceed 1 month.  A maximum advance of £8 million may be loaned to Building Societies with appropriate credit ratings for a period of up to three months.

 

9.4.      Approved organisations will be continually reviewed taking into account credit rating and other relevant information and amended by the Chief Financial Officer or his nominated deputy.

 

10.              SECTION 45 OF THE LOCAL GOVERNMENT AND HOUSING ACT 1989

 

10.1.    POLICY ON INTEREST RATE EXPOSURE

 

1)         The Prudential Code requires the Council to fix each year the maximum proportion of interest on borrowing which is subject to variable rate interest.

           

            2)         In order to take advantage where appropriate of low short-term interest rates it is proposed that for the financial year 2004-2005.

 

the limit on the proportion of interest payable by the Council which is at a rate or rates which can be varied by the person to whom it is payable or by reference to any external factors be 20%.

  

10.2.    OVERALL BORROWING LIMIT

 

Taking account of existing debt and the requirements for 2004/05 and the borrowing powers available:

 

the maximum amount which the authority may have outstanding by way of external debt be £181 million.

 

10.3.    SHORT TERM BORROWING LIMIT

 

Taking account of the need for flexibility in borrowing and in order to take advantage of low short term interest rates as appropriate:

 

the maximum amount which the authority may have outstanding by way of short term borrowing (being part of the overall borrowing limit) be £40 million.

 

11.       POLICY ON EXTERNAL ADVISERS

 

11.1.    Treasury Advisers have been employed by the Council to:

 

·                      forecast movements in long term and short term interest rates

·                      advise on long term borrowing and debt maturity profiles

·                      advise on leasing and capital finance legislation

·                      restructuring of PWLB debt

·                      advise on future interest rate movements (including PWLB) and other market developments

 

The Chief Financial Officer has responsibility for the review of future provision of such advice, and to amend the conditions or appoint different advisers as appropriate.