APPENDIX C
1. TREASURY POLICY
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 by the
Council in February 2003.
2. TREASURY MANAGEMENT
The
Council’s Treasury Management activities include the following:-
·
Cash Flow (daily balances and longer term forecasting)
·
Investing surplus funds
·
Borrowing to finance day to day cash fluctuations
·
Funding of capital investment through borrowing, capital receipts,
grants or leasing
·
Management of debt (including restructuring and monitoring an even
maturity profile)
·
Interest rate exposure management
·
Dealing procedures with brokers, banks and the Public Works Loan Board
(PWLB).
3. ANNUAL INVESTMENT STRATEGY
3.1 Under
the powers of the Local Government Act 2003 the Secretary of State has now
issued guidance on local authority investments. Local Authorities are required
under the Act to have regard to this guidance, which recommends that an Annual
Investment Strategy should be approved each year by Full Council. The guidance does not apply to pension and
trust funds, which are covered by a completely separate regulatory regime. A
copy of the guidance from the Office of the Deputy Prime Minister (ODPM) is
attached to this paper.
3.2. The
general policy objective of the guidance is that local authorities should
invest prudently the surplus funds held on behalf of their communities.
Priority is given to the security and liquidity of funds, but this should not
mean that yield is ignored. It is necessary as under previous regulations to
seek the highest rate of return consistent with proper levels of risk and
security.
3.3. The
guidance provides for a concept of specified and non-specified
investments. A Specified Investment is
one with a term no longer than 364 days which is made with a body or scheme
which has been awarded a high credit rating by an approved credit rating
agency. The two such agencies used by
the Isle of Wight Council are included in those recommended by the Secretary of
State. It is proposed that as part of
this Council’s Investment Strategy that the approved organizations for specified
investments are as set out in Schedule One to this Appendix and that the
associated credit ratings are monitored on an ongoing basis.
3.4. With
regard to Non Specified Investments for 2006/07, these could be used to add
wider flexibility and improved returns on the current investment portfolio,
without the addition of any significant risk. In order to determine approved
bodies for unspecified investments, this could be achieved by limiting it to
those bodies approved for specified investments who also satisfy the top credit
ratings for longer term investments (those classified Aa or above). It is proposed that such investments should
be limited to a maximum of £5 million with any one organisation for a period of
up to three years. In addition
specified investments should not exceed 25% of the investment portfolio at the
time of the investment.
3.5. Credit ratings are
monitored on an ongoing basis with any changes reported to the Chief Financial
Officer or Financial Services Manager.
The Chief Financial Officer is responsible for the implementation of the
Investment Strategy and it is proposed that the authority to enact any changes,
consistent with approved credit ratings be delegated to the Chief Financial
Officer.
3.6. 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
Approved
Money Market Funds
3.7. 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.
4. BORROWING STRATEGY
4.1. The objectives of the strategy will
be:
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.
4.2. FORECAST OF INTEREST RATES FOR 2006-2007
Bank base rate has been held at 4.5% since August
2005. There is currently mixed feeling among commentators as to whether the
next movement will be up or downward.
There is a consensus that rates are likely to stay on hold into the next financial year.
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 2006-2007.
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%.
4.3. STRATEGY
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 2006-2007 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.
4.4. 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.
4.5. APPROVED BORROWING INSTRUMENTS
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
5. SOURCES
OF FINANCING
The following specifies which borrowing instruments
the Council may adopt.
5.1 PUBLIC
WORKS LOAN BOARD (PWLB)
The main source of longer term borrowing for the
Council for many years has been from the Government through the Public Works
Loan Board.
It
is still likely that the PWLB will remain the major source of the Council’s
long term borrowing requirements. The
2006-2007 quota for the Council is estimated to be £17.9 million, excluding the
sums for Undercliff Drive and Ryde Interchange.
5.2. 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.
5.3. OVERDRAFT
& TEMPORARY LOANS
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.
5.4. 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.
6. POLICY
ON EXTERNAL ADVISERS
6.1. 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.