APPENDIX C

 

TREASURY STRATEGY 2006-2007

 

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.