County Hall Beverley East Riding of Yorkshire HU17 9BA Nigel Pearson Solicitor Chief Executive

Transcription

1 County Hall Beverley East Riding of Yorkshire HU17 9BA Nigel Pearson Solicitor Chief Executive Your Ref: Our Ref: Enquiries to: summons/er Liz Russell Tel. Direct: (01482) Fax. Number (01482) Date: 1 February 2017 Dear Councillor I hereby give you notice that a MEETING of EAST RIDING OF YORKSHIRE COUNCIL (BUDGET) will be held at COUNTY HALL, CROSS STREET, BEVERLEY on THURSDAY, 9 FEBRUARY 2017 at 2.00 pm. The business to be transacted is as set out below. 1. Declarations of Pecuniary and Non-Pecuniary Interests - Members to declare any interests in items on the agenda and the nature of such interest. 2. To receive the minutes of the Council meeting held on 11 January 2017 (pages 1-4). 3. Treasury Management Strategy Report of the Director of Corporate Resources (pages 5-12). 4. Prudential Indicators to Report of the Director of Corporate Resources (pages 13-19). 5. Housing Revenue Account Financial Plan to Joint Report of the Director of Corporate Resources and Director of Planning and Economic Regeneration (pages 20-43). 6. Revenue Budget and Financial Plan to Report of the Director of Corporate Resources (pages ). 7. Council Tax Report of the Director of Corporate Resources (pages ). Yours sincerely Nigel Pearson Chief Executive

2 Under the Openness of Local Government Bodies Regulations 2014 members of the public may film, record, take photographs or use social networking during Council meetings that are open to the public. Members of the public who do not wish to be filmed during meetings should make this known to the committee manager prior to the start of the meeting. Democratic Services kindly requests advance notice from anyone wishing to film, record or take photographs during open meetings so that suitable provision can be made.

3 EAST RIDING OF YORKSHIRE COUNCIL 11 JANUARY 2017 PRESENT: Councillors Dennis (Chairman), Abraham, Aird, Aitken, Barrett, C Bayram, L Bayram, Billinger, Birmingham, A Burton, R Burton, Chadwick, Cracknell, Davison, Elvidge, Evison, Finlay, Fox, Fraser, Galbraith, Green, Hall, Hardy, Harrap, Head, Healy, Hogan, Horton, Jefferson, Jump, Kingston, Lisseter, Mathieson, Matthews, McMaster, Medini, M Milns, T Milns, Mole, Moore, Owen, Parnaby OBE, Pearson, Robson, Rudd, Sharpe, Skow, Smith, Stathers, Steel, Strangeway, Temple, Tucker, Walker, West, Whittle and Wilkinson. Also in attendance: Press - 2 Public - 4 The Council met at County Hall, Beverley. Apologies for absence were submitted on behalf of Councillors Boatman, Bryan, Harold, Healing, Holtby, Meredith, O Neil, Peacock, Pollard and Turner DECLARATIONS OF PECUNIARY AND NON-PECUNIARY INTERESTS - There were no declarations of interest MINUTES - Moved by the Chairman, seconded by the Vice-Chairman, and Resolved - That the minutes of the meeting held on 23 November 2016 be approved and signed as a correct record MINUTES OF THE CABINET AND COMMITTEES - Moved by the Chairman, seconded by the Vice-Chairman, and Resolved - That the minutes of the undermentioned meetings be received and the recommendations contained therein be approved and adopted with the exception of Minute 599 of the Standards Committee (Hearing) held on 14 December 2016:- The Cabinet:- 29 November December 2016 Overview and Scrutiny Committee and Sub-Committees:- Children and Young People of 9 November and 7 December 2016 Safer and Stronger Communities of 10 November and 8 December 2016 Health, Care and Wellbeing of 15 November, 6 and 14 December 2016 Overview Management of 17 November and 15 December 2016 Environment and Regeneration of 14 December 2016 Health and Wellbeing Board of 15 December 2016 Non-Executive Committees:- Standards of 8 November and 14 December 2016 Standards Assessment of 8 and 30 November and 14 December 2016 Democrat_CR\Council\MINUTES\11jan17.docx (dh/dj) 1

4 Council 11 January 2017 Planning of 17 November and 8 December 2016 Licensing of 5 December 2016 Licensing Act 2003 of 7 and 13 December 2016 Appeals of 9 December LOCAL INVESTIGATION OF COMPLAINTS - COUNCILLOR DOMINIC PEACOCK - Moved by Councillor Chadwick, seconded by Councillor Davison, and Resolved - That the excepted minute be received and the recommendation contained therein be approved and adopted. Voting on the motion was by way of a recorded vote as follows:- For - Councillors Abraham, Aitken, Barrett, C Bayram, L Bayram, Billinger, Birmingham, A Burton, R Burton, Chadwick, Cracknell, Davison, Dennis, Elvidge, Evison, Finlay, Fox, Fraser, Galbraith, Green, Hall, Hardy, Harrap, Head, Healy, Hogan, Horton, Jefferson, Jump, Kingston, Lisseter, Matthews, McMaster, Medini, M Milns, T Milns, Moore, Owen, Parnaby OBE, Robson, Sharpe, Skow, Smith, Stathers, Steel, Strangeway, Temple, Tucker, Walker, Whittle and Wilkinson. Against - Councillors Mathieson, Pearson and Rudd. Abstentions - Councillors Mole and West. For Against - 3. Abstentions LEADER S UPDATE - The Leader of the Council submitted an oral report updating the Council on current issues. At the conclusion of his report Members had the opportunity to ask questions relating to the content of his update QUESTIONS UNDER PROCEDURE RULE 8.1(i) - (a) Councillor Billinger asked whether or not the Leader agreed with him that given the pressure on Local Authority budgets, it was time that Adult Social Care be funded by general taxation rather than by increases in council tax, in the same way that the NHS is. Councillor Parnaby replied. (b) Councillor Hall asked whether, following its careful consideration of residents views and the update from the Clinical Commissioning Group (CCG), the Leader would lend his support to the response agreed by the Health, Care and Wellbeing Overview and Scrutiny Sub- Committee to the CCG s Urgent Care Services public consultation. Councillor Owen replied. Democrat_CR\Council\MINUTES\11jan17.docx (dh/dj) 2

5 Council 11 January 2017 (c) Councillor Fox asked whether the Leader would join her in congratulating Pollington Balne CE (VA) Primary School for being awarded the accolade of being named the highest performing Key Stage Two primary school in the East Riding. Councillor Parnaby replied. (d) Councillor Barrett asked whether or not the Leader would agree that the Hull 2017 City of Culture programme had got off to a great start and feedback from those who attended the opening event In with a Bang and Made in Hull had been extremely positive. Councillor Parnaby replied PORTFOLIO HOLDER REPORT - Councillor R Burton, Portfolio Holder for Civic Wellbeing and Culture, submitted an oral report on matters within the remit of his Portfolio. At the conclusion of his report, Members had the opportunity to ask questions relating to the content of the report DISABILITY ADVISORY GROUP - Moved by Councillor Temple, seconded by Owen and Resolved - That this Council welcomes the recent review of the way we ensure a strategic approach to all issues of Equality and Diversity, and looks forward to the work to be undertaken in the New Year by one of our recently relaunched consultative bodies, now constituted as a Disability Advisory Group. Voting on the motion was by way of a recorded vote as follows:- For - Councillors Abraham, Aird, Barrett, C Bayram, L Bayram, Billinger, Birmingham, A Burton, R Burton, Chadwick, Cracknell, Davison, Dennis, Elvidge, Evison, Finlay, Fox, Fraser, Galbraith, Green, Hall, Hardy, Harrap, Healy, Hogan, Horton, Kingston, Lisseter, Matthews, McMaster, Medini, Mole, Moore, Owen, Parnaby OBE, Pearson, Robson, Rudd, Sharpe, Skow, Smith, Stathers, Steel, Temple, Tucker, Walker, West and Wilkinson. Against - 0. Abstentions - Councillors Head, Jefferson, Jump, Mathieson, M Milns, T Milns, Strangeway and Whittle. For Against - 0. Abstentions MEMBERS ALLOWANCES PANEL - The Director of Corporate Resources submitted a report concerning a review of the current Members Allowances Scheme carried out by the Members Allowances Panel. In accordance with the Local Authorities (Members Allowances) (England) Regulations 2003, the Council established an independent remuneration panel to provide independent advice on the Members Allowances Scheme and the level of allowances to be paid. The Council must have regard to the Panel s advice in determining a revised scheme. The Members Allowances Panel had reviewed the scheme and produced its report which contained one recommendation as follows:- Democrat_CR\Council\MINUTES\11jan17.docx (dh/dj) 3

6 Council 11 January 2017 That the IT initial allowance be set at a maximum of 370 to cover 50% of the cost incurred in purchasing IT equipment, paid upon receipt of an itemised invoice once during a term of office and that the annual maintenance allowance be set at 130 to be used towards the cost of repairs, maintenance and consumables. Moved by Councillor Parnaby, seconded by Councillor Owen, and Resolved - (a) That having regard to the Panel s report, the recommendation be accepted and the current Members Allowances Scheme be revised; meeting, and (b) that the revisions to the scheme take effect from the date of this (c) that the Members of the Panel be thanked for their work. Democrat_CR\Council\MINUTES\11jan17.docx (dh/dj) 4

7 Agenda Item No EAST RIDING OF YORKSHIRE COUNCIL 3 Report to: Council 09 February 2017 Wards: All Treasury Management Strategy Report of the Director of Corporate Resources A. Executive Summary Treasury Management is 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. Department for Communities and Local Government (DCLG) Guidance under the Local Government Act 2003 requires local authorities to set out their policies for managing investments and for giving priority to the security and liquidity of those investments. This strategy is drawn from the Council s Treasury Management Policy Statement and covers investments, borrowing, the outlook for interest rates, the management of associated risks and the policy to be adopted on Minimum Revenue Provision (MRP). This Strategy had been considered by the Audit Committee on 27 January 2017 and the Cabinet on 31 January 2017, both of which had recommended it be approved by full Council. B. Corporate Priorities Reducing costs, raising performance C. Portfolio Council Corporate Service and Performance Leader D. Recommendation and Reason for Recommendation The Council approve the Treasury Management Strategy and Minimum Revenue Provision policy as set out in this report. DCLG Guidance requires an annual investment strategy and an MRP policy to be approved by full Council before commencement of the financial year. 5

8 1. Background 1.1 Treasury Management is 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. 1.2 The Council maintains and operates a Treasury Management Policy comprising the principles and practices to which the activity will comply. Alongside this policy, the Council must have regard to Department for Communities and Local Government (DCLG) guidance, under section 15(1)(a) of the Local Government Act This guidance provides for each authority to determine its own controls within a given framework. 1.3 This strategy is developed from and complies with the Council s Treasury Management Policy and takes account of the DCLG guidance referred to above. 2. Considerations including Options 2.1 This report considers the strategy to be followed, during , for investment and borrowing. It also sets out the Council s expectation for interest rates and highlights the uncertainties and risks in the forecast. 2.2 Furthermore, the report considers those aspects of treasury policy that change annually or more frequently, highlighting the Council s views or interpretation of factors that may influence treasury management decisions and proposes how these matters will be dealt with during Treasury Management Strategy 3.1 The prime objective of the Council s investment strategy is to maintain capital security whilst ensuring that there is the necessary liquidity to carry out its business. Within these constraints, the strategy aims to maximise returns. 3.2 The borrowing strategy aims to minimise both the revenue cost of debt and the potential volatility of these costs which can arise from changes to interest rates. 3.3 One revenue consequence of borrowing is the statutory requirement to set aside an amount for repayment of debt, known as Minimum Revenue Provision (MRP). Regulations require the authority to determine annually a principle by which MRP will be determined. 3.4 The Treasury Management Strategy aims to protect the Council from market-related risks by monitoring interest rates, economic indicators and UK and overseas government finances and reacting accordingly. A range of information sources are used to inform economic analysis and forecasts. 3.5 The following paragraphs represent the detailed strategy to be followed during Investment 4.1 Except for speculative type investments (eg stock market), local authorities are free to invest money widely. The DCLG guidance provides two definitions for investments specified and non-specified investments. 6

9 4.2 Specified investments are those investments denominated in sterling, which are due or may be required to be repaid within 12 months of the date the transaction was made and the organisation or scheme with which the investment is made is of high credit quality. Nonspecified investments are all other investments. 4.3 The guidance leaves it to each local authority to determine what it considers high credit quality. East Riding of Yorkshire Council demands security of capital as a prime objective. It is considered that those institutions with a long-term rating of A- or higher combined with a short-term rating of A2 or higher are commensurate with a low level of risk. These levels constitute the top three (of four) investment grade categories. The Council does not rely on credit ratings alone. In addition to and complementing credit ratings, the use of credit default swap prices, real-time market data monitoring, and quality financial press are used to gain further market intelligence and determine those organisations of high credit quality. An extract from the Council s Treasury Management Policy is included at Appendix 1, which sets out the limits that apply to each counter party and the portfolio as a whole. 4.4 Non-specified investments are risk-assessed at the time an investment is made. Unquoted investments will not normally be made. The authority may enter into reverse repurchase agreements, provided they are based on the GMRA 2000 or 2011 (Global Master Repo Agreement) and the collateral is UK government debt including: Index linked gilts, Conventional gilts, UK Treasury bills or a pool of gilts referred to as DBV (Delivery By Value). 4.5 Investment risk cannot be entirely eliminated but is managed through the credit and counterparty framework set out in the Treasury Management Policy. 4.6 The following restrictions to the investment criteria in the Treasury Management Policy remain in place: The maximum loan limit for specified investments is set at 10m and the maximum duration is twelve months. The limit on investments in AAA-rated money market mutual funds is set higher at 15m per fund, since those funds mirror the Council s policy objectives of security and liquidity. Investments are permitted with banks domiciled in the core Euro-member states of Germany, the Netherlands, Belgium and Finland. Banks domiciled in the weaker peripheral Euro-zone countries remain suspended in view of the ongoing sovereign debt issues and high levels of non-performing loans in the region. Banks domiciled in the Middle East remain suspended in view of the ongoing conflict, political instability and civil unrest in the region. To enhance diversification, up to 10% of the investment portfolio may be invested in corporate bonds, restricted to those issued by specific counterparties agreed by the Operational Treasury Management Board (OTMB). 4.7 The OTMB will continue to monitor market conditions throughout the year and amend investment criteria within the Treasury Management Policy as appropriate. 5. Borrowing 5.1 In general, the Council will borrow for one of two purposes to finance cash flow in the short term or to fund capital investment over the longer term. It is not anticipated that it will be necessary to borrow for either of these purposes during The government intends that all supported capital expenditure will be grant funded. Additionally, capital investment plans provide for 25.6m of unsupported borrowing and there 7

10 is at present an underlying need to borrow up to 91.8m to finance past capital expenditure. The current Financial Plan does not anticipate a need to externalise this borrowing during The Council is able to borrow from the Public Works Loan Board, a statutory body, and would expect to be able to meet its needs from that source. However, loans are also available from the market and these will also be considered if the costs of such loans are favourable. 5.4 The Council s debt portfolio is managed to ensure that the maturity profile will not leave any one future year with a high level of repayments that could present difficulties in refinancing. In line with this, long term borrowing will generally be taken on the basis of equal instalment of principal or annuity, rather than maturity, thereby spreading repayments over future years. 5.5 The exception to this is borrowing in respect of the HRA. This is generally structured to match business plan cash flow. 5.6 Whilst the above deals with past or present borrowing requirements, it is also possible to borrow in advance of need. Current capital investment forecasts require funding from borrowing of 24.7m for the three years , however, projected levels of cash balances indicate that it will not be necessary to action this borrowing until a later point. Borrowing in advance of need introduces additional credit and interest risk. Whilst there is no present intention to borrow in advance, should conditions favour such action all risks will be then considered. 5.7 Furthermore, the portfolio is regularly reviewed to identify any refinancing opportunities. The current interest rate structure means this is not cost effective and it is unlikely that such an opportunity will present itself this year. 6. Interest Rates 6.1 There are many influences that affect money market sentiment and consideration is given to both short-term and long-term interest rates, which move and react differently and to differing factors. The relevant treasury management decisions taken in respect of the strategy will be influenced by the prevailing interest rates throughout the year. 6.2 The Bank of England s Monetary Policy Committee (MPC) is charged with setting UK Official Bank Rate in order to achieve a Consumer Price Inflation (CPI) target of 2%. For short term rates, money markets are normally guided by Bank Rate, or more precisely the level, direction and timing of bank rate changes. In other words, money markets try to predict what the MPC will do in the future. 6.3 The MPC had been holding Bank Rate at 0.5% since March 2009 in an effort to encourage lending and stimulate domestic consumer spending and business investment. With the rate close to zero, the Bank had also embarked on a programme of asset purchases using new money, a process known as quantitative easing (QE). In August 2016, responding to the result of the UK s June referendum in favour of leaving the European Union (EU), the MPC reduced Bank Rate to 0.25% and increased QE by 60bn to 435bn to bolster the UK economy and shore up market confidence. The MPC has stated that when Bank Rate does begin to rise, it would do so gradually, depend on economic developments, and likely be materially below the 5% average level prior to the financial crisis. Markets do not expect the first rate rise until 2019, eventually reaching 1% by 2021 as heightened uncertainty drags on growth and the UK negotiates the terms of its departure from the EU and subsequent trade deals. The MPC has suggested a further rate cut, to near zero, is a possibility in the face of a deteriorating economy 8

11 and there is a risk that formally notifying the EU of the UK s intention to leave in March 2017 could be the trigger. However, if Sterling continued to weaken driving inflation significantly over the 2% target the BoE may be forced to raise rates earlier, although the UK s reliance on domestic consumers and the negative impact an increase in mortgage rates could have on their disposable income continues to be a major factor in the MPC s deliberations. 6.4 Inflation in the UK has been rising throughout 2016 with Consumer Price Inflation (CPI) reaching 1.0% in September and this is likely to continue throughout 2017 fuelled by weaker Sterling exchange rates and OPEC s recent agreement to reduce oil production. The Bank of England s (BoE) November Inflation Report forecast CPI to breach the 2% target in early 2017 reaching around 2.5% by mid-year and remaining at this level for the remainder of the forecast period. 6.5 Longer-term rates are set by reference to bond yields, which concentrate on perceived success in inflation management. Government bond yields move with expectations of ability and willingness to control inflation but are also influenced by the supply of bonds. Planned annual gilt issuance for remains around three times normal as the government manages the budget deficit caused by the recession. During 2016 the UK continued to benefit from safe haven status as investors responded to geopolitical tensions, and slowing emerging market economies. The expansion of the BoE s QE programme and resilient economic growth, have also maintained demand for gilts keeping yields low. 6.6 However once formal notification has been given, the UK will have 2 years to negotiate its exit from the EU. The UK Government has already come under intense scrutiny from the media and investors regarding its approach to the process and its strategy for trade negotiations. There will clearly be a prolonged period of uncertainty for the UK economy and estimates of up to a decade have been quoted before replacement bi-lateral trade agreements are in place. A loss of faith in the government s ability to effectively manage the economy through this process, would lead to gilts losing their safe-haven status and rising public borrowing costs. 6.7 Public Works Loan Board (PWLB) interest rates are priced around 0.8% above gilts. Twentyfive year rates have moved between 1.84% and 2.98% during , with 50-year rates moving between 2.28% and 3.84%. Expectations are that the range during will be from 3.00% to 4.50%. 6.8 The strategy does not rule out the possibility of economic circumstances changing during but, in view of the forecast, a trigger point of 4.50% will be used, being the 25-year PWLB rate at which active consideration will be given to borrow longer term. At this point, projected levels of cash balances indicate that it will not be necessary to borrow until after , but this would be re-considered if cash balances were to fall to a level where borrowing is deemed necessary or a significant increase to borrowing rates is forecast. 7. Management of Risk 7.1 Credit and counterparty risk and market risk (the risks associated with the core principles of security, liquidity and yield) are managed within and monitored against the framework approved in the Treasury Management Policy. 7.2 Investment is mainly by cash deposits with financial institutions. However, in order to increase diversification, it is possible to purchase financial assets issued by banks, non-financial companies, sovereigns and sub-sovereign organisations. These assets, such as Certificates of Deposit and bonds, are bought with a view to accessing counterparties not normally available to the Council. 9

12 7.3 Limited use of derivatives to manage risk appears to be permitted by the Localism Act 2011 and the latest CIPFA Code of Practice on Treasury Management. However, government has been silent on this matter and it is likely that it will be left for the courts to determine. Consequently, the use of derivatives will not be considered until the situation becomes clarified. 7.4 The OTMB continues to meet bi-monthly, chaired by the Director of Corporate Resources, to consider issues of best practice, market conditions and intelligence and formally review the restrictions in place over investment and borrowing within the limits set out in the Treasury Management Policy. 8. MRP Statement 8.1 A revenue consequence of borrowing is the statutory requirement to set aside an amount for the repayment of debt, known as Minimum Revenue Provision (MRP). Regulations require the authority to determine annually a principle by which MRP will be determined. 8.2 DCLG guidance requires that before the start of each financial year a local authority prepares a statement of its policy on making MRP in respect of that year and submits it to the full Council. 8.3 The 2008 regulations require the amount of MRP charged to be a prudent amount. The broad aim of prudent provision is to ensure that debt is repaid over a period that is either reasonably commensurate with that over which the capital expenditure provides benefits, or, in the case of borrowing supported by government funding, reasonably commensurate with the period implicit in the determination of that funding. 8.4 It is recommended that the Council applies the following policy to determine its MRP for : The asset life method is to be used to calculate MRP for the remaining Capital Financing Requirement relating to capital expenditure incurred before 1 April In an average asset life of 51 years was determined for the pre-2007/08 assets on the Balance Sheet as at 31/03/2016. The asset life method is to be used to calculate MRP for all General Fund capital expenditure incurred from 1 April 2007, with the asset life determined from the outset and MRP charged in the year following the one in which the expenditure is incurred, with the exception of: a) Where expenditure is incurred over more than one year, then the asset life and MRP shall commence in the year the asset becomes operational in accordance with proper accounting practice, b) Deemed capital expenditure financed by borrowing which will have an asset life as prescribed in the guidance, and c) Finance leases and PFI assets which will have a life determined by the life of the financial instrument as a proxy for asset life. Use of the financial instrument life to determine MRP is similar to the prescribed life in respect of deemed capital and associates the charge to revenue with cash flows. For HRA capital expenditure, there is no requirement to set aside MRP or to repay debt. Consequently, the HRA will periodically set aside voluntarily an amount considered affordable within its business plan. 10

13 8.5 This is a continuation of existing practice. The policy for calculating MRP for may be revised and brought back for further consideration at a later date if deemed appropriate. 9. Conclusion 9.1 Financial markets have not yet returned to normal. In light of this and with the prime objective of capital security, as outlined in section 4, restrictions on lending will continue to be subject to regular review. 9.2 For borrowing, a trigger point of 4.50% will be used, being the 25-year PWLB rate at which active consideration will be given to borrow longer term. Whilst borrowing above that level may be considered, the Council is not in a position where it needs to borrow at any cost. 9.3 The determination of the MRP policy set out in section 8 offers the Council maximum flexibility in its charge to revenue. 9.4 The Council s Treasury Management Policy is regularly reviewed to ensure that it continues to reflect best practice. Caroline Lacey Director of Corporate Resources Contact Officer: Julian Neilson Interim Head of Finance Telephone Number: E.mail: julian.neilson@eastriding.gov.uk Contact Officer: Mark Buckton Senior Accountant Telephone Number: E.mail: Background Papers Treasury Management Policy 11

14 Appendix 1 EXTRACT FROM THE TREASURY MANAGEMENT POLICY Credit and Counterparty Risk Management For specified investments, an institution or instrument must be rated by at least two of the three reference agencies and, if these are different, the lowest rating will apply. Credit ratings are live and therefore subject to change. New ratings may be issued and existing ratings may go up or down. As such it is not appropriate to include in this statement a list of counterparties meeting the above criteria since it would only be valid at a point in time, although in practice a list is maintained. Similarly, non-specified investments will be assessed on their merits at the time of investment, having regard to the counterparty, size and duration of the investment, which will not exceed five years. The aggregate of nonspecified investments is limited to 50 million at any one time. To further embed diversification, a maximum of 10% of the portfolio will be invested with an individual institution (15% limit applied to a group). In addition to these limits, no more than 25% of the Portfolio may be placed in each of the regions North America including Canada; Middle East; Asia; Australia and New Zealand and non-uk Europe. Non-UK institutions are determined by ultimate ownership (parent company) where part of a group. Since money market mutual funds themselves dilute risk, a maximum of 20% of the portfolio may be placed with a single fund. Applying the principles detailed above provides the following framework, within which counterparties and investment transactions will be made. 1. Specified Investments (limit per counterparty) 1 UK Government Local Authorities Money Market Funds with a minimum rating AAA 3 Institutions with a minimum rating of AAA/A1 3 Institutions with a minimum rating of AA-/A2 3 Institutions with a minimum rating of A-/A2 3 Building Societies assets greater than 5,000 million Building Societies assets greater than 1,000 million Building Societies assets greater than 250 million 2. Non-specified Investments (limit per counterparty) Investments for more than 365 days Other non-specified investments 2 Maximum Limit Unlimited 20.0m 20.0m 20.0m 15.0m 10.0m 5.0m 2.5m 1.0m 5.0m 5.0m 3. Other Limits (on day of investment) Percentage of portfolio with a single institution 10.0% Percentage of portfolio with a group with common ownership 15.0% Percentage of portfolio within UK Europe Unlimited Percentage of portfolio within each geographic region 25.0% Percentage of portfolio with a single fund 20.0% Aggregate value of Non-specified Investments 50.0m Notes: 1. Ratings shown are Standard and Poor s; comparable ratings are used by Moody s and Fitch rating agencies. 2. For example, a commercial loan for economic development purposes 3 Ratings and limits are for guidance only, other information will also be taken into account, (eg. Credit default swap prices), in determining whether to use a counterparty. 12

15 Agenda Item No: EAST RIDING OF YORKSHIRE COUNCIL 4 Report to: Council 9 February 2017 Wards: All Prudential Indicators to Report of the Director of Corporate Resources A. Executive Summary The CIPFA Prudential Code provides a framework whereby the Authority can decide what it can afford to spend or borrow in respect of capital investment. The Code requires a series of indicators to be calculated which demonstrate that the principles of affordability, sustainability and prudence have been satisfied. This report explains and recommends the prudential indicators for each of the next three years compared with the current and previous years. The indicators will be monitored during the year and will be revised by Council when required, including changes necessary to account for the advancement of the capital investment programme. B. Corporate Priorities Reducing Costs, Raising Performance Portfolio Leader D. Recommendation and Reason for Recommendation That Council approve the eleven prudential indicators set out in this report, subject to any amendments as a consequence of decisions taken by the Council during the meeting. It is a requirement of the Prudential Code that the indicators are set and revised by full Council. E. Equality Implications There are no equality implications. 13

16 1. Background 1.1 The Prudential Code, produced by the Chartered Institute of Public Finance and Accountancy (CIPFA) is recognised by the Local Government Act 2003 as proper practice, to which local authorities must have regard. 1.2 The Prudential Code requires the Council, in determining its programme for capital investment, to consider: Affordability, e.g. implications for council tax Prudence and sustainability, e.g. implications for external borrowing and whole life costing Value for money, e.g. option appraisal Stewardship of assets, e.g. asset management planning Service objectives, e.g. strategic planning for the Authority Practicality, e.g. achievability of the forward plan. 1.3 In order to embed the above considerations into both the capital investment and revenue expenditure planning processes, the Prudential Code requires a series of indicators to be calculated and approved by Members to determine self-imposed limits. 1.4 This report explains and recommends the indicators for the Council. 2. Considerations including Options 2.1 Each of the indicators shown in the report has been calculated on the basis of existing approved capital investment plans. 2.2 As the Council s capital investment plans evolve throughout 2017/18, the prudential indicators may also change and will then be reported for further consideration and approval. 3. Introduction 3.1 The Capital Finance and Accounting Regulations (SI2003/3146 as amended) give statutory backing to the Prudential Code. 3.2 Each authority is required to set its own prudential indicators as detailed in the Code. They are not intended for use as performance indicators to compare individual or classes of authorities with each other. The indicators relate to the authority in question to measure capital investment performance over time and how it has responded to changing service demands and external conditions. 3.3 Decisions to undertake capital investment by a local authority are limited by the local responsibility to determine whether it is affordable, sustainable and prudent. However, the Local Government Act 2003 enables the Government to impose capital investment limits on all or individual authorities, which can be applied retrospectively, in the light of macro-economic conditions and to avoid decision-making being distorted. The Government has imposed a limit on future borrowing in respect of Housing Revenue Account capital investment. 4. Affordability, Stability and Prudence 4.1 The Prudential Code places emphasis on the authority deciding what it can afford to spend or borrow. This decision encompasses factors around whether the long-term borrowing costs are 14

17 affordable as well as the immediate cost. Affordability is ultimately measured within the Code as the impact of capital investment strategies on council tax and housing rent levels for current and subsequent years. 4.2 Affordability is also measured by calculating capital financing costs as a percentage of the net revenue expenditure of the authority. Capital financing costs include the statutory minimum revenue provision (MRP, calculated as a percentage of external debt and other liabilities) as well as interest payments. 4.3 Risk and uncertainty has to be built in as an integral element of capital investment planning for the medium and long term. The Code necessitates three-year integrated capital and revenue spending plans to determine the prudential indicators. The prudential indicators have to be approved by the Council as part of the budget setting process. 4.4 Within the Code, there is a key indicator of prudence which is meant to ensure that, over the medium term, gross borrowing is only for a capital purpose. In addition to this, the authority is required to set targets for its interest rate exposure to fixed and variable rate loans and amounts invested longer than one year. It also needs to ensure that it has adequate resources to service loans as they mature on an ongoing basis. 5. Capital Expenditure 5.1 The Council has to make a reasonable estimate of the capital expenditure that it plans to incur in the following three years and must record the actual capital expenditure incurred in each financial year. 5.2 The Council s Capital Investment Programme and its Capital Strategy inform the requirements of these indicators. The actual capital expenditure that was incurred by the Authority in 2015/16, the revised estimate for the current year and estimates for future years are as follows: Actual Revised Estimates 2015/ / / / /20 m m m m m General Fund (GF) Housing Revenue A/C (HRA) Total Indicator 1 - These are the capital expenditure indicators, which are recommended for approval. 6. Capital Financing Requirement 6.1 The capital financing requirement indicators measure the Authority s underlying need to borrow to fund capital expenditure, which is the normal level of borrowing expected. The actual capital financing requirement at 31 March 2016, the revised estimate for the current year and estimates for future years are as follows: Actual Revised Estimates 31/3/16 31/3/17 31/3/18 31/3/19 31/3/20 m m m m m General Fund Housing Revenue Account Total

18 6.2 Indicator 2 - These are the capital financing requirement indicators, which are recommended for approval. 7 External Debt 7.1 The Council has to set two indicators for external debt: an authorised limit, which is the statutory maximum borrowing permitted, and an operational boundary, which is the normal level of borrowing expected. 7.2 There is a clear link between the Council s capital financing requirement and its external borrowing. Within the Code, there is a key indicator of prudence that ensures that, over the medium term, borrowing is only for a capital purpose (the golden rule). 7.3 The authorised limits set out below are consistent with the Council s current commitments, existing plans, and with its approved treasury policy statement and practices. They are based on the most likely and prudent, but not worst case, scenario with sufficient headroom over and above this to allow for operational management. Risk analysis and risk management strategies have also been taken into account. Actual Revised Estimates 2015/ / / / /20 m m m m m Borrowing Other Liabilities Total Indicator 3 - These are the authorised limits, which are recommended for approval. 7.5 In agreeing these limits, Members are asked to note that the authorised limit for 2016/17 and 2017/18 will be the statutory limit, determined under Section 3(1) of the Local Government Act 2003, for each of those years. 7.6 In exercise of his powers under Section 4(2) of the Local Government Act 2003, the Secretary of State has set a limit of m that the Council is allowed to borrow in respect of the Housing Revenue Account. 7.7 The operational boundaries set out below are based on the authorised limit, but reflect existing and new borrowing without the additional headroom. The operational boundary is a key management tool for in-year monitoring. Temporary breach of the operational boundary will not in itself be a cause for concern, although a sustained breach might indicate an underlying issue that would need investigation and action. Actual Revised Estimates 2015/ / / / /20 m m m m m Borrowing Other Liabilities Total Indicator 4 - These are the operational boundaries, which are recommended for approval. 16

19 7.9 The Council s actual external debt at 31 March 2016 was m, comprising m borrowing and m other long-term liabilities. It should be noted that actual external debt is not directly comparable to the authorised limit and operational boundary, since the actual external debt reflects the position at one point in time. 8. Gross Debt and the Capital Financing Requirement 8.1 In order to ensure that, over the medium term, debt will only be incurred for a capital purpose, the Authority should ensure that debt does not, except in the short term, exceed the total of capital financing requirement in the preceding year plus the estimates of any additional capital financing requirement for the current and next two financial years. This is a key indicator of prudence. 8.2 Where the gross debt is greater than the capital financing requirement the reasons for this will be clearly stated in the annual treasury management strategy as one reason might be that it has borrowed in advance of need. Gross debt is the total of borrowing and long-term liabilities. Actual Revised Estimates 2015/ / / / /20 m m m m m Capital Financing Requirement Gross Debt Headroom Indicator 5 - These are the indicators for gross debt and the capital financing requirement, which are recommended for approval. 9. Capital Financing Costs 9.1 One of the indicators of affordability is the estimated ratio of the Council s General Fund capital financing costs to its net revenue stream in percentage terms. If the ratio is increasing rapidly over time then a larger proportion of revenue resources is being taken up by capital financing costs, which could be used for other elements of the Council s budget. A similar calculation is carried out for the Housing Revenue Account (HRA). 9.2 For 2017/18, net revenue streams are based on the CMT draft General Fund and HRA revenue budgets. For future years, the GF net revenue stream is that projected in the Council s Financial Plan and for the HRA net revenue stream, an estimate of future revenue streams. The actual ratios for 2015/16, revised estimate for the current and estimates for future years are as follows: Actual Revised Estimates 2015/ / / / /20 General Fund 6.91% 5.72% 5.92% 6.25% 6.05% Housing Revenue Account 29.14% 80.53% 36.29% 36.50% 36.54% 9.3 Indicator 6 - These are the capital financing costs indicators, which are recommended for approval. 9.4 In buying out of the housing subsidy system, the HRA has plans in place to repay the associated borrowing at intervals over a 30-year period. The HRA will repay 10.5m in , provision for which has been set aside over the preceding five years. Additionally, in 2016/17 the depreciation on dwellings has more than trebled because of a one-off accounting adjustment. If both the debt repayment and additional depreciation are excluded, the equivalent percentage for 2016/17 is 36.07%. 17

20 10. Incremental Impact 10.1 The other indicator of affordability is the estimate of the incremental impact on council tax and housing rents, over and above capital investment decisions that have previously been taken by the Council. On this occasion, the consequences of all capital investment decisions that have been approved by the Council and are currently proposed to the Council are included in the revenue budget. The impact of all new borrowing is therefore nil, as follows: 2015/ / / /19 Council tax at band D Average weekly housing rent Indicator 7 - These are the incremental impact indicators, which are recommended for approval 10.3 As further capital investment decisions are taken throughout the year, these indicators will be revised. 11. Treasury Management 11.1 The predominant indicator is that the Authority should follow the CIPFA Code of Practice for Treasury Management in the Public Services. This Code is incorporated in the Council s Constitution under paragraph 6.2 of its Financial Procedure Rules Indicator 8 - It is recommended that the Council continue to follow the CIPFA Code of Practice Other indicators are: Annual upper limits over three years for both fixed and variable interest rate exposures to the effects of interest rate changes for net sums outstanding on borrowing and investments Upper and lower limits for the maturity structure of the Authority s debt for the forthcoming year Annual upper limits over three years for amounts that the Authority can invest for periods of longer than one year 11.4 Indicator 9 - It is recommended that the Council sets upper limits of 200% for fixed rate and 100% for variable rate exposures of the net outstanding principal sums for 2016/17, 2017/18, 2018/19 and 2019/ This means that fixed interest rate exposures will be managed within the range 100% to 200% and variable rate exposures within the range 100% to 0%. The possibility of a negative percentage arises because the indicator looks at net debt, which includes investments All borrowing is at fixed rates of interest, whereas the council maintains variable rate no notice instruments, such as Money Market Funds, to meet day-to-day liquidity. Consequently, the value of variable rate investments exceeds the value of variable rate borrowing, which produces the negative indicator. 18

21 11.7 Indicator 10 - It is recommended that the Council sets upper and lower limits for the maturity structure of its debt for the forthcoming year as follows Upper Limit Lower Limit Under 12 months 15% 3% 1 to 2 years 15% 3% 2 to 5 years 25% 8% 5 to 10 years 50% 15% Over 10 years 75% 50% 11.8 The above percentages are the ranges for projected borrowing maturing in each year out of the total projected borrowing and are intended to ensure that the Council is not exposed to the possibility of not being able to refinance debt. The actual percentage debt planned for repayment during 2017/18 is 3.4% Indicator 11 - It is recommended that the Council sets a limit on the amount invested for periods longer than one year of 50 million in total for 2017/18, 2018/19 and 2019/ These four recommendations reflect existing practice, the Treasury Management Strategy 2017/18 and the Treasury Management Policy Statement. Contact Officer: Julian Neilson Interim Head of Finance Telephone Number: E.mail: Julian.neilson@eastriding.gov.uk Caroline Lacey Director of Corporate Resources Contact Officer: Mark Buckton Senior Accountant Telephone Number: E.mail: mark.buckton@eastriding.gov.uk Background Papers None 19

22

23 Agenda Item No EAST RIDING OF YORKSHIRE COUNCIL 5 Report to: Council 09 February 2017 Wards: All Housing Revenue Account Financial Plan to Joint Report of the Director of Corporate Resources and Director of Planning & Economic Regeneration A. Executive Summary The Housing Revenue Account (HRA) is still subject to a number of uncertainties resulting from the Government s policy changes. Much of the detail contained within both the Housing and Planning Act and Welfare Reform and Work Act has yet to be determined in secondary legislation or requires further consultation on the detailed implementation. Both Acts of Parliament have numerous implications for the HRA, such as 1% rent reduction for four years, the High Value Asset (HVA) Levy, welfare reform, and pay to stay rents. The latter has now been abandoned by the Government, with others still to be implemented and fully consulted upon. The Government has given no indication on rent policy beyond the period of 1% reductions, which end in 2019/20. The introduction of the HVA Levy has been put back until at least 2018/19, whilst the Government completes a more robust pilot exercise of the extension of right to buy (RTB) to Housing Association tenants, which the HVA Levy is to be utilised for. Given this continuing uncertainty, it is proposed that the HRA financial plan only covers the next three financial years up to 2019/20 when the 1% rent reductions end. Based on current assumptions and projections, the Council s HRA remains viable in the short to medium term. Although the Business Plan continues to support key initiatives such as the sheltered housing review, along with maintaining levels of capital and revenue investment in existing stock, to ensure homes are maintained to decent homes standards, levels of investment in new build has been significantly reduced in order to mitigate the impacts from the financial pressures arising from the rent reduction and projected impact from the HVA Levy. In the longer term it will be necessary to restructure the self-financing debt, to allow the Business Plan to remain viable. Options will be considered once the full impact is known in respect of the future rent policy and the HVA Levy, but could include refinancing the full debt, refinancing a proportion of the debt at each five year repayment, or only paying interest on the debt and no principal. The HRA budget for and indicative budgets for and , together with the impact on HRA reserves and balances are summarised at Appendix 1. The council house rents detailed at Appendix 2 are based on the continuation of the 1% rent reductions until as detailed in the Welfare Reform and Work Act. There is no longer a rent cut exemption for supported and sheltered dwellings. A summarised medium term financial plan, which reflects the income and expenditure estimates has been produced at Appendix 4. This sets out budget pressures, proposed savings, growth and appropriations within the HRA over the next three years. 20