LONDON BOROUGH OF NEWHAM COUNCIL. 22 February 2016

Transcription

1 LONDON BOROUGH OF NEWHAM COUNCIL 22 February 2016 Subject: Treasury Management Strategy Statement and Annual Investment Strategy 2016/17 Source: OneSource - Finance Wards affected: All Purpose of Report This report presents the 2016/17 Treasury Management Strategy Statement (TMSS). This report has been scrutinised by Audit Board 26/01/16 Recommendations The Council is asked to agree the: 1 Investment Strategy 2016/17 2 Prudential and Treasury indicators 2016/19 3 MRP Policy Statement 2016/17; and 4 Treasury Policy Statement Reasons for the Recommendations The TMSS is a requirement of the council s reporting procedures and recommended by the Chartered Institute of Public Finance and Accountancy ( CIPFA ) code of practice on treasury management and its prudential code for capital finance in local authorities. The council is required to comply with both codes through regulations issued under the Local Government Act Name of Lead Member consulted: Councillor Lester Hudson Position: Deputy Mayor and Cabinet Member for Finance, Project Delivery and onesource Originator of report: Stephen Wild Tel no: address: Stephen.wild@onesource.co.uk Local Government (Access to Information) Act 1985 Background papers used in preparing this report: CIPFA Treasury management in the public services code of practice & guide for chief financial officers CIPFA Prudential code for local authority capital finance Capita Asset Services - UK economic forecasts Fathom UK economic forecasts Bloomberg UK economic forecasts TMSS 2014/15 General Report Template: Ver: 006 Last revised: April 2015

2 Treasury management practices Local Government Act 2003 CLG Guidance on local authority investments 2010 CLG MRP Guidance CIPFA Treasury and investment management in UK local authorities Guidance notes for practitioners on financial instruments (chapter 4 of the 2007 SORP) CIPFA Treasury management In local authorities Icelandic banks collapse Communities and Local Government Select Committee on local government investments, 11 June 2009 Audit Commission, risk and return, English local authorities and the Icelandic banks, March 2009; and Medium Term Financial Strategy Copies of Background documents can be obtained from: Stephen Wild Tel no: address: Stephen.wild@onesource.co.uk List of enclosures / Appendices: Appendix 1 Treasury Policy Statement Appendix 2 Interest Rate Forecasts(Amended) Appendix 3 Borrowing in advance of need Appendix 4 Specified and non-specified investments Appendix 5 Minimum credit rating Appendix 6 Prudential Indicators Appendix 7 MRP Policy General Report Template: Ver: 006 Last revised: April 2015

3 Report 1. INTRODUCTION AND BACKGROUND 1.1 The 2016/17 Treasury Management Strategy Statement (TMSS) manages treasury risk, c 1.1bn. The Council s treasury policy is set out in appendix 1 of this report. The TMSS fully complies with the requirements set out in the CIPFA Prudential Code and Treasury Management Code ( the TM Code ). 2. KEY CONSIDERATIONS AND SUSTAINABILITY 2.1 Table 1 shows the capital finance budget Table 1: Medium term capital finance budget / / / /19 Budget Budget Budget Budget Interest payable and MRP 43,614 42,814 42,814 42,814 Investment income - 4,362-4,462-4,462-4,462 New Capital Programmes 1,000 2,000 3,000 4,000 MRP Savings* -2,468-2,145-1,830-1,538 NET 37,784 38,207 39,522 40,815 Estimated savings if proposed MRP policy is appendix 7 is approved. 2.2 It is a statutory requirement that the level of borrowing is kept under review and is affordable 3. OUTCOMES 3.1 The effective operation of treasury activities will contribute towards the financial standing of the Council and the medium term budget strategy 4. SERVICE DELIVERY AND PERFORMANCE ISSUES 4.1 Prospects for interest rates Appendix 2 details the current interest rate forecasts (amended 21/01/16), Short term investment rates are set to remain low for at least another year. The November Bank of England inflation report implies that the market expects the first rate rise will not take place early The hedgehog graph below demonstrates how market expectations of interest rate hikes and the speed of them have consistently been missed. Pressure for a rate increase will remain low while inflation remains subdued and global growth forecasts remain insipid. General Report Template: Ver: 006 Last revised: April 2015

4 4.1.3 The uncertainty generated by the upcoming EU referendum could force the Bank of England to keep its rates lower and flatter for longer some economists have warned. 4.2 Borrowing Strategy The Council s borrowing strategy will be informed by: interest rate forecasts and the shape of the interest rate curve spread of current debt maturities to avoid high concentrations in any year shape of the Council s future capital finance requirement (CFR) curve; and balance of callable long term debt and non callable long term debt in the portfolio The Council s policy on borrowing in advance of need is set out in Appendix There are currently no plans to undertake further borrowing until there is clarity on the RDV revised business plan and other new capital projects currently being appraised by the Council and provision in the Council s budget strategy has been identified Loan repayment/restructuring options will be considered only if they provide long term value for money. The continuation of a low interest rate environment means that opportunities for undertaking this activity remain very low However, it should be noted that officers, in consultation with the Lead Member for Finance, are actively working on strategies to restructure existing loans within the portfolio, provided that the aims of reducing net interest rate risk, creating interest rate savings and re-balancing the portfolios are achieved A credit rating will only be considered where officers are confident that it would result in the council being able to access lower borrowing costs than the PWLB. General Report Template: Ver: 006 Last revised: April 2015

5 4.3 Investment Strategy The Council s investment policy has regard to the CLG s Guidance on Local Government Investments and the TM Code, hence its priorities remain security first, liquidity second and then return The Council s officers recognise that ratings should not be the sole determinant of the quality of an institution, nor will be bound by the agency with the lowest rating and, importantly, they will continually to assess and monitor the financial sector on both a micro and macro basis and in relation to the economic and political environments in which institutions operate Investments will make reference to the core balance, cash flow requirements and the outlook for short and medium term interest rates The Council will avoid making longer term deals while investment rates are at historically low levels unless attractive rates with high quality counterparties are available Investment instruments identified for use in the financial year are listed in Appendix 4 under the Specified and Non Specified investment categories; these are the revised categories as detailed in the Mid Year report. The Director of Finance will, on advice, make operational changes to these limits in response to prevailing market conditions and regulatory changes. Included in the list is a new category for deposits covered by netting agreements in respect of existing loans within the Council s portfolio The Councils minimum criteria are set out in Appendix 5, these again are the revised criteria detailed in the mid year report. The Director of Finance will, on advice, make operational changes to criteria in response to prevailing market conditions Local measures of yield benchmarks are: returns over 7 day LIBID rate, Capital Asset Services (CAS) rate and UK Debt Management Office (DMO). 4.4 Treasury Indicators The indicators cover 2015/ /19. The CIPFA Prudential Code and the TM Code requires authorities to set treasury indicators and these are set out in Appendix 6, and again these are the revised indicators detailed in the mid year report. No breaches in the indicators are likely in 2015/ Minimum revenue provision (the MRP) The proposed MRP Policy Statement 2016/17 is set out in Appendix 7 of this report 4.6 Policy on the use of external service providers The Council uses Capita Asset Services (CAS) as its external treasury advisor but responsibility for treasury management decisions remains with this Council at all times. General Report Template: Ver: 006 Last revised: April 2015

6 5.1 FINANCIAL IMPLICATIONS The proposals in this report do not have a direct economic impact within the borough. Clearly the effective operation of treasury activities should contribute towards the financial standing of the Council and the budget strategy that supports the delivery of objectives generally. 5.2 COMMENTS OF THE FINANCE OFFICER The recommended TMSS, including the Treasury Prudential Indicators will provide sufficient flexibility for the Director of Finance to manage the Council s loan debt effectively in 2016/17. The Capital Financing forecast used for the Budget strategy is consistent with the proposals of this report 6. COMMENTS OF THE LEGAL OFFICER 6.1 The TMSS is a requirement of the Council s reporting procedures and both the CIPFA Code of Practice on Treasury Management and the CIPFA Prudential Code for Capital Finance in Local Authorities. The Council is required to comply with both Codes through Regulations issued under the Local Government Act The Local Authorities (Capital Finance and Accounting) (England) (Amendment) Regulations 2008 state that a local authority has a duty to make an amount of MRP which it considers to be prudent. The regulation does not itself define prudent provision however; the MRP guidance makes recommendations to authorities on interpretation and determination of MRP provision for the future. 7. RISK MANAGEMENT 7.1 A fundamental part of Treasury Management involves the management of interest rate changes and thus financial risk. In addition to this, administration procedures are monitored and audited to ensure they are secure. Internal controls ensure investments are only made with financially sound organisations to minimise the risk of capital loss. The Treasury Management Strategy is regularly reviewed with professional advisors to ensure that changes in market conditions can be responded to promptly. 8. SUSTAINABILITY IMPACT APPRAISAL 8.1 Equalities/Diversity implications The report has no specific impact on Equalities/Diversity other than the achievement of financial savings that will help to maximise resources available for Council services 8.2 Protecting Children The report has no specific impact on children in the borough other than that the achievement of financial savings that will help to maximise resources available for Council services. 8.3 Human Rights Not applicable 8.4 Climate Change implications and the effect on the Carbon footprint Not applicable General Report Template: Ver: 006 Last revised: April 2015

7 8.5 Crime and Disorder Not applicable 8.6 Economic Impact Effective operation of treasury activities contribute towards the financial standing of the Council and the budget strategy. 9. Consultation 9.1 This report was reviewed and noted by the Audit Board 26 th January 2015 and Cabinet 18 th January 2016 General Report Template: Ver: 006 Last revised: April 2015

8 Appendix 1 Treasury policy statement 1. Treasury management within this council is undertaken in accordance with the CIPFA Code of Practice for Treasury Management in the Public Services ( the TM Code ). 2. The council has been compliant with the requirements of the TM Code and has formally adopted the key recommendations as described within Section 4 of the TM Code. 3. In accordance with the TM Code, the council defines treasury management activities 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. 4. The council regards the successful identification, monitoring and control of risk to be the prime criteria by which the effectiveness of its treasury management activities will be measured. Accordingly, the analysis and reporting of treasury management activities will focus on their risk implications for the organisation, and any financial instruments entered into to manage these risks. 5. The council acknowledges that effective treasury management will provide support towards the achievement of its business and service objectives. It is therefore committed to the principles of achieving best value in treasury management, and to employing suitable performance measurement techniques, within the context of effective risk management. 6. The council will create and maintain, as the cornerstone for effective treasury management: a Treasury policy statement, stating the objectives of its Treasury Management activities suitable Treasury Management Practices (TMPs) setting out the manner in which the Council will seek to achieve those policies and objectives, and prescribing how it will manage and control those activities (copy available for members to inspect) Treasury management Prudential Indicators as determined by the requirements of the CIPFA Prudential Code; and the content of the policy statement and TMPs will follow the recommendations contained in Sections 7 of the TM Code, subject only to amendment where necessary to reflect the particular circumstances of this organisation. Such amendments will not

9 result in the organisation materially deviating from the TM Code s key principles. 7. The council will receive reports on its treasury management policies, practices and activities, including as a minimum, an annual strategy and plan in advance of the year, an annual report after its close and an interim review report. 8. The council delegates responsibility for the implementation and monitoring of its treasury management policies and practices to the Mayor, and for the execution and administration of treasury management decisions to the Director of Finance, who will act in accordance with the council s policy statement and the TM Code. 9. The council has nominated Audit Board to be responsible for ensuring effective scrutiny of the treasury management strategy and policies. 10.Derivative instruments will only be used as a hedging tool for the management of risk and the prudent management of its financial affairs. The council will seek proper advice and Audit Board will consider that advice before entering into arrangements to use such products to ensure that it fully understands them.

10 Appendix 2 Mar- Mar- Mar- Mar- NOW Jun-16 Sep-16 Dec-16 Jun-17 Sep-17 Dec-17 Jun-18 Sep-18 Dec BANK RATE month LIBID month LIBID month LIBID yr PWLB yr PWLB yr PWLB yr PWLB

11 Appendix 3 Borrowing in advance of need Borrowing is primarily required to finance the council s capital expenditure programme and is long term in nature. Views of interest rate movements and moreover rising interest rate risk must be managed. This may result in borrowing in advance of need to secure long term finance on advantageous terms and reduce financing risk when capital will be required. Borrowing in advance can increase cash balances temporarily that are then available for investment. There are attendant risks associated with investments but the council has taken measures to substantially reduce the level of credit risk from holding investments and manage the carry cost (the difference between borrowing costs and investment yield) The council will not borrow more than or in advance of its needs purely in order to profit from the investment of extra sums borrowed. Risk associated with any borrowing in advance activity will be subject to prior appraisal and subsequent reporting through the mid-year or annual reporting mechanism. Officers will monitor the interest rate market and adopt a pragmatic approach to changing circumstances, reporting any decisions to Audit Board at the next available opportunity.

12 Specified and Non-Specified Investments Appendix 4 SPECIFIED INVESTMENTS: (All such investments will be sterling denominated, with maturities up to maximum of 1 year, meeting the minimum high rating criteria where applicable) Debt Management Agency Deposit Facility Term deposits local authorities and other public institutions Term and call deposits banks and building societies * * Minimum High Credit Criteria UK sovereign rating UK sovereign rating Set out in appendix 5, Banks #1,2,3, 4, 5 and 6 Use In-house In-house and Fund Manager In-house and Fund Term deposits with nationalised banks and banks and building societies Max % of * Minimum Credit Use total Criteria investments Max. maturity period UK part nationalised banks UK sovereign rating In-house year UK part nationalised banks UK sovereign rating Fund year Banks part nationalised by high credit rated (sovereign rating) countries non UK* Sovereign rating A In-house and Fund year * The countries approved for investing with their banks: Canada, Denmark, Finland, France, Germany, Luxembourg, Netherlands, Norway, Singapore, Sweden, Switzerland, UK, Australia, Belgium, Hong Kong, USA

13 Other instruments Collateralised deposit ( see note 1) Minimum High Credit Criteria UK sovereign rating Use In-house and Fund Certificates of deposits issued by banks and building societies sovereign rating AA- In-house Certificates of deposits issued by banks and building societies As appendix 7; Banks#3 Fund UK Government Gilts UK sovereign rating In-house and Fund Bonds issued by multilateral development In-house and Long term AAbanks Fund Treasury Bills UK sovereign rating Fund Collective Investment Schemes structured as Open Ended Investment Companies (OEICs): - 1. Government Liquidity Funds 2. Money Market Funds 3. Enhanced cash funds 4. Bond Funds Long-term AA- Long-term AA, Variable NAV aggregate limit of 20m and 10m per fund. Stable NAV limit is 30m per fund. Longterm AA,. Long-term AA Investment Grade BBB or higher In-house and Fund In-house and Fund In-house and Fund In-house and Fund 5. Gilt Funds UK Sovereign Rating In-house and Fund 6. Property Funds UK Property Only In-house and Fund 7. Equity Funds FTSE 100 Companies Only In-house and Fund 8. Mixed Asset Funds Mixed Investments 20% to In-house and 60% shares only Fund If forward deposits are to be made, the forward period plus the deal period should not exceed two year in aggregate. Note 1: as collateralised deposits are backed by collateral of local authority LOBOs, this investment instrument is being regarded as being equivalent to lending to a local authority. Accounting treatment of investments. The accounting treatment may differ from the underlying cash transactions arising from investment decisions made by the council. To ensure that the council is protected from any adverse revenue impact, which may arise from these differences, we will review the accounting implications of new transactions before they are undertaken.

14 NON-SPECIFIED INVESTMENTS a maximum of 75% may be held in aggregate in non-specified investments. 1. Term deposits with Financial Institutions Term deposits with part nationalised banks and banks and building societies operating with government guarantees. * Minimum Credit Criteria Use Max % of total investments Max. maturity period UK part nationalised banks UK sovereign rating In-house 75 5 year UK part nationalised banks UK sovereign rating Fund 75 5 year Banks part nationalised by high credit rated (sovereign rating AA-) countries non UK Sovereign rating AA- In-house and Fund 75 5 year

15 2. Maturities of ANY period Fixed term deposits with variable rate and variable maturities: - Structured deposits Structured deposits - Local Authorities and other public institutions Term deposits with unrated counterparties : any maturity Term deposits with unrated counterparties : any maturity Municipal Bonds Commercial paper. Minimum Credit Criteria As set out in appendix 7, Banks #1,2,3 & 4 Use In-house And Fund Max % of total investments Appendix 7, Building Societies # 5 &7 Appendix 7, Challenger Banks # 6. UK sovereign rating Short-term F2, Longterm A - In-house and Fund In-house and Fund In-house and Fund In-house and Fund Max. maturity period yrs Corporate Bonds Corporate Bond funds/gilt funds Short-term F2, Longterm A - In-house and Fund Floating Rate Notes Long-term A- In-house andfund 10 5 Covered Bonds Long Term AA- In-house and Fund Un rated bonds In-house Property fund: the use of these investments may constitute capital expenditure* -UK Property Only - Fund none Equity Funds FTSE 100 Companies Only In-house and Fund 20 none Mixed Asset Funds Mixed investments 20%to60% shares only In-house and Fund 20 none Bond Funds Investment Grade BBB or higher In-house and Fund 20 none

16 Gilt Funds UK Sovereign Rating In-house and Fund 20 none Service investments for capital (C) or working capital(wc) purposes to third parties such as the NLI(C), Newco (WC), LCCU(WC) and RDV(C) - are not classified as treasury management investments, and are therefore outside of the Specified/Non specified categories. These investments are subject to their own governance and due diligence procedures.

17 3. Maturities in excess of 1 year Term deposits local authorities and other public institutions. Term deposits banks and building societies Certificates of deposits issued by banks and building societies Certificate and deposit issues by banks and building societies UK Government Gilts Bonds issued by multilateral development banks Corporate bonds Minimum Credit Criteria -- Set out in appendix 7, Banks #1,2, 3, 4, 5 &7 UK sovereign rating A- UK sovereign rating AA *Short-term F2 Longterm A- Use In-house and Fund In-house and Fund In house and Fund In house and Fund In-house and Fund In-house and Fund In-house and Fund Max % of total investm ents Collateralised Term Deposit Local Authority In-house 75 5 Sovereign bond issues (i.e. other than the UK govt) AA Collective Investment Schemes structured as Open Ended Investment Companies (OEICs) 1. Bond Funds 2. Gilt Funds Investment grade BBB or higher UK Sovereign Rating In-house and Fund In-house and Fund In-house and Fund 10 5 Max. maturity period yrs none none 3. Property Funds -UK Property Only - 4. Equity Funds 5. Mixed Asset Funds FTSE 100 Companies Only Mixed investments 20%to60% shares only In-house and Fund In-house and Fund In-house and Fund 20 none 20 none 20 none

18

19 The council s minimum credit ratings criteria Appendix 5 Banks # 1 the council will use banks which have at least one of the following Fitch, Moody s and Standard and Poor s (S&P) ratings: i. Short Term: Fitch- F2 or equivalent rating from Moody s or S&P. ii. Long Term: Fitch A- or equivalent rating from Moody s or S&P. Banks # 2 In addition, the council will use a bank whose ratings fall below the criteria specified above if it is either UK part nationalised or meets all of the following conditions: i. wholesale deposits in the bank are covered by a government guarantee ii. the government providing the guarantee is rated A by all three major rating agencies (Fitch, Moody s and S&P s); and iii. the council s investments with the bank are limited to amounts and maturities within the terms of the stipulated guarantee Banks # 3 The council s own banker, if this falls below the above criteria. While the bank remains outside the above criteria, the council will restrict investments to short term only and the amount and duration of investment will be set by the Director for Finance (DoF). Bank Subsidiary and Treasury Operations # 4 the council will use these where the parent bank has the necessary ratings outlined above. Building Societies # 5 the top twenty building societies by total assets with a minimum asset size of 1bn and the following credit rating Fitch (or its equivalent) long term rating, short term rating: AA- F1+ 50m, 5 years; Non rated 7.5mm 1 year.. Challenger Banks # 6 The non rated bank must have a minimum asset level of 250m, the amount invested will be restricted to 5m or 1% of the council s investments (whichever is the lower) and limited to one year duration. Building Societies #7 rated building societies that meet the credit criteria detailed in Appendix 3 currently employed, updated annually, for non-rated building societies Money Market Funds the council will use money market funds whose long term rating is at least AA. AA rated variable Net Asset Value (NAV) products can be used. The limits on individual products will be agreed by the DoF UK Government (including gilts and the Debt Management Agency Deposit Fund DMADF ) Local Authorities

20 Supranational institutions Bond, Gilt, Property, Equity and Mixed Asset Funds

21 Appendix 6 Treasury indicators within the Prudential Code and TM Code Capital prudential indicators The council s capital expenditure plans are the key driver of treasury management activity. The outputs of the capital expenditure plan are reflected in prudential indicators, which are designed to assist members overview and confirm capital expenditure plans. The following strategic projects are currently under development and have not yet been approved in the capital programme. They will not be approved until their affordability and sustainability has been confirmed. These projects (and others that emerge during the year) and the proposed expanded RDV borrowing requirement do not feature in the limits below although the authorised limit and the operational limit have been set sufficiently high to accommodate the projects once they are approved: Red Door Ventures (RDV) RDV is a local authority Trading Company wholly owned by Newham Council. As part of the legal agreement between the Council and RDV, the Council as shareholder are formally required to agree the business plan. Formal agreement is delegated to the Chief Executive after consultation with relevant Officers and Members. This is in progress at the time of writing the report. The RDV Board are due to consider the business plan on 2 nd February 2016, after which it will be formally considered by the council there is an on-going dialogue between the parties to ensure that decisions for the council arising from the business plan are aligned with the funding requirements. The RDV business plan sets out the intended development programme to 2021/22. If the business plan were to be implemented in full, the total funding required by the RDV would increase the figure is yet to be determined but based on provision of 1,800 units could be up to 600m. This is an increase from the 162m programme within the previous business plan and is in the current capital programme and reflected in the indicators below. This level of funding was also included in the reports on the Medium Term Budget and Treasury Management strategies agreed by council in February For 2016/17 the RDV have indicated the revised programme could be 195m this would be the maximum amount RDV would require from the council in the financial year and includes contingencies. The balance of the programme will be progressed in subsequent years and more detailed phasing will be provided as part of each year s business plan.

22 Progression of individual projects within the business plan is dependent on a viability assessment. This will consider whether the rent generated from each development will be sufficient to repay the borrowing and running costs and cover the cost of running the Company. Projects where this is not the case will not proceed. The council provides a working capital facility to RDV to enable the company to operate before properties are brought into rent. Working capital is also used to fund design and preplanning work required before the viability assessment is undertaken. Once approved, the working capital becomes part of the project cost and is transferred within RDV s accounts. Council in October 2015 extended RDV s working capital facility to 12 million. With an extension of the programme to 600m over the period to 2021/22, there is likely to be an increase in working capital as more projects are under development. As a result RDV may request an increase in the facility. Repayment will be supported by the business plan projections. All loans to RDV are made at commercial rates and subject to revision as there are movements in both interest rates and funding terms. The council generates a return on loans to RDV via the difference between its own borrowing costs, after debt management expenses, and via dividends which RDV will generate as the company becomes profitable. Regeneration projects The council is adopting a more commercial approach and needs to be proactive about maximising investment opportunities. There are several regeneration projects including Carpenters and Canning Town where the Council may be required to provide funding on an investment basis; that is with the intention of generating a financial return. To enable the Council to take advantage of potential opportunities, it will be recommended that provision is made within the capital programme for future investment opportunities. The figure is yet to be determined but could be as much as 100m. The funding would then be included within the council budget strategy. The use of this funding would require a detailed business case to be made, setting out in detail the financial benefits and associated risks.

23 Funding for the investments would generally be a combination of income generation and savings in existing revenue budgets. It is possible that land transactions may generate a capital receipt and if so this would add a further source of funding. The Business Case would need to be agreed by Cabinet. Where approval is obtained the funding would be released and adjustments made to the revenue budget to reflect the impact (if any) of the proposals. Capital expenditure This prudential Indicator is a summary of the council s capital expenditure plans, both those agreed previously, and those forming part of this budget cycle. Members are asked to approve the capital expenditure forecasts: Table 1: Capital expenditure indicator Capital Expenditure 2015/ / / /19 000s Estimate Estimate Estimate Estimate Non-HRA 141, , ,600 67,500 HRA 36,400 58,400 21,200 21,200 Total 178, , ,800 88,700 Financed by: Capital receipts 9,300 9,500 17,900 15,800 Capital grants 49,800 76,800 53,700 11,100 HRA Self Financ g 25,800 55,000 21,200 21,300 Revenue reserves , Net financing need for the year 85,700 77,000 50,500 41,500 Other long term liabilities: The above financing need excludes other long term liabilities, such as PFI and leasing arrangements which already include borrowing instruments. The council s borrowing need (the Capital Financing Requirement) 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. Any capital expenditure above, which has not immediately been paid for, will increase the CFR. Following accounting changes the CFR includes any other long term liabilities (e.g. PFI schemes, finance leases) brought onto the balance sheet. Whilst this increases the CFR, and therefore the council s borrowing requirement, these types of scheme include a borrowing facility and so the council is not required to separately borrow for these schemes. The council currently has 129m of such schemes within the CFR.

24 The council is asked to approve the CFR projections below: Table 2: Capital financing requirement indicator 000s 2015/ / / /19 CFR non housing 31 March CFR housing 31 March Total CFR 31 March Estimate Estimate Estimate Estimate 506, , , , , , , , , , , ,400 Movement in CFR 69,500 60,200 35,100 24,900 Net financing need for the year (above) 85,700 77,000 50,500 41,500 Less: MRP/PFI and other financing movements -16,200-16,800-15,400-16,600 Movement in CFR 69,500 60,200 35,100 24,900 The council is required to pay off an element of the accumulated General Fund capital spend each year (the CFR) through a revenue charge (the minimum revenue provision - MRP), although it is also allowed to undertake additional voluntary payments if required (voluntary revenue provision - VRP). The above table excludes Private Finance Initiative and Finance lease transactions. The use of the council s resources and the investment position 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.

25 Table 3: Use of council s resources and the investment position Year End Resources 2015/ / / /19 000s Estimate Estimate Estimate Estimate Fund balances / reserves 298, , , ,500 Capital receipts 20,500 20,500 20,500 20,500 Provisions 16,000 15,800 15,800 15,800 Total core funds 335, , , ,800 Working capital* 81,000 81,000 81,000 81,000 (Under)/over -41, , , ,000 borrowing before additional debt Additional debt Expected investments 375, , , ,800 *Working capital balances shown are estimated year end; these may be higher mid year. All figures cumulative Presently there are no plans to undertake external borrowing, however this may change once the aforementioned RDV and other projects have presented viable schemes as per their business plan projections and how forecast interest rates change over the medium term. Affordability prudential indicators 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: 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.

26 Table 4: Estimates of the ratio of financing costs to net revenue stream* % 2015/ / / /19 Non-HRA HRA * To be confirmed when Budget is agreed The estimates of financing costs include current commitments and the proposals in this budget report. Estimates of the incremental impact of capital investment decisions on council tax: this indicator identifies the revenue costs associated with proposed changes to the three year capital programme recommended in this budget report compared to the council s existing approved commitments and current plans. The assumptions are based on the budget, but will invariably include some estimates, such as the level of Government support, which are not published over a three year period and the expected level of capital receipts. Table 5: Incremental impact of capital investment decisions on the band D council tax 2015/16 Estimate 2016/17 Estimate 2017/18 Estimate 2018/19 Estimate Council tax - Nil Nil Nil Nil band D The expectation is that the budget will be based on approved capital schemes existing commitments and current plans but if on review this is not the case this will be reported to Members. If it was decided to increase the Capital Programme by 1m above planned levels the net impact on Band D Council Tax would be 3.91higher. Estimates of the incremental impact of capital investment decisions on housing rent levels: similar to the council tax calculation, this indicator identifies the trend in the cost of proposed changes in the housing capital programme recommended in this budget report compared to the council s existing commitments and current plans, expressed as a discrete impact on weekly rent levels. Table 6: Incremental impact of capital investment decisions on housing rent levels Weekly housing rent levels 2015/ / / /19 Estimate Estimate Estimate Estimate Nil Nil Nil Nil

27 This indicator shows the revenue impact on any newly proposed changes, although any discrete impact will be constrained by rent controls. The expectation is that budget will be based on approved capital schemes existing commitments and current plans but if on review this is not the case this will be reported to Members. Limits to Borrowing Activity The operational boundary: this is the limit beyond which external borrowing is not normally expected to exceed. Table 7: Operational boundary limit Operational boundary 2015/ / / /19 m Limit Limit Limit Limit Borrowing 800 1,200 1,300 1,400 Other long term liabilities Total 930 1,325 1,420 1,515 The authorised limit for external borrowing: A further key prudential indicator represents a control on the maximum level of borrowing. This represents a limit beyond which external borrowing is prohibited, and this limit needs to be set or revised by the full council. It reflects the level of external borrowing which, while not desired, could be afforded in the short term, but is not sustainable in the longer term. The limits have been set wide in the event that the council agrees the aforementioned RDV and other projects into the capital programme. 1. This is the statutory limit determined under section 3 (1) of the Local Government Act The Government retains an option to control either the total of all councils plans, or those of a specific council, although this power has not yet been exercised. 2. The council is asked to approve the following Authorised Limit: Table 8: The authorised limit for external borrowing Authorised limit m 2015/16 Limit 2016/17 Limit 2017/18 Limit 2018/19 Limit Borrowing 850 1,300 1,400 1,500 Other long term liabilities Total 980 1,425 1,520 1,615 The council is asked to approve these limits and to delegate authority to the Director of Finance (DoF), within the total limit for any individual year, to effect movement between the separately agreed limits for borrowing and other long term liabilities. Any such changes made will be reported to the council at its next meeting following the change.

28 Separately, the council is also limited to a maximum HRA CFR through the HRA self-financing regime. This limit is currently: Table 9: The HRA debt limit HRA Debt Limit m 2015/ / / /19 Estimate Estimate Total The authorised limit allows for any potential overdraft position as this will be counted against the overall borrowing, and provides headroom for rescheduling (i.e. borrowing in advance of repayment). Prudence The council s treasury portfolio forward projections are summarised below. The table shows the actual external debt, against the CFR. Table 10: Current portfolio position m 2015/16 Estimate 2016/17 Estimate 2017/18 Estimate 2018/19 Estimate External debt Debt Other long term liabilities OLTL Actual gross debt at March The Capital Financing Requirement** (Under)/over borrowing Principal debt excludes any temporary borrowing that may be undertaken for liquidity purposes. CFR (includes PFI and Finance leases) The prudential indicator requires that the council needs to ensure that its gross debt does not, except in the short term, exceed the total of its CFR, in the preceding year plus estimates of any additional CFR for 2015/16 and the following two financial years. This allows that borrowing is not undertaken for revenue purposes. It is expected that the gross debt figure will fall below the CFR in 2015/16. Treasury management limits on activity There are three debt related treasury activity limits. The purpose of these are to restrain the activity of the treasury function within certain limits, thereby managing risk and reducing the impact of any adverse movement in interest rates. However, if these are set to be too restrictive they will impair the

29 opportunities to reduce costs / improve performance. The Code requires that for LOBO loans the maturity date is deemed to be the next call date. The indicators are: Upper limits on variable interest rate exposure: this identifies a maximum limit for variable interest rates based upon the debt position net of investments Upper limits on fixed interest rate exposure: this is similar to the previous indicator and covers a maximum limit on fixed interest rates; Maturity structure of borrowing: these gross limits are set to reduce the council s exposure to large fixed rate sums falling due for refinancing; these have been kept deliberately wide to provide flexibility for any restructuring that might be carried out to de-risk the debt portfolio. Table 11: Interest rate principal exposures and maturity structure limits 2014/15 m 2015/16 Revised Limit 2016/17 Limit 2017/18 Limit 2018/19 Limit Interest rate principal exposures Limits on fixed interest rates based on net debt Upper Upper Upper Upper ,000 Limits on variable interest rates based on net debt Limits on fixed interest rates: Debt only ,200 1,300 1,400 Investments only Limits on variable interest rates Debt only ,100 1,100 Investments only Maturity Structure of fixed interest rate borrowing 2016/17 Lower Upper

30 Under 12 months 0% 90% 12 months to 2 years 0% 90% 2 years to 5 years 0% 90% 5 years to 10 years 0% 100% 10 years and above 0% 100% Maturity Structure of variable interest rate borrowing 2016/17 Lower Upper Under 12 months 0% 90% 12 months to 2 years 0% 90% 2 years to 5 years 0% 100% 5 years to 10 years 0% 100% 10 years and above 0% 100% Investment treasury indicator and limit - 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 is asked to approve the treasury indicator and limit: Table 12 Maximum principal sums invested > 364 days m 2015/16 Revised Limit 2016/17 Limit 2017/18 Limit 2018/19 Limit Principal sums invested > 364 days m 500 m 500 m 500 m 500

31 Appendix 7 Revised Minimum Revenue Provision Policy Statement 2015/16 and Minimum Revenue Provision Policy Statement 2016/ Background 1.1 Local Authorities are required to set aside from revenue, a regular annual provision in respect of their debt; this is known as Minimum Revenue Provision (MRP). 1.2 This refers to Local Authorities (Capital Finance & Accounting) (England) Regulations 2003) as amended and MRP statutory guidance issued by the Secretary of State. 1.3 This policy will take effect from 1 April Pre 2007/08 Debt 2.1 The major proportion of the MRP relates to historic debt liability incurred to 31 March The Council has reviewed the previous approach of calculating MRP on 4% of the CFR for this element. From 2015/16 inclusive, MRP for this element will be provided on an annuity basis. This will include retrospective application to 1 st April Where there has been overprovision under the previous approach, the Council will equalise the difference through reduced MRP in future years up to the point that the MRP profile falls back in line with the annuity approach. 2.2 Certain expenditure reflected within the debt liability at 31 March 2008 will under delegated powers be subject to MRP under option 3 the Asset Life method. This excludes PFI scheme which is accounted for as set out later. 3.0 Post 2007/08 Debt 3.1 General The Council is committed to principles of equality and will seek to apportion MRP on capital expenditure over the term during which the underlying assets will yield benefits. As such, MRP will be based on the estimated life of the assets at inception and does not change, in accordance with the regulations issued by DCLG. The calculation of the provision will be on the annuity method but under exceptional circumstances the equal instalments method may be applied.. Furthermore, where appropriate, provision for MRP will commence when an asset becomes operational Estimated life periods will be determined under delegated powers. The council may defer to the estimated useful economic life periods

32 specified in the MRP guidance, but reserves the right to determine such periods and prudent MRP 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. 3.2 Deferral of MRP In certain circumstances, capital expenditure may be funded by anticipated capital receipts. Where there is a degree of certainty that these receipts will materialise, MRP would be deferred pending realisation of those capital receipts. The capital receipt would when received be applied to discharge the arising Capital Financing Requirement (CFR). This approach will be subject to annual review. 4.0 Loans 4.1 General From time to time, the Council may advance loans to other organisations, which are treated as capital expenditure for the Council. As this is a temporary arrangement and the funds will be returned in full, there is no need to set aside prudent provision to repay the debt liability in the interim period, so there is no MRP application. The Council will annually review the validity of all loans advanced to other organisations and that if it is assessed that a loan is likely not to be fully repaid than MRP will be calculated on the amount of the shortfall over the remaining life of the loan. 4.2 Local Authority Mortgage Scheme Where the council enters into a Local Authority Mortgage Scheme using the cash backed option, the mortgage lenders require a 5 year deposit from the local authority to match the 5 year life of the indemnity. The deposit placed with the mortgage lender provides an integral part of the mortgage lending, and is treated as capital expenditure and a loan to a third party. The CFR will increase by the amount of the total indemnity. The deposit is due to be returned in full at maturity, with interest paid either annually or on maturity. Once the deposit matures and funds are returned to the local authority, the returned funds are classed as a capital receipt, and the CFR will reduce accordingly. Again, as this is a temporary (5 year) arrangement and the funds will be returned in full, there is no need to set aside prudent provision to repay the debt liability in the interim period, so

33 there is no MRP application. The scheme loans will be subject to annual review and if it is assessed that a loan is likely not to be fully repaid then MRP will be calculated on the amount of the shortfall over the remaining life of the loan. 5.0 Service Concession Arrangements (or PFI s) and Leases 5.1 The Council will apply the principles of this MRP policy to assets procured by PFI or lease arrangements; that is it will apply MRP over the expected life of the underlying assets, taking into account any contractually obligated lifecycle repairs and maintenance. 6.0 Housing Revenue Account (HRA) 6.1 The duty to make MRP does not extend to cover borrowing or credit arrangements used to finance capital expenditure on HRA assets. This is because of the different financial structure of the HRA, in which depreciation charges have a similar effect to MRP.