Treasury Management – Annual Strategy for 2006/7, Prudential ...

Treasury Management –

Annual Strategy for 2006/7,

Prudential Indicators and

Statutory Borrowing

Determinations

Acting Director of Finance

Date 27 February 2006

Telephone: 0207-641-2950Email: [email protected]

mailto:[email protected]

Item no:

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XXX

27 February 2006

For General Release

Treasury Management – Annual Strategy for 2006/2007, including Prudential Indicators and Statutory Borrowing Determinations

Acting Director of Finance

All

Low Tax

Cabinet and Council

The Treasury Management Strategy aims to maximise investment income and minimise interest payments on loan debt whilst maintaining capital security. The strategy is also designed to meet the objectives of the Prudential Code of ensuring that the capital investment plans are prudent, affordable, and sustainable.The Council’s projected interest earnings in 2006/7 are £14.8m with interest payments on loan debt of £14.6million. These figures are fully reflected in 2006/7 budget projections.

2950

Helen Strand, Capital Finance Accountant

1. Introduction

1.1. The Council has average revenue and capital cash balances of some £350m which are used to fund day to day service operations and support capital funding requirements through internal borrowing. Any surplus funds are invested within constraints set out by the Secretary of State. The Council also has £220m in outstanding external debt which has built up over time to fund its fixed assets. The Director of Finance manages both the day to day cash requirements (including the investment of surplus funds) and the borrowing requirements of the Council through a treasury management team whose key objectives are set out in Appendix 1. Investment earnings of £14.8m and interest payments of £14.6m are within the Council’s proposed 2006/07 revenue and HRA budgets and reflect the approved capital programme.

1.2. The Council’s investment and borrowing policies are governed by the Local Government Act 2003 and the Secretary of State’s Investment Code. These contain regulations backed up by various Codes of Practice. The CIPFA Treasury Management Code of Practice, which has been formally adopted in Standing Order 49, and the Investment Code, both require the Director of Finance, before the beginning of each financial year, to present an Annual Treasury Management Strategy and an Annual Investment Strategy for the forthcoming year for approval by the full Council.

1.3. The CIPFA Prudential Code for Capital Finance in Local Authorities sets out indicators that are to be used to support capital expenditure plans and treasury management decisions. These Prudential Indicators also have to be set by the full Council at budget time and are to be reviewed during the year.

1.4. Finally, Section 3 of the Local Government Act 2003 requires the Council to approve an “affordable borrowing limit”. This is the maximum level of loan debt that may be outstanding at any point in time. This is set having regard for the overall treasury management strategy.

1.5. The contents of this report and associated recommendations satisfy all of the above requirements.

1.6. Appendix 2 contains a glossary of terms used within the report.

2. Recommendations

2.1. That the Cabinet recommends that the Council approve the proposed Treasury Management Strategy and the Annual Investment Strategy for 2006/07 as set out in Section 4.

2.2. That the Cabinet recommends that the Council approve the proposed Prudential Indicators (A-J), as set out in Appendix 7.

2.3. That, as required under Section 3 of the Local Government Act 2003, the Cabinet recommends that the Council approve an Affordable Borrowing Limit as set out in paragraph 4.8.2 of:

£320 million for the year commencing 1 April 2006,£310 million for the year commencing 1 April 2007, and£290 million for the year commencing 1 April 2008.

(Under the provisions of the Act these limits are to be approved by the full Council before the beginning of the financial year, and kept under review.)

3. Appendices

This report contains various references to the following appendices which include supplementary supporting information and are attached at the back of the report.

Appendix 1. Treasury Management Objectives for 2006/07.Appendix 2. Glossary of Terms. Appendix 3. Loan Resources.Appendix 4. Profile of Maturing Debt Appendix 5 Cashflow ForecastsAppendix 6. Investment CriteriaAppendix 7. Prudential Indicators

4. Treasury Management Strategy

The Treasury Management Strategy comprises the following sections:

(i) Interest Rate Projections (ii) Capital Financing Strategy(iii) Borrowing Strategy(iv) Investment Strategy(v) Managing Investment Performance(vi) Investment Risk Management(vii) Prudential Indicators(viii) Statutory Determination(ix) Monitoring and Reporting(x) Summary

The strategy has been developed with the assistance of the Council’s Treasury Advisors, Sector Treasury Services.

4.1. Interest Rate Projections

4.1.1. The assumptions on interest rates and their projected movement during the three year planning period represent a key element of the treasury management strategy. These assumptions are based on information gained from a wide range of sources in the investment market including the Council’s treasury consultants (Sector Treasury Services), the Pension Fund advisors (Mercers) and the external fund managers (Citibank, Morley and Scottish Widow).

4.1.2. At the beginning of February 2006, short-term interest rates ranged from 4.5% for periods of one week to 4.6% for one year, compared with the long term rates which ranged from 5 years at 4.45%, 10 years at 4.3%, 25 years at 4.05% and 50 years at 3.90%. Base rate was at 4.5%, having fallen to this level in August 2005.

4.1.3. For 2006/07 base rates are expected to start the year at 4.5%, fall to 4.25% in the summer, but revert to 4.5% by March 2007. These changes are reflected in the short-term yield curve. No significant changes in long-term rates are anticipated until the end of 2006 when rates are expected to start rising. However there will inevitably be some minor fluctuations during the year.

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These projections are shown in more detail below.

Average assumed for year 2006/07

Trend predicted for the year 2006/07

Actual at 31/01/06

Bank of England Base Rate

4.25% Starting the year at 4.5% but falling to 4% by the end of 2006. From 2007 base rate could start to edge up, to reach 4.75% by March 2008.

4.5%

PWLB * Rate– 5 years 4.25% All periods steady, but edging

upwards by March 20074.35%

– 10 years 4.50% 4.20%– 25 years 4.25% 4.00%– 50 years 4.00% 3.70%

Average Rate of all loans borrowed by the Council

6.25% Reducing, due to maturing debt, and new funding at rates lower than at present average rate.

6.40%

It should be noted that long term interest rates, which are determined by yields on Government Stocks (gilts), are now at relatively low levels, and this is expected to continue, due to continuing lower interest rate expectations, and strong demand as investors seek more secure investments, and pension funds adjust their funding ratios. Although gilt yields have fluctuated in 2005/06 they have been on a general downward trend.

4.2. Capital Financing Strategy

4.2.1. The Prudential System of capital controls which came in to effect in April 2004, allows the Council to determine its own level of capital investment. However, the Council must demonstrate that its capital programme is affordable, prudent and sustainable. To this end the capital programme has been set at a level that can be contained within existing budgets for debt charges and associated revenue costs and assumes that borrowing will generally be limited to the amount of borrowing the government will support through the grant system. However provision has been made for there to be additional unsupported borrowing to finance 'invest to save' capital schemes, as the annual capital charges relating to these schemes will be met from revenue savings and not be an additional charge on the Council Tax. In addition some schemes may initially be financed by prudential borrowing, pending the arrival of future planned capital receipts.

4.2.2. Although the capital programme is planned with reference to the total level of resources available to finance capital expenditure, the method of financing individual capital schemes will be determined by the Acting Director of Finance at the end of the financial year. The order of use of sources of finance for the capital programme is:

1. Capital Grants.2. Capital Contributions from outside bodies.3. Capital Receipts.4. Borrowing (to the limit of the Government supported level).5. Borrowing (unsupported) to finance 'invest to save' schemes and pending the

arrival of future known capital receipts.

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6. Revenue Contributions.

4.2.3. Capital Grants and external contributions are likely to have been received for specific schemes and therefore cannot be used for any other purpose. For other schemes, capital receipts are to be used in preference to revenue contributions.

4.2.4. Capital Receipts will be fully applied in the year in which they are received to reduce the level of Minimum Revenue Contribution (MRP) i.e. the monies that the Council sets aside for debt repayment. Unlike the private sector, local authorities are not required to write down the book value of their capital assets in line with the assets depreciation. Instead a prescribed formula is used to determine the MRP.

4.2.5. The funding assumptions for the capital programme include two large capital receipts; one from the sale of Dolphin Square (£48m) which was received in January 2006 and the other from the sale of the North Westminster Community School site which is planned to realise some £70m in 2008 (on the basis that the school will be vacated by April 2007).

4.2.6. The amount of supported borrowing for 2006/07 was announced in December 2005, and Westminster's allocation amounts to £13.1 million, comprising £6.6m for the General Fund and £6.5m for the HRA. However, because there is currently uncertainty as to whether the supported borrowing on the General Fund is being fully reflected in the annual grant settlement, this allocation has not been used in determining the level of funding the Council can afford. The government have been asked for clarification on how future funding for supported borrowing will be guaranteed.

4.2.7. At this stage the capital programme also excludes the Building Schools for the Future (BSF) project which has a potential capital investment over the planning period of some £140m. This project is still being developed and its financial implications will be assessed separately as part of an Outline Business Case due to be finalised in the spring.

4.3. Borrowing Strategy

4.3.1. The capital financing strategy effectively limits any additional borrowing to the level of anticipated HRA supported borrowing, that required to fund invest to save schemes and short term borrowing, both in lieu of planned capital receipts and to meet day to day cash shortfalls. So the main focus of the borrowing strategy is on the restructure of the total loan debt within the Loans Pool between internal and external borrowing and in terms of debt maturity dates. The various loan resources available to local authorities are detailed in Appendix 3.

4.3.2. The projected structure of the capital borrowing as at 31st March 2006 compared with the previous year end is shown below:

Type of LoanExternal Loans Internal Loans Total Loans

31.3.05 31.3.06 31.3.05 31.3.06 31.3.05 31.3.06£m £m £m £m £m £m

Fixed Rate PWLB 120.6 122.6 - - 120.6 122.6 LOBOs 45.0 75.0 - - 45.0 75.0 Other 22.8 22.8 - - 22.8 22.8Variable Rate 2.4 2.4 6.9 3.0 9.3 5.4

Total 190.8 222.8 6.9 3.0 197.7 225.8

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4.3.3. The Acting Director of Finance has taken advantage of the low long-term interest rates being offered on LOBOs to finance the Council’s additional borrowing requirements in 2005/06. Future borrowing will continue to have regard for the relative advantages of LOBOs and PWLB borrowing at the time. The future borrowing requirements are detailed in the table below.

External Internal Total£m £m £m

Balances as at 31.3.06 222.8 3.0 225.8Repayment of maturing debt (9.5) - (9.5)Net Unsupported borrowing for General Fund (in lieu of capital receipts)

24.5 - 24.5

Supporting borrowing HRA 6.5 - 6.5Minimum Revenue Provision (0.7) - (0.7)Balances as at 31.3.07 243.6 3.0 246.6

Repayment of maturing debt (0.8) - (0.8)Supporting borrowing HRA 6.5 - 6.50Minimum Revenue Provision (1.6) - (1.6)Balances as at 31.3.08 247.7 3.0 250.7

Repayment of maturing debt (0.5) - (0.5)Net Unsupported borrowing(lieu of capital receipts)

(32.4) - (32.4)

Supporting borrowing HRA 5.0 - 5.0Minimum Revenue Provision (0.3) - (0.3)Balances as at 31.3.09 219.5 3.0 222.5

The above table excludes borrowing for invest to save schemes which is currently planned as follows: 2006/07 £15.6m

2007/08 £17.5m2008/09 £14.0m

The table also excludes funding for the BSF project which is currently being developed.

4.3.4. Whilst it is proposed to effect these changes through a mixture of PWLB lending and LOBOs the use of the latter will be restricted to 40% of total new lending as these loans may have short maturity date options.

4.4. Investment Strategy

4.4.1. S12 of the Local Government Act 2003 gives a local authority power to invest for “any purpose relevant to its functions under any enactment, or for the prudent management of its financial affairs”. S15(1) of the 2003 Act requires an authority to “have regard to such guidance as the Secretary of State may issue”, and the Secretary of State has issued guidance on investments.

4.4.2. The erstwhile concept of “approved investments” has been replaced with a definition of “specified investments”. An investment is a specified investment if it meets the following conditions:-

it is denominated in sterling, and any payments or repayments are payable only in sterling, and

it is not a long-term investment (ie with a life over 12 months), and it does not involve the acquisition of share or loan capital in any body corporate,

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and it is either

– made with the UK government or a UK local authority, or

– with a body or investment scheme with a high credit-rating

Non-specified investments are permitted, but prior approval for their use must be obtained as part of the Annual Investment Strategy. It is intended to make appropriate use of such investments as detailed in Appendix 6. However, their use will be limited to 40% of investments up to a maximum of £100m.

4.4.3. Under the provisions of the guidance on local authority investments issued in March 2004, local authorities are required to draw up an Annual Investment Strategy. The strategy must set out :-

the policies for giving priority to the security and liquidity of investments rather than the yield

explicitly state the credit rating criteria to be used for the categories of investments the authority intends to use during the financial year, how frequently the credit ratings are to be monitored, and what action is to be taken when ratings change

the procedures for determining whether non-specified investments may prudently be used, and the maximum amounts which may be held in any category, and

the procedures for determining the maximum periods for which funds may prudently be committed and the minimum amount which may be held in investments other than long term investments.

4.4.4. These elements have been incorporated in the strategy set out below, and in Investment Criteria detailed in Appendix 6.

4.4.5. The day to day cash balance varies significantly during the course of a year. The monthly cashflow forecast over the three year planned period is attached as Appendix 5. One of the key objectives of the treasury management team is to maximise the return on the investment of daily cash surpluses subject to the restrictions in place to control the Council’s exposure to risk (see Section 4.6). This is achieved through the use of a mix of internal and external investment management.

4.4.6. The proposed allocation of cash balances between the internal treasury management team and external fund managers is as follows:

Projected Average Available Funds2005/6 2006/7 2007/8 2008/9£'million £'million £'million £'million

Internally ManagedDay-to-day surplus 100.0 78.7 75.5 64.7Internal Funds 112.5 116.5 101.9 104.5Total Internal 212.5 195.2 177.4 169.2

Externally ManagedCitibank 38.5 40.4 42.4 44.6Morley 52.7 55.3 58.1 61.0Scottish Widows 56.3 59.1 62.1 65.2Total External 147.5 154.9 162.6 170.7

Total All Investments 360.0 350.0 340.0 340.0

Estimated Interest Earnings 17.3 14.8 14.2 14.5

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4.4.7. The internally managed investments consist of cash deposits with banks, building societies and other local authorities. The externally managed portfolios can also be invested in Certificates of Deposit (CD’s) and gilts which, being negotiable instruments, involve more risk than cash deposits but have the potential for greater returns than cash.

4.4.8. The average seven-day investment rate is expected to remain fairly constant throughout most of 2006/07, with any increases during the first quarter of 2007. The overall level of the Council’s cash resources in 2006/07 are anticipated to be lower than those held in the current year. In these circumstances most investments in the internally managed portfolios will initially be made for shorter periods to take advantage of more frequent compounding of interest. A more liquid portfolio will allow the fund to take earlier advantage of interest rate anomalies or base rate increases. For 2006/07 it has been assumed that the base rate will fall to 4.25% and as a result interest earnings in 2006/07 will be lower than 2005/6. The estimated 2005/6 out-turn for interest earnings is £17.3million, compared with £14.8million included in the 2006/07 budget.

4.4.9. With a flat yield curve, there is little value in investing for periods in excess of one year, but this will be kept under review, and if conditions become favourable the Acting Director of Finance may consider investing up to £100m of total investments in deposits of over 12 months.

4.4.10. It is also intended to make use of investment opportunities in Money Market Funds and bank deposit accounts when appropriate. There are new 3-5 year “borrowers option” investments which are being developed by the money market and these will be added to the investment portfolio if the Acting Director of Finance considers they can add value and increase returns.

4.5. Managing Investment Performance

4.5.1. The flat yield curve also means the external managers may have limited opportunities to add capital value by strategic investment in gilts. However short-term market anomalies may provide small opportunities for tactical trading. Therefore the relative performance of the external managers and the in-house funds will continue to be kept under close examination. The present managers have been managing their portfolios for a number of years now and it is proposed to carry out a full review of all managers and their mandates in 2006/07.

4.5.2. The benchmark rate against which the performance of the investments is measured is the Local Authority Seven-Day Rate. This benchmark will also be included in the managers’ review to ensure the Council is obtaining the best returns on its’ temporary cash surpluses.

4.5.3. Sector Treasury Services has been retained to provide comparative performance data for different cash managers to assist in the monitoring process.

4.6. Investment Risk Management

4.6.1. The management of risk must always over-ride investment performance in the context of local authority treasury management. The risks include :-

Liquidity risk - that cash will not be available when required

This is reduced by preparation of cash forecasts, and investing with future cash requirements in mind.

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Interest rate risk - that unexpected market movements and/or changes in interest rates have an impact on the valuation of the Council’s investments.

This risk is reduced by specifying limits on the exposure to instruments such as gilts which are susceptible to such changes

Credit risk - that monies, with interest, are not repaid when due.

This risk is reduced by having a lending list compiled with reference to up-to-date credit ratings, and a limit on the amount which can be lent to each institution based on each institution’s credit rating

4.6.2. In order to control the risk the following restrictions have been placed on the external managers:(i) not more than 30% of the portfolio can be invested in gilts(ii) the average life of the investments should not exceed three years(iii) there is a limit on the percentage of the portfolio which may be invested with a

single borrower, and (iv) deposits (including CD’s) can only be placed with banks and building societies

having acceptable (minimum A/F1 or equivalent) credit ratings

4.7. Prudential Indicators

4.7.1. The objectives of the Prudential Code are to ensure that local authorities’ capital investment plans are affordable, prudent and sustainable. In addition, treasury management decisions must reflect good professional practice and support prudence, affordability and sustainability. The Code also has the objectives of being consistent with and supporting local strategic planning, local asset management planning and proper option appraisal. To demonstrate that the objectives are being fulfilled, and to support and record local decision-making Councils are required to set specific Prudential Indicators. These are not designed to be inter-authority comparative performance indicators and each authority sets its own limits or ratios.

4.7.2. The proposed indicators over the three year planning period are detailed in Appendix 7. Indicators A to G represent tests of affordability (i.e. implications for the Council Tax and Housing Rents). The indicators H to J demonstrate both prudence and sustainability (i.e. implications for external borrowing).

4.8. Statutory Determinations

4.8.1. The Council must “determine and keep under review” how much money it can afford to borrow – the Affordable Borrowing Limit . This is the maximum amount of loan debt that may be outstanding at any point in time, and includes both borrowing for capital purposes and an allowance for temporary revenue borrowing

4.8.2. The calculation of proposed borrowing limits is set out below: these calculations reflect the capital financing and borrowing strategies.

Proposed

Limit *

£’m £’mEstimated Borrowing at 31 March 2006 (see para 4.3.2 above)

223

AddAllowance for temporary Revenue borrowing 60New capital expenditure + cost of credit arrangements 2006/07 31

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Maximum estimated borrowing during 2006/07 314 320AddLoans repaid (10)New borrowing 7 Maximum estimated borrowing during 2007/08 311 310AddLoans repaid (32)New borrowing 5 Maximum estimated borrowing during 2008/09 284 290

* It is proposed that the Affordable Borrowing Limit should be set at the maximum estimated borrowing level for each year, rounded to the nearest £10m.

4.9. Monitoring and Reporting

4.9.1. The treasury management activities during the year will be included in the quarterly monitoring report to the Finance and Support Services Overview and Scrutiny Committee and/or the Audit and Performance Sub-Committee.

4.9.2. A further report on treasury management activities for the year and actual

performance against the Prudential Indicators will be incorporated in the 2006/07 Closing of Accounts Report to the Cabinet.

4.10. Summary

4.11. The Treasury Management Strategy provides an operating framework for the day to day management of the Council’s cash resources. The limits and controls set out within the strategy not only ensure that the Council is meeting its’ legal obligations but also represent best financial practice.

5. Financial Implications

5.1. The strategy for treasury management is to maximise, in a prudent fashion, investment income and to minimise interest payments on debt. In 2005/06, interest payments will amount to an estimated £14.4 million of which £9.8 million relates to the Housing Revenue Account and £4.6 million to the General Fund. The projected out-turn for 2006/07 is £14.6 million. These amounts have been included in the Council’s revenue budget.

5.2. In 2005/06, estimated interest earnings will total £17.3million with the estimated earnings in 2006/07 of £14.8 million.

6. Proposed Reasons for Decisions

6.1. It is a statutory requirement for the Council to set certain limits relating to treasury management and capital financing activities before the start of each financial year.

6.2. Under the CIPFA Treasury Management Code (which the Council has adopted under SO 49) the Council is required to adopt an Annual Treasury Management Strategy for 2006/07 before 31 March 2006

Under the Secretary of State’s “Guidance on Investments” issued under S15(1) of the Local Government Act 2003, local authorities are required to draw up an Annual

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Investment Strategy for the following financial year which must be approved by the full Council.

Under Part 1 of the Local Government Act 2003 and “The CIPFA Prudential Code for Capital Finance in Local Authorities”, specified Prudential Indicators must be set by the full Council as part of the budget setting process.

Under S3 of the Local Government Act 2003 the Council must determine how much money it can afford to borrow by setting the “Affordable Borrowing Limit”.

7. Ward Member Consultation

7.1. As the proposal does not affect any ward in particular, ward members have not been consulted.

BACKGROUND PAPERS

1 The Prudential Code for Capital Finance in Local Authorities, published by CIPFA October 2003

2 Capital Programme Review – Report of Director of Finance to Cabinet 17 January 2006 3 Budget and Council Tax 2006 Report of Acting Director of Finance to Cabinet

27 February 2006

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APPENDIX 1 - TREASURY MANAGEMENT OBJECTIVES FOR 2006/07

1. Borrowing

To minimise the revenue costs of borrowing.

To manage the Council's debt maturity profile to ensure a spread of maturities over future years. (The current debt maturity profile is shown in Appendix 4).

To reschedule and repay debt if this will enable the Council to achieve revenue savings.

To appraise new sources of finance and loan instruments and to use such sources of borrowing if financially advantageous.

The interest rate on new loans should be less than the equivalent PWLB average rate for the year.

To repay/reschedule debt at the optimum time to yield the lowest premium (or highest discount) and maximum overall savings.

2. Investment

To maintain capital security.

To achieve a rate of return in excess of the local authority 7-day rate.

The average daily bank balance during the year to be within the range +/- £250,000.

To review available cash balances and the performance of external and in-house fund managers and, if a higher rate of return can be obtained, to redistribute monies between managers.

To appraise new investment opportunities, and, if the level of risk is acceptable, consider the use of new types of investment.

3. Capital Financing

To maximise the use of supported borrowing.

To use unsupported borrowing to finance revenue-saving schemes – in particular invest to save schemes and also for temporary financing pending the arrival of known future capital receipts..

To maximise the use of capital grants (including lottery funding) and consider leasing when appropriate.

To appraise various sources of financing, including private sector finance and any new financial instruments, and use to finance new capital expenditure if financially advantageous.

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APPENDIX 2

GLOSSARY OF TERMS USED IN THE TREASURY MANAGEMENT STRATEGY REPORT

Affordable Borrowing LimitandAuthorised limit for external debt

The maximum amount the Council can borrow for capital and revenue purposes, allowing for unusual events. It reflects a level of borrowing which, while not desired, could be afforded but may not be sustainable in the longer term.

Borrowing for Capital Purposes – Supported

- Unsupported

The amount of borrowing to finance capital projects for which the Government will give revenue support through the grant system (the capital financing element of Formula Spending Share (FSS))Additional borrowing the Council may wish to undertake, but for which there will be no financial contribution through the grant system.

Capital receipts - reserved and usable parts

Monies received by a local authority when it sells an asset. A prescribed proportion (currently 75%) of housing receipts must be paid over to the Government. The balance may be used to finance new capital expenditure, to meet any liability for a credit arrangement, or to repay the principal of loan debt.

CIPFA Treasury Management Code of Practice

The professional code governing treasury management, which the Council has formally adopted (SO 49).

Credit arrangements Forms of credit which do not involve borrowing of money, e.g. leases of land and buildings.

Capital Financing requirement The authority’s underlying need to borrowLenders Option / Borrowers Option Loans (LOBO’s)

A form of long-term borrowing where loans run at a fixed rate of interest for a fixed period of time, after which the Lender has the option to ask for repayment or change the interest rate on each interest payment date. If the Lender decides to exercise the option to increase the rate the borrower can then decide whether to accept the new terms or repay the loan.

Local Authority Seven-day rate The rate at which local authorities pay to borrow money subject to seven-days notice of repayment. This rate is used as a benchmark for comparing investment performance.

Net Revenue Stream (NRS) The NRS for the General Fund is the “Amount to be met from Government Grant”, as shown in the consolidated revenue account.The NRS for the Housing Revenue Account is the amount to be met from housing subsidy and rent income as shown in the HRA accounts.

Minimum revenue provision (MRP)

The amount which must be set aside from revenue each year to cover future repayment of loan debt. From 1 April 2004 MRP for General Fund borrowing is 4%, but there will be no MRP requirement for HRA borrowing.

Operational boundary for external debt

The maximum amount of external debt according to probable events and consistent with the level of external debt projected in the estimates.

Public Works Loan Board (PWLB)

Part of the Government’s Debt Management Office, making long-term funds available to local authorities on prescribed terms and conditions. The PWLB is normally the cheapest source of fixed rate long-term borrowing for a local authority, and the Board will also act as a lender of last resort.

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APPENDIX 3 - LOAN RESOURCES AVAILABLE TO LOCAL AUTHORITIES

Long-term Borrowing

Public Works Loan Board (PWLB)

PWLB loans are available for periods ranging from 1 to 50 years at fixed or variable rates of interest. It is possible to make premature repayments (subject to payment of a premium or discount), or convert from fixed to variable terms and vice versa. With effect from 1 April 2004, the system of quota entitlements was abolished, and local authorities can now borrow amounts from the Board up to their authorised lending limit as agreed by Members.

Subject to available terms it is proposed to borrow up to 50% of the annual borrowing requirement from the Public Works Loan Board because of the relative flexibility of these long term loans

Money Market Loans

Money can also be borrowed from financial institutions via the money market. Interest rates for fixed rate long-term loans are normally slightly higher than PWLB rates. However in recent years a cheaper form of long-term borrowing has been available on a Lenders Option / Borrowers Option basis (LOBO). These loans run at a fixed rate of interest for a fixed period of time after which, on each interest payment date, the lender has the option to ask for repayment of the loan or change the interest rate. If the lender decides to exercise the option to increase the rate the borrower can then decide whether to accept the new terms or repay the loan.

It is likely that some of the 2006/07 borrowing requirement will be met through LOBOs.

Short-term borrowing

Any short-term borrowing required to meet day-to-day cash shortfalls will be raised from the market, as PWLB monies are not available for periods of less than one year. All money market loans (and investments) will be arranged through the money brokers with whom the Council is in daily contact. The Council also has an overdraft facility with Lloyds Bank – the Council’s bankers

Debt – Rescheduling and Premature Repayments

Most of the £223million loans currently out-standing are at fixed rates of interest for a fixed period of time but it is possible to make premature repayments, subject to payment of a premium to reflect the difference between the rate on the existing loan and the cost of new borrowing.

For many loans this premium is over 4%, which makes the cost of rescheduling or premature repayment prohibitive, especially for the General Fund. For example, if the Council wished to repay today the £30m loan with a coupon of 9.25% due to mature in 2018, an additional premium of £14.09m would be payable.

In spite of these premiums the Acting Director of Finance will consider rescheduling some debt – especially loans repayable in the peak maturity years of 2013/14 and 2018/19, if there is an overall benefit to the Council.

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Sector Treasury Services has been retained to review the Council's treasury operations, and to advise on selective debt redemption versus continued investment, and conversion between fixed and variable loans from the PWLB.

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APPENDIX 4 -

Year by year profile of maturing debt including average rate of interest payable on maturing loans

4.6%

4.0%

4.1%

5.0%

3.7%

4.8% 6.7%

9.7%

8.6%

4.6%

6.0% 6.1%

8.6%

6.0%

4.6%

4.6%

6.1%

10.7%4.7%

4.5%

3.0%

4.3%

0

5

10

15

20

25

30

35

40

45

50

55

2007/8 2009/10 2011/12 2013/14 2015/16 2017/18 2019/20 2021/22 2023/24 2025/26 2027/28

Fixed Term Loans LOBO Loans (earliest option date) New LOBO

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APPENDIX 6 - INVESTMENT CRITERIA

Specified Investments (unlimited by LG Act 2003)

Approved organisations for investment of day-to-day cash balances.

Monies may be placed on deposit (term deposit or certificate of deposit) with credit-rated financial institutions, public bodies, and other local authorities, subject to the following limits:

No limit^ Main UK Clearing Banks with minimum credit rating of A/F1UK Local Authorities

£10 Million limit^ Credit Rated Banks and Building Societies (minimum rating AA/F1+)

£5 Million limit^ Selected A/F1 Credit Rated BanksCredit - rated Building Societies with assets in excess of £4,000m

£1 Million limit Other Credit Rated Banks (A/F1) Credit Rated Building Societies with assets in excess of £500m.

This lending list will be reviewed by the Acting Director of Finance at least each quarter and updated taking into account credit rating information published either by Fitch or Moody's. It was last reviewed in January 2006 when some newly credit-rated building societies were added to the list, and some individual lending limits were changed.

Notes:^ Subject to the overall constraint that not more than 10% of outstanding investments

to be placed with a single institution.

F1+ and F1 are the highest ratings in the range of short-term credit ratings and AAA, AA, A and BBB are the investment grade long-term credit ratings awarded to banking institutions by the Fitch credit rating agency. The equivalent investment grade ratings awarded by Moody’s are P-1 and P-2 (short-term), and Aaa, A1, A2 and Baa1 (long-term).

If appropriate for cash-flow and liquidity requirements, monies may also be placed on deposit with the Government-backed Debt Management Agency Deposit Facility (DMADF) and invested in AAA rated money market funds.

Non-specified Investments (set by WCC, limited by LG Act 2003)

Holdings in UK gilts, sovereign bond issues and bonds issued by multilateral development banks- included in externally managed investment portfolios, subject to guidelines agreed with

managers and an overall maximum limit of 30% of investment portfolios.

Term deposits over 12 months- with Credit Rated Banks and Building Societies (minimum rating AA/F1+) may be

included in in-house portfolio at Acting Director of Finance’s discretion to preserve income if interest rates are expected to fall.

(Subject to a maximum limit of £10million with any one counter-party, maximum period of 5 years and a maximum of 10% of total investments).

Deposits with non-investment grade credit ratings or non-credit-rated banks and building societies are only permitted if a credit-rating is reduced or withdrawn after the deposit has been made.

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Non-specified investments should not exceed 40% of the Council’s investments.

Investments which are not permitted (as per LG Act 2003)

Corporate bonds (issued by bodies other than sovereign bodies) and Floating Rate Notes are not permitted as under current investment rules such investments would count as capital expenditure.

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APPENDIX 7 - THE PROPOSED PRUDENTIAL INDICATORS

It should be noted that where indicators for three years are required, these are rolling scenarios, not fixed for three years.

Any indicator can be reviewed at any time, following due process, and must be reviewed when the prudential indicators are set in subsequent years.

AFFORDABILITY

A Capital expenditureActual capital expenditure for previous year, and estimated capital expenditure in future years.

2004/5 actual

2005/6 estimate

2006/07 estimate

2007/8 estimate

2008/9 estimate

£’000 £’000 £’000 £’000 £’000HRA* 51,712 69.484 72,311 33,325 33,758General Fund 71,235 61,668 46,540 30,699 20,429Total 122,947 131,152 118,851 64,024 54,187

The Council is considering a number of Invest to Save schemes, which will be approved subject to meeting certain criteria. The projected expenditure on these schemes has not bee reflected in the above figures. The proposed BSF project has also been excluded from the table. * The HRA programme is subject to further update.

B Ratio of financing costs to net revenue streamActual ratio of financing costs for previous year, and estimated ratio in future years.

2004/5 actual

2005/6 estimate

2006/07 estimate

2007/8 estimate

2008/9 estimate

£’000 £’000 £’000 £’000 £’000Net Revenue StreamHRA 78,383 82,129 84,103 84,290 85,706General Fund 261,004 292,460 219,660 224,870 227,270Financing Costs (Interest + Minimum Revenue Provision Less interest and investment income)HRA 7,591 9,996 11,627 11,967 12,091General Fund (12,526) (14,823) (12,430) (12,609) (14,400)

% % % % %RatioHRA 9.68 12.17 13.82 14.20 14.11General Fund (4.80) (5.07) (5.66) (5.61) (6.34)

The figures are estimated, based on the definitions set out in the Prudential Code. The General Fund ratio of financing costs to net revenue stream is negative. This arises as interest costs on borrowing are exceeded by interest and investment income. This reflects the fact that the negative financing costs are making a contribution to the General Fund.

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C. Capital Financing RequirementEstimated end of year capital financing requirement for current and future years, as at 31 March 2005.

31/3/05actual

31/3/06 estimate

31/3/07 estimate

31/3/08 estimate

31/3/09 estimate

£’000 £’000 £’000 £’000 £’000HRA 163,632 205,082 211,550 218,018 223,018General Fund 34.043 20,743 44,559 42,910 10,210Total 197,675 225,825 256,109 260,928 233,228

This indicator measures the authority’s underlying need to borrow for capital (not revenue) purposes, but does not mean that borrowing will necessarily be undertaken. The borrowing assumptions are based on the Capital Programme agreed by Cabinet in November 2005.

D. Authorised limit for external debt

2004/5Agreed

limitActual

2005/6Agreed

limitActual

2006/07 Proposed

2007/8 Proposed

2008/9Proposed

£’000 £’000 £’000 £’000 £’000Borrowing 310,000 300,000 310,000 300,000 280,000Other Longterm Liabilities

0 0 10,000 10,000 10,000

Total 310,000 300,000 320,000 310,000 290,000

This is the maximum possible limit on borrowing for both capital and temporary revenue purposes, and includes an allowance for unusual or uncertain events – for example the late receipt of a monthly NNDR instalment (£42+ million) due to a failure of the bank money transmission service.

These are the same limits that have been used for the Affordable Borrowing Limit Determination – see section 4.8 of this report.

E. Operational boundary for external debt*

2004/5 actual

2005/6 actual

2006/07 estimate

2007/8 estimate

2008/9 estimate

£’000 £’000 £’000 £’000 £’000Borrowing 210,000 230,000 250,000 250,000 250,000Other Long- term liabilities 10,000 10,000 10,000 10,000 10,000Total 220,000 240,000 260,000 260,000 260,000

This is the most likely maximum level of borrowing for most of the year, but may occasionally be exceeded due to unforeseen events.

F. Estimate of the incremental impact on Council Tax and Housing Rents of capital investment decisions proposed in the Capital Programme report, over and above capital investment decisions taken in previous years

Assuming all borrowing used to finance General Fund and HRA capital expenditure is supported by Government grants and subsidies, there will be no net impact on the

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Council Tax or Housing rents over the three year planning period. (It is only intended to use unsupported borrowing for self-financing “invest to save” capital schemes, and temporarily pending the arrival of large capital receipts due to be received towards the end of 2007/8. There is no incremental impact on the Council tax or Housing Rents from 2006/07 as sufficient provision has been made in the business plans from the previous capital plans.

The Council is currently developing its Building Schools for the Future project: it has been assumed that this will not result in an affordability gap to be funded from the general fund.

2006/07 estimate

2007/8 estimate

2008/9 estimate

£ £ £For Band D Council Tax +5.16 +11.53 -23.08For average weekly Housing rents 0 0 0

G. Upper limit on fixed interest rate exposures and variable rate exposures

(Note: These are the highest anticipated levels of borrowing and investments, and allow for flexibility between fixed and variable rate exposures).

2006/07 estimate

£’000

2007/8 estimate

£’000

2008/9 estimate

£’000BorrowingFixed interest rate exposures 310,000 300,000 280,000Variable interest rate exposures 80,000 80,000 80,000

InvestmentsFixed interest rate exposures 100,000 100,000 100,000Variable interest rate exposures 500,000 500,000 500,000

H. Maturity structureAmount of projected borrowing maturing in each period as a percentage of total borrowing

Upper limit Lower limit% %

Under 12 months 40 01-2 years 35 02-5 years 35 05-10 years 50 010 years and over 90 35

This structure allows headroom for temporary borrowing pending receipt of revenues, rescheduling existing debt, and allows for new borrowing with a range of maturity dates, and the possibility that LOBO loans may be called for repayment.

The debt maturity profile at 31 January 2006 is shown in Appendix 4.

I. Limit on Investments for periods over 364 days

2006/07 2007/8 2008/9£’000 £’000 £’000

Total principal sums invested for more than 100,000 100,000 100,000

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364 days

This limit allows for the external cash managers to invest up to 30% of the portfolios in Gilts, and allow for the investment in deposits for periods in excess of 1 year.

J. The Council has adopted the CIPFA Code of Practice for Treasury Management in Public Services

Yes – Council Standing Order 49 refers.

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