1.  That the review of the financial year 2009/10 which has been compiled in accordance with the Code of Practice on Treasury Management as adopted by this Authority be noted.

2.  That no amendments be made to current procedures as a result of the review of activities in 2009/10, with the exception that the prudential indictors be amended to incorporate the adjustment reported by the Head of Finance regarding Long Term Liabilities and detailed in the revised Appendix A attached.

The Council has adopted and incorporated into its Financial Regulations, the CIPFA Code of Practice on Treasury Management in Local Authorities.  This Code covers the principles and guidelines relating to borrowing and investment operations.

In February 2009 the Council approved a Treasury Management Strategy for 2009/10.  The strategy was based upon guidelines in CIPFA’s Code of Practice on Treasury Management.  The Code requires that a report be presented reviewing the strategy that was approved, the previous year’s activities and endorsing or amending current procedures for the forthcoming year.

The Strategy for 2009/10 set out the following objectives:

a)  Keep investments short term (up to 1 year) to help fund the existing capital programme when needed and to make funds available to invest if rates increased;

b)  The counterparty list was amended due to the banking structure changing with nationalised and part nationalised banks, banks with Government backing and Sovereignty stability coming under attack for bailing out the banking industry;

c)  There was to be no planned borrowing, other than for short term cashflow purposes.  The Council is currently debt-free.

d)  That the prudential indicators detailed in Appendix C to the Record of Recommendation of the Cabinet was approved;

e)  That the Head of Finance had been given delegated authority consultation with the Cabinet Member for Corporate Services) to make use of alternative investment instruments should it be considered prudent to do so and should it be of advantage to the Council;

f)  That the Council’s Treasury Management Practices be amended to reflect those decisions.

Since the adoption of the Treasury Management Strategy for 2009/10, CIPFA has published a revised code which incorporates guidance on additional reporting of activities to Cabinet, Audit Committee and Council.  This revised code is in operation for the 2010/11 strategy and will be used for year end reporting of 2009/10 activity.
 

2009/10 Overview

Economic Overview – The Bank of England cut its base rate to 0.5% over 2008/09 and it has remained at this level since.  Despite the low base rate, the Bank of England has found it necessary to provide “quantative easing” to the market in order to maintain the economy.  Inflation was not a major concern during 2009/10 although it increased dramatically in the last quarter.  RPI increased to 3.5% following the reinstatement of a 17.5% VAT rate.  Since that time it has continued to increase.  At April 2010 it was 5.3%.  The Bank of England forecasts it to fall back to below 2% by the end of 2010.

MBC Overview – The revenue and capital outturn position of the Authority was reported separately.  The overall theme of these reports is that, notwithstanding the fact that some projects have been contractually committed or are near to implementation.  The amount of slippage within this financial year has reduced which means that balances are being spent and less funds, along with the low interest rates, has led to low investment income.

All investments have been on a short-term basis in line with the Strategy.

Throughout 2009/10 the level of investments had an average balance of £23.5m invested over the course of the year.  This covers investment of balances, capital receipts and other balance sheet assets.  However it is higher than anticipated as a consequence of slippage in both revenue and capital expenditure, as reported to Cabinet in various budget monitoring reports.

Investments at the start of the year totalled £23m, and the Treasury Management Strategy for 2009/10 anticipated year end investments of £7m.  However, the actual year end investments totalled £8.7m.  The main differences between the estimated and actual outturn figures are summarised below:

Compliance with Treasury Limits

The Treasury Limits were agreed at Cabinet in February 2009 and by Council in March 2009.  The outturn for Prudential Indicators was shown at Appendix A of the report of Head of Finance.  The Council operated within these limits through 2009/10. A revised Appendix A was distributed at the meeting by the Head of Finance detailing an adjustment to the prudential indicator for external debt. This indicator includes the value of other long term liabilities and was estimated at £100,000 for the year 2009/10. On advice from the External Auditor, the Council intends to account for the works at the Leisure Centre as a long term financing arrangement which is an arrangement that should be measured by this indicator. The long term liability created by the Leisure Centre arrangement is valued at £6.4m as at 31^st March 2010 which is significantly above the approved level for 2009/10. This value will require amending in the approved indicators for 2010/11.

Debt Management

At 1^st April 2009 the Council had no outstanding long term borrowing.  The only borrowing during 2009/10 was for short-term cashflow purposes only.

Cash Management

The major element of the Council’s Treasury Management function is the management on a daily basis of the cash requirements of the Council.  The policy objectives in this respect are:-

a)  The minimisation of the daily credit bank balance, subject to the clearance of monies overnight;

b)  Interest earned on investments should be maximised subject to the security of the funds being paramount;

c)  Interest paid on borrowing should be minimised;

d)  Adequate funds should be available to meet precept payments and other payments as they fall due;

e)  Cash management activities are carried out in accordance with the agreed Treasury Management Strategy.

As detailed above, the Council continues to have a positive cash flow pattern which has resulted in the investment activities detailed below during 2009/10.  All investments made were in accordance with the agreed Treasury Management Strategy.

There was continued use made in 2009/10 of Call/Notice Accounts and the Money Market Fund Account.  These accounts continued to offer short term competitive rates in comparison with those on the money market, as well as offering some improved flexibility in terms of cashflow management.

No alternative investment instruments were utilised in 2009/10.

The average interest rate received during 2009/10 on short term investments (less than 1 year) was approximately 1.87%.  The average interest rate on call/notice deposits was approximately 0.65%.  The overall rate achieved on all investments was 3.69%.  This compares with the average seven day rate in 2009/10 of 0.45% and the average three monthly rate of 0.73%.

The financial benefit from investment income of £735k was partly secured by the long term investments made at higher rates in prior years and the remaining Eurosterling Bond taken out in 2004, which had matured within the year.  The decline in short term rates throughout the year was effectively controlled by this.

Approved Lending List

The criteria adopted in the investment of surplus funds are the security of the capital and the avoidance of risk which can be associated with maximising returns.

For 2009/10 Members had approved a lending list to govern the investment policy of the Authority and had stipulated that a maximum of £4m be lent to any one institution from resources temporarily available.  The current approved lending list covers British clearing banks and their wholly owned subsidiaries (including the HSBC Bank which is owned by a foreign institution) and the top 30 building societies (ranked by asset size).  A decision was taken by the Head of Finance to reduce the risk of exposure to Building Societies by reducing the lending list from top 30 to top 20.  This was decided after market intelligence advised that the continued problem with the housing market and the downgrading of building societies within the ratings may have a detrimental effect.  Local Authorities and a selected list of overseas institutions were also included.

There is also a maximum limit of £10m to be lent to any one institution from resources available to be invested for periods greater than one year.  This covers issuers of Eurosterling Bonds and the UK Government.

The primary criteria for assessing the suitability of an institution to be on the list are its credit rating and the rating of its Sovereignty, which is supplied by the Council’s Treasury Management advisors.  Part and wholly Nationalised Banks were also included along with banks that had taken up the offer of Government backing.

Current Issues

The CIPFA Prudential Code was introduced on April 1^st 2004.  In broad terms, the code allows, subject to prudential, sustainability and affordability issues, authorities to borrow whatever resources they need to fulfill their capital spending priorities.  This has now been updated by CIPFA’s Code of Practice on Treasury Management 2009 (Revised).  There is no current plan to borrow at the present time, however, the option of borrowing will be reviewed at least annually in planning to fund key priority spending and will possibly have an impact in the medium term.

There continues to be the potential for future developments in terms of accounting for investment instruments, as well as the introduction of new and alternative instruments into the market.  The likely impact of these will continue to be monitored in conjunction with the Council’s Treasury Management advisors.

External Fund Managers

The Council does not currently use external fund managers.

Delegation

The decisions on the investment and borrowing activities described in the report of the Head of Finance have been performed under authority delegated to the Director of Regeneration and Communities (formerly the Director of Resources and Partnerships).

It would be possible for the Council to amend its practices to enable investment at higher rates by increasing the number of institutions on the approved lending list. This action would increase risk by reducing security of the capital sums invested. Such a change to the strategy would require approval of Cabinet, Audit Committee and Council and is contrary to the recommendations of CIPFA and is therefore not recommended.