AUDIT, GOVERNANCE AND STANDARDS COMMITTEE				16 January 2017
Is the final decision on the recommendations in this report to be made at this meeting?					No
Treasury Management Strategy 2017/18 – Revised Report
Final Decision-Maker		Council
Lead Director		Mark Green, Director of Finance & Business Improvement
Lead Officer and Report Author		John Owen, Finance Manager Ellie Dunnet, Chief Accountant
Classification		Public
Wards affected		None
This report makes the following recommendations to this Committee:
1.   That the Audit, Governance and Standards Committee recommends the adoption of the Treasury Management Strategy for 2017/18 attached at Appendix A to this report, subject to potential amendments arising following the approval of the capital programme for 2017/18 onwards by the Policy & Resources Committee on 18 January 2017.
This report relates to the following corporate priorities:
The Treasury Management Strategy impacts upon all corporate priorities through the resource it provides from the investment of the council’s balances and the security and control it provides for decisions on borrowing and investment. These resources are incorporated in the council’s budget
Timetable
Meeting			Date
Audit, Governance and Standards Committee			16 Jan 2017
Council			1 March 2017

Treasury Management Strategy 2017/18

 

1.        PURPOSE OF REPORT AND EXECUTIVE SUMMARY

 

1.1     This report sets out the Draft Treasury Management Strategy for 2017/18 for consideration by the Audit, Governance & Standards Committee and subsequently, recommendation to Council for adoption.  The strategy statement and associated documents are attached at appendices A-C to this report.

 

1.2     The Council has adopted CIPFA’s Code on Treasury management (the Code) which requires an annual report on the strategy and plan to be pursued within the coming year to be made to full Council. This report considers the proposed strategy for 2017/18 onwards along with current guidance from CIPFA and the Department for Communities and Local Government (DCLG).

 

2.        INTRODUCTION AND BACKGROUND

 

2.1     The Council is required to operate a balanced budget, which broadly means that cash raised during the year will meet cash expenditure. The Treasury

Management Strategy assists the Council in achieving this objective while maintaining value for money.

 

2.2     The first function of the Council’s treasury management operation is to ensure that this cash flow is adequately planned, with cash being available when it is needed. Surplus monies are invested in low risk counterparties or instruments commensurate with the Council’s low risk appetite, providing adequate liquidity initially before considering investment return.

 

2.3     The second main function of the treasury management service is the funding of the Council’s capital plans.  These capital plans provide a guide to the borrowing need of the Council, essentially the longer term cash flow planning to ensure that the Council can meet its capital spending obligations.  This management of longer term cash may involve arranging long or short term loans, or using longer term cash flow surpluses.   On occasion any debt previously drawn may be restructured to meet Council risk or cost objectives.

 

2.4     The council has adopted the Treasury Management in Public Services: Code of Practice 2011 Edition (‘the Code’) issued by the Chartered Institute of Public Finance and Accountancy (CIPFA).  CIPFA defines treasury management as:

 

“The management of the local authority’s investments and 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.”

 

2.5     There have not been any significant revisions to the strategy for 2017/18 from the 2016/17 strategy, which was reviewed by this Committee and agreed by Council in March 2016 then monitored by his Committee mid-year.  However, the following changes should be noted:

 

-      The maximum principal sums to be invested for a period exceeding 364 days has been reduced to £5m from £8m.  This is consistent with the borrowing strategy to utilise cash balances rather than loan debt to finance the capital programme in the short term, due to low investment returns and high counterparty risk in the current economic climate;

 

-      The council will endeavour to further diversify its portfolio, as far as is operationally feasible, ensuring that a combination of secured and unsecured investments are considered;

 

-      Changes to the capital financing requirement are proposed in light of updated capital plans.  The proposed limit on prudential borrowing has been revised accordingly, as set out in paragraph 2.9;

 

-      The expected level of interest income to be generated through investment returns has been revised downwards in light of the current economic outlook and interest rate forecasts.

 

2.6     The strategy statement is set out at Appendix A to this report. It is consistent with the requirements of the CIPFA and DCLG. It has been developed in line with currently approved spending and financing proposals.

 

2.7     Appendix B details the proposed list of investment counterparties based on current ratings against the selection criteria set out in the strategy.

 

2.8     The Policy & Resources Committee will consider a capital programme for the

period 2017/18 to 2021/22 at its meeting on 18th January 2017. This

programme proposes a significant increase in prudential borrowing to

support the housing development and regeneration objectives of the Council. Should any changes to this programme be agreed at this meeting then the prudential borrowing limits set out in the attached strategy will require amendment before consideration by Council.

 

2.9     The following table shows the maximum and expected prudential borrowing

required to fund the draft capital programme.  The maximum borrowing limit excludes any internal borrowing:

 

 

2.10 The prudential indicators for the proposed strategy are set out within Appendix C to this report.

 

 

3.        AVAILABLE OPTIONS

 

3.1     Option 1: The Committee could decide not to recommend the strategy to

Council. The Council must adopt a strategy for 2017/18 and should the

Committee decide not to recommend the attached strategy it would need to

recommend an alternative to Council. The strategy is in line with the

necessary codes and practice guides and takes a low risk approach

favouring liquidity over return and as such is considered suitable for this

Council.

 

3.2     Option 2: Subject to any legal obligations placed upon the Council, the

Committee could amend the strategy prior to recommendation to Council.

The Committee would need to provide Council with detailed reasons for the

amendment and the risks and benefits that the proposed amendment

provides in order for the Council to make a fully informed decision on the

recommendation. Areas where amendments could be made include the

following, which are detailed along with current reasons for not changing

the current strategy.

 

3.2.1   Limits: the proposed strategy allows maximum investments with

certain institutions of £8m. The current limit could be retained,

increased or reduced. Given the difficulty in identifying opportunities

to lend at suitable rates within the counterparty list, it is considered

appropriate to incorporate sufficient flexibility by retaining the

current limit for investments with the most secure organisations.

 

3.2.2   Counterparties: the proposed strategy allows non-specified

          investments with other local authorities and the rated/unrated building societies that are within Arlingclose’s suggested counterparty list. The strategy could propose to utilise additional counterparties from the non-specified investments group. However, due to the fact that this would involve an increased level of risk to the security of the council’s cash, this is not considered to represent a prudent course of action.

 

3.2.3   Alternative use of cash: the resources invested in expenditure could

  be utilised to deliver key priority outcomes. However the core cash

  held by the Council is either set aside for future expenditure, such

  as the capital programme, or held as a form of risk mitigation, such

  as the minimum level of revenue balances. To utilise these

  resources for alternative projects could compromise liquidity and put

  the Council at future risk should an unforeseen event occur.

 

3.2.4   External Fund Managers: by appointing external managers local

  authorities may possibly benefit from security of investments,

  diversification of investment instruments, liquidity management and

  the potential of enhanced returns. Managers do operate within the

  parameters set by local authorities but this involves varying degrees

  of risk. This option has been discounted on the basis of the risk

  which would make it difficult to ascertain a suitable sum to assign to

  an external manager.

 

3.3     Option 3: The Committee could agree the attached strategy and

recommend it to Council. The attached strategy has been produced in line

with current guidance from CIPFA and the Department for Communities and

Local Government (DCLG) and has been reviewed by the Council’s Treasury

Management Advisors and their recommended amendments have been

taken into account.

 

4.        PREFERRED OPTION AND REASONS FOR RECOMMENDATIONS

 

4.1     The recommended option is Option 3, to recommend to Council the strategy

set out in Appendix A.  In agreeing this option the committee should note the potential change in the level of prudential borrowing if there are any changes to the council’s proposed capital spending plans.

 

4.2     As stated above, the proposed strategy has been produced in line

with current guidance from CIPFA and the Department for Communities and

Local Government (DCLG).

 

5.       CONSULTATION RESULTS AND PREVIOUS COMMITTEE FEEDBACK

 

5.1     No specific consultation has been undertaken in relation to this strategy, however this forms part of the council’s medium term financial strategy for 2017/18 for which detailed consultation has been undertaken.

 

6.       NEXT STEPS: COMMUNICATION AND IMPLEMENTATION OF THE DECISION

 

6.1     The final decision on the strategy will be made by Council on 1 March 2017 when it considers the 2017/18 budget and strategic plan update. All three strategies are interlinked and the Council meeting will be able to consider the cross-strategy implications of each decision.

 

7.       CROSS-CUTTING ISSUES AND IMPLICATIONS

 

Issue	Implications	Sign-off
Impact on Corporate Priorities	The Treasury Management Strategy impacts upon all corporate priorities through the resource it provides from the investment of the council’s balances and the security and control it provides for decisions on borrowing and investment. These resources are incorporated in the council’s budget.	Director of Finance and Business Improvement
Risk Management	Risk Management is included within the Treasury Management Practices which the council adheres to. The main risks to the council are counterparty risk, liquidity risk and interest rate risk which are closely monitored on a regular basis using the council’s treasury advisors and other market intelligence. If there is a possibility of a negative risk, the appropriate action is taken immediately through delegated authority.	Director of Finance and Business Improvement
Financial	Financial implications are covered within the strategy itself.	Director of Finance and Business Improvement
Staffing	None identified.	Director of Finance and Business Improvement
Legal	Legal implications are set out in the body of the strategy.	Director of Finance and Business Improvement
Equality Impact Needs Assessment	None identified.	Director of Finance and Business Improvement
Environmental/Sustainable Development	None identified.	Director of Finance and Business Improvement
Community Safety	None identified.	Director of Finance and Business Improvement
Human Rights Act	None identified.	Director of Finance and Business Improvement
Procurement	None identified.	Director of Finance and Business Improvement
Asset Management	None identified.	Director of Finance and Business Improvement

 

8.        REPORT APPENDICES

 

The following documents are to be published with this report and form part of the report:

·         Appendix A: Treasury Management Strategy Statement

·         Appendix B: Proposed List of Investment Counterparties

·         Appendix C: Prudential Indicators

 

9.        BACKGROUND PAPERS

 

None