The Council is required to operate a balanced budget, which broadly means that cash raised during the year will meet cash expenditure.� Part of the treasury management service 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.

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.

The council has adopted the Treasury Management in Public Services: Code of Practice 2017 Edition (�the CIPFA 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.�

1.2 Reporting requirements

The Council is required to receive and approve the Treasury Management Strategy, which incorporates a variety of policies, estimates and actuals.�

Prudential and treasury indicators and treasury strategy (this report) - The first, and most important report covers:

� the capital plans (including prudential indicators);

� the treasury management strategy (how investments and borrowings are organised) including treasury indicators; and

The following reports are not required to be approved by Council but are to be reported and scrutinised to the relevant Committee.� The Council has delegated this function to the Audit, Governance and Standards Committee.

A mid year treasury management report � This will update members with the progress of the capital position, amending prudential indicators as necessary, and determining whether any policies require revision if the assumptions on which this strategy is based were to change significantly.� In accordance with guidance issued by Ministry of Housing, Communities and Local Government (MHCLG), the circumstances which may require the council to revise its strategy would include, for example, a large unexpected change in interest rates, or in the council�s capital programme or in the level of its investment balance.

An annual treasury report � This provides details of a selection of actual prudential and treasury indicators and actual treasury operations compared to the estimates within the strategy.

A quarterly update on the Council�s treasury management position is also provided through budget monitoring reports presented to Policy & Resources Committee.

Investments held for service purposes or for commercial profit are considered in a different report, the Investment Strategy.

1.3 Treasury Management Strategy for 2019/20

The strategy for 2019/20 covers two main areas:

Capital issues

� the capital plans and the prudential indicators;

Treasury management issues

� treasury indicators which limit the treasury risk and activities of the Council;

� prospects for interest rates;

� the borrowing strategy;

� policy on borrowing in advance of need;

� the Treasury Management investment strategy; and

� creditworthiness policy.

1.4 Treasury management consultants

The Council had been using Arlingclose Limited as its external treasury management advisors.� However, after a tendering exercise during 2018/19, the Director of Finance and Business Improvement has decided to appoint Link Asset Services (formally Capita Asset Services) from 1^st January 2019.

Responsibility for treasury management decisions ultimately remains within the Council and officers will not place undue reliance on the advice of external service providers.

The terms of appointment and value gained through use of treasury management consultants will be subject to regular review by the Director of Finance and Business Improvement.

1.5 Training

The CIPFA Code requires the responsible officer to ensure that members with responsibility for treasury management receive adequate training in treasury management.� Training is offered to members of the Audit, Governance and Standards Committee on a regular basis.

Staff regularly attend training courses, seminars and conferences provided by the Council�s Treasury Consultants and CIPFA. Relevant staff are also encouraged to study professional qualifications delivered by CIPFA, the Association of Corporate Treasurers and other appropriate organisations.

Staff training needs are assessed regularly both as part of the appraisal process and when the responsibilities of individual members of staff change.

2 THE CAPITAL PRUDENTIAL INDICATORS AND MINIMUM REVENUE PROVISION

The Council�s capital expenditure plans are the key driver of treasury management activity.� The output of the capital expenditure plans is reflected in the prudential indicators, which are designed to assist members� overview and confirm capital expenditure plans.

2.1 Capital expenditure

This prudential indicator is a summary of the Council�s capital expenditure plans; those agreed previously, as well as those forming part of this budget cycle.� Capital expenditure forecasts are shown below:

2018/19	2019/20	2020/21	2021/22	2022/23
�,000	�,000	�,000	�,000	�,000
24,066	23,122	18,906	13,683	12,638

2.2 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.�

The CFR does not increase indefinitely, as the minimum revenue provision (MRP) is a statutory annual revenue charge which broadly reduces the borrowing need in line with each asset�s life.

The CFR includes the liability for the arrangement with Serco Paisa for leisure centre improvements.� Whilst these increase 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 will be using its own cash to fund the CFR (internal borrowing) until the time where funding will be required externally.

CFR projections are shown in the table below:

2018/19	2019/20	2020/21	2021/22	2022/23
�,000	�,000	�,000	�,000	�,000
22,302	39,293	57,119	69,939	81,023

2.3 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.�

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.

2018/19	2019/20	2020/21	2021/22	2022/23
%	%	%	%	%
-0.9	1.0	3.1	4.5	5.5

2018/19	2019/20	2020/21	2021/22	2022/23
�000	�000	�000	�000	�000
-180	208	564	821	1,042

The estimates of financing costs include current commitments and the proposals in this budget report.

2.4 Minimum Revenue Provision

Where the Authority finances capital expenditure by debt, it must put aside resources to repay that debt in later years.� The amount charged to the revenue budget for the repayment of debt is known as Minimum Revenue Provision (MRP), although there has been no statutory minimum since 2008. The Local Government Act 2003 requires the Authority to have regard to the Department for Communities and Local Government�s Guidance on Minimum Revenue Provision (the DCLG Guidance) most recently issued in 2012.

The broad aim of the Guidance is to ensure that debt is repaid over a period that is either reasonably commensurate with that over which the capital expenditure provides benefits, or, in the case of borrowing supported by Government Revenue Support Grant, reasonably commensurate with the period implicit in the determination of that grant.�

The Council expects that its Capital Financing Requirement will be positive on 31st March 2019 and in line with the MHCLG Guidance it will therefore charge MRP in 2019/20.

3 BORROWING

The capital expenditure plans set out in Section 2 provide details of the service activity of the Council.� The treasury management function ensures that the Council�s cash is organised in accordance with the relevant professional codes, so that sufficient cash is available to meet this service activity.� This will involve both the organisation of the cash flow and, where capital plans require, the organisation of approporiate borrowing facilities.� The strategy covers the relevant treasury / prudential indicators, the current and projected debt positions and the annual investment strategy.

3.1 Treasury Indicators: limits to borrowing activity

The operational boundary.� This is the limit beyond which external debt is not normally expected to exceed.� In most cases, this would be a similar figure to the CFR, but may be lower or higher depending on the levels of actual debt.

Operational boundary	2019/20 �000	2020/21 �000	2021/22 �000	2022/23 �000
Debt	17,884	35,710	48,530	59,614
Other long term liabilities	3,047	2,527	2,010	1,473
Total	20,931	38,237	50,540	61,087

The authorised limit for external debt. A further key prudential indicator represents a control on the maximum level of borrowing.� This represents a limit beyond which external debt is prohibited, and this limit needs to be set or revised by the full Council.� It reflects the level of external debt which, while not desired, could be afforded in the short term, but is not sustainable in the longer term.�

1. This is the statutory limit determined under section 3 (1) of the Local Government Act 2003. 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:

Authorised limit	2019/20 �000	2020/21 �000	2021/22 �000	2022/23 �000
Debt	36,246	54,592	67,929	79,550
Other long term liabilities	3,047	2,527	2,010	1,473
Total	39,293	57,119	69,939	81,023

3.2 Prospects for interest rates

The Council�s advisors have provided the following interest rate forecast:

Underlying assumptions:

� The MPC left Bank Rate unchanged at the September meeting, after voting unanimously to increase Bank Rate to 0.75% in August.

� The projected outlook for the UK economy means we maintain the significant downside risks to our interest rate forecast. The UK economic environment is relatively soft, despite seemingly strong labour market data. GDP growth recovered somewhat in Q2 2018, but the annual growth rate of 1.2% remains well below the long term average. Our view is that the UK economy still faces a challenging outlook as the country exits the European Union and Eurozone economic growth softens.

� Cost pressures were projected to ease but have risen more recently and are forecast to remain above the Bank�s 2% target through most of the forecast period. The rising price of oil and tight labour market means inflation may remain above target for longer than expected. This means that strong real income growth is unlikely in the near future.

� The MPC has a bias towards tighter monetary policy but is reluctant to push interest rate expectations too strongly. We believe that MPC members consider both that: 1) ultra-low interest rates result in other economic problems, and 2) higher Bank Rate will offer a more effective policy device should downside Brexit risks crystallise and cuts are required.

� The global economy appears to be slowing, particularly the Eurozone and China, where the effects of the trade war has been keenly felt. Despite slower growth, the European Central Bank is adopting a more strident tone in conditioning markets for the end of quantitative easing, the timing of the first rate hike (2019) and their path thereafter. Meanwhile, European political issues, mostly lately with Italy, continue.

� The US economy is expanding more rapidly. The Federal Reserve has tightened monetary policy by raising interest rates to the current 2%-2.25% range; further rate hikes are likely, which will start to slow economic growth. Central bank actions and geopolitical risks have and will continue to produce significant volatility in financial markets, including bond markets.

Forecast:

� The MPC has maintained expectations of a slow rise in interest rates over the forecast horizon. The central case provided by Arlingclose is for the Bank Rate is to rise twice in 2019. The risks are weighted to the downside.

� Gilt yields have remained at low levels. We expect some upward movement from current levels based on our interest rate projections, the strength of the US economy and the ECB�s forward guidance on higher rates. However, volatility arising from both economic and political events will continue to offer borrowing opportunities.

3.3 Borrowing strategy

Based on current assumptions regarding slippage in the capital programme, it is anticipated that the Council will maintain an under-borrowed position for the current financial year.� This means that the capital borrowing need (the Capital Financing Requirement), has been funded using cash supporting the Council�s reserves, balances and cash flow as a temporary measure, rather than through loan debt.� This strategy is prudent as currently investment returns are low and counterparty risk is relatively high and will be retained for the forthcoming financial year on the assumption that this situation is unlikely to change in the short term. However, if short term cash requirements cannot be met from balances in hand for day to day purposes, the Council has access to a range of sources of short term borrowing options, which includes other local authorities.

The Authorised Limit to borrow up to �36.290m for the financing of capital expenditure and day to day cash flow liquidity within 2019/20 includes the current capital programme and the current prudential indicators. The 2019/20 strategy includes the continuation of that authority within the calculation of the indicators. If the Council is to borrow then the affordability of the capital programme must include an assessment of the cost of borrowing along with the loss of investment income from the use of capital resources held in cash.

Should rates move more quickly than the forecast predicts, the current and proposed strategies do allow the section 151 officer to take advantage of external borrowing.� The Council�s policy on borrowing in advance of need is set out at section 3.4 of this strategy.

Objectives: The Authority�s chief objective when borrowing money is to strike an appropriately low risk balance between securing low interest costs and achieving certainty of those costs over the period for which funds are required.� The flexibility to renegotiate loans should the Authority�s long-term plans change is a secondary objective.

Strategy: The Authority�s borrowing strategy continues to address the key issue of affordability without compromising the longer-term stability of the debt portfolio. With short-term interest rates currently much lower than long-term rates, it is likely to be more cost effective in the short-term to either use internal resources, or to borrow short-term loans instead.�

By doing so, the Authority is able to reduce net borrowing costs (despite foregoing investment income) and reduce overall treasury risk. The benefits of internal / short-term borrowing will be monitored regularly against the potential for incurring additional costs by deferring borrowing into future years when long-term borrowing rates are forecast to rise modestly. The Council�s Treasury Advisors will assist the Authority with this �cost of carry� and breakeven analysis. Its output may determine whether the Authority borrows additional sums at long-term fixed rates in 2019/20 with a view to keeping future interest costs low, even if this causes additional cost in the short-term.

Alternatively, the Authority may arrange forward starting loans during 2019/20, where the interest rate is fixed in advance, but the cash is received in later years. This would enable certainty of cost to be achieved without suffering a cost of carry in the intervening period.

In addition, the Authority may make use of short-term loans to cover unplanned cash flow.

Sources: The approved sources of long-term and short-term borrowing are:

� Public Works Loan Board (PWLB) and any successor body

� any institution approved for investments (see below)

� any other bank or building society authorised to operate in the UK

� capital market bond investors

� any other UK public sector body

� UK Municipal Bonds Agency plc and other special purpose companies created to enable local authority bond issues

� UK public and private sector pension funds (except the Kent County Council� Pension Fund)

Other sources of debt finance: In addition, capital finance may be raised by the following methods that are not borrowing, but may be classed as other debt liabilities:

�� leasing

�� hire purchase

�� Private Finance Initiative

�� sale and leaseback

3.4 Policy on borrowing in advance of need

The Council will not borrow more than or in advance of its needs purely in order to profit from the investment of the extra sums borrowed. Any decision to borrow in advance will be within forward approved Capital Financing Requirement estimates, and will be considered carefully to ensure that value for money can be demonstrated and that the Council can ensure the security of such funds.

Risks associated with any borrowing in advance activity will be subject to prior appraisal and subsequent reporting through the mid-year or annual reporting mechanism.

4 ANNUAL INVESTMENT STRATEGY

4.1 Investment policy

The Authority holds significant invested funds, representing income received in advance of expenditure plus balances and reserves held.� In the past 12 months, the Authority�s investment balance has ranged between �17.4 and �40.18 million.� These investment balances are likely to reduce in 2019/20 due to funding of the capital programme with its own cash balances (internal borrowing).

Objectives: The CIPFA Code requires the Authority to invest its funds prudently, and to have regard to the security and liquidity of its investments before seeking the highest rate of return, or yield.� The Authority�s objective when investing money is to strike an appropriate balance between risk and return, minimising the risk of incurring losses from defaults and the risk receiving unsuitably low investment income.

Strategy: Given the increasing risk and continued low returns from short-term unsecured bank investments, the council aims to further diversify into more secure and/or higher yielding asset classes during 2019/20.� This is especially the case for the proposed �5m that is estimated to be available for longer-term investment. �The majority of council�s surplus cash is currently invested in Local Authority borrowing, short-term unsecured bank/building society deposits, certificates of deposit, money market funds and cash enhanced funds.� This diversification will represent a continuation of the new strategy.

Negative interest rates: If the UK enters into a recession in 2019/20, there is a small chance that the Bank of England could set its Bank Rate at or below zero, which is likely to feed through to negative interest rates on all low risk, short-term investment options. This situation already exists in many other European countries. In this event, security will be measured as receiving the contractually agreed amount at maturity, even though this may be less than the amount originally invested.

Approved Counterparties: The Authority may invest its surplus funds with any of the counterparty types in the table below, subject to the cash limits (per counterparty) and the time limits shown.� Additional detail regarding the different types of counterparty is provided below the table.�

Approved Investment Counterparties and Limits

Credit Rating

Banks Unsecured

Banks

Secured

Government

Corporates

Registered Providers

UK Govt

n/a

� Unlimited

50 years

n/a

AAA

�3m

�5 years

�5m

20 years

�5m

50 years

�3m

�20 years

�3m

�20 years

AA+

�3m

5 years

�5m

10 years

�5m

25 years

�3m

10 years

�3m

10 years

�3m

4 years

�5m

5 years

�5m

15 years

�3m

5 years

�3m

10 years

AA-

�3m

3 years

�5m

4 years

�5m

10 years

�3m

4 years

�3m

10 years

A+

�3m

2 years

�5m

3 years

�5m

5 years

�3m

3 years

�3m

5 years

�3m

13 months

�5m

2 years

�5m

5 years

�3m

2 years

�3m

5 years

A-

�3m

�6 months

�5m

13 months

�5m

�5 years

�3m

�13 months

�3m

�5 years

None

�1m

100 days

n/a

�5m

25 years

�50,000

5 years

�3m

5 years

Pooled funds

�8m per fund

The time limits set out above are consistent with the recommended durations provided by the council�s treasury management advisors.� The cash limits have been set with reference to this guidance, although the upper limit in certain categories of investment exceeds the limit proposed by its advisors in order to meet the operational requirements of the council.� The limits adopted within the strategy remain prudent and consistent with ensuring the security of capital and appropriate levels of liquidity.

Credit Rating: Investment limits are set by reference to the lowest published long-term credit rating from a selection of external rating agencies. Where available, the credit rating relevant to the specific investment or class of investment is used, otherwise the counterparty credit rating is used. However, investment decisions are never made solely based on credit ratings, and all other relevant factors including external advice will be taken into account.

Banks Unsecured: Accounts, deposits, certificates of deposit and senior unsecured bonds with banks and building societies, other than multilateral development banks. These investments are subject to the risk of credit loss via a bail-in should the regulator determine that the bank is failing or likely to fail. See below for arrangements relating to operational bank accounts.

Banks Secured: Covered bonds, Tri Party Repos, reverse repurchase agreements and other collateralised arrangements with banks and building societies. These investments are secured on the bank�s assets, which limits the potential losses in the unlikely event of insolvency, and means that they are exempt from bail-in. Where there is no investment specific credit rating, but the collateral upon which the investment is secured has a credit rating, the higher of the collateral credit rating and the counterparty credit rating will be used to determine cash and time limits. The combined secured and unsecured investments in any one bank will not exceed the cash limit for secured investments.

Government: Loans, bonds and bills issued or guaranteed by national governments, regional and local authorities and multilateral development banks. These investments are not subject to bail-in, and there is generally a lower risk of insolvency, although they are not zero risk. �Investments with the UK Central Government may be made in unlimited amounts for up to 50 years.

Corporates: Loans, bonds and commercial paper issued by companies other than banks and registered providers. These investments are not subject to bail-in, but are exposed to the risk of the company going insolvent.� Loans to unrated companies will only be made as part of a diversified pool in order to spread the risk widely.

Registered Providers: Loans and bonds issued by, guaranteed by or secured on the assets of Registered Providers of Social Housing and registered social landlords, formerly known as Housing Associations.� These bodies are tightly regulated by the Regulator of Social Housing and, as providers of public services, they retain the likelihood of receiving government support if needed.�

Pooled Funds: Shares or units in diversified investment vehicles consisting of the any of the above investment types, plus equity shares and property. These funds have the advantage of providing wide diversification of investment risks, coupled with the services of a professional fund manager in return for a fee.� Short-term Money Market Funds that offer same-day liquidity and very low or no volatility will be used as an alternative to instant access bank accounts, while pooled funds whose value changes with market prices and/or have a notice period will be used for longer investment periods.

Operational bank accounts: The Authority may incur operational exposures, for example though current accounts, collection accounts and merchant acquiring services, to any UK bank with credit ratings no lower than BBB- and with assets greater than �25 billion. These are not classed as investments, but are still subject to the risk of a bank bail-in, and balances will therefore be kept below �500,000 per bank. The Bank of England has stated that in the event of failure, banks with assets greater than �25 billion are more likely to be bailed-in than made insolvent, increasing the chance of the Authority maintaining operational continuity.

Risk assessment and credit ratings: Credit ratings are obtained and monitored by the Authority�s treasury advisers, who will notify changes in ratings as they occur.� Where an entity has its credit rating downgraded so that it fails to meet the approved investment criteria then:

�� no new investments will be made,

�� any existing investments that can be recalled or sold at no cost will be, and

�� full consideration will be given to the recall or sale of all other existing investments with the affected counterparty.

Where a credit rating agency announces that a credit rating is on review for possible downgrade (also known as �rating watch negative� or �credit watch negative�) so that it may fall below the approved rating criteria, then only investments that can be withdrawn on the next working day will be made with that organisation until the outcome of the review is announced.� This policy will not apply to negative outlooks, which indicate a long-term direction of travel rather than an imminent change of rating.

Other information on the security of investments: The Authority understands that credit ratings are good, but not perfect, predictors of investment default.� Full regard will therefore be given to other available information on the credit quality of the organisations in which it invests, including credit default swap prices, financial statements, information on potential government support and reports in the quality financial press and analysis and advice from the Authority�s treasury management adviser.� No investments will be made with an organisation if there are substantive doubts about its credit quality, even though it may meet the above criteria.

When deteriorating financial market conditions affect the creditworthiness of all organisations, as happened in 2008 and 2011, this is not generally reflected in credit ratings, but can be seen in other market measures.� In these circumstances, the Authority will restrict its investments to those organisations of higher credit quality and reduce the maximum duration of its investments to maintain the required level of security.� The extent of these restrictions will be in line with prevailing financial market conditions. If these restrictions mean that insufficient commercial organisations of high credit quality are available to invest the Authority�s cash balances, then the surplus will be deposited with the UK Government, via the Debt Management Office or invested in government treasury bills for example, or with other local authorities.� This will cause a reduction in the level of investment income earned, but will protect the principal sum invested.

Investment Limits: �In order that available reserves will not be put at risk in the case of a single default, the maximum that will be lent to any one organisation (other than the UK Government) will be �5 million.� A group of banks under the same ownership will be treated as a single organisation for limit purposes.� Limits will also be placed on fund managers, investments in brokers� nominee accounts, foreign countries and industry sectors as below. Investments in pooled funds and multilateral development banks do not count against the limit for any single foreign country, since the risk is diversified over many countries.

	Cash limit
Any single organisation, except the UK Central Government	�5m each
UK Central Government	unlimited
Any group of organisations under the same ownership	�5m per group
Any group of pooled funds under the same management	�8m per manager
Negotiable instruments held in a broker�s nominee account	�10m per broker
Foreign countries	�5m per country
Registered Providers and registered social landlords	�5m in total
Unsecured investments with Building Societies	�3m each
Loans to unrated corporates	�50,000 each
Money Market Funds	�8m each fund or fund group

Liquidity Management: The council uses a cash flow forecasting spreadsheet to determine the maximum period for which funds may prudently be committed.� The forecast is compiled on a prudent basis to minimise the risk of the council being forced to borrow on unfavourable terms to meet its financial commitments. Limits on long-term investments are set by reference to the council�s medium term financial plan and cash flow forecast.

Accounting treatment of investments.�

The accounting treatment may differ from the underlying cash transactions arising from investment decisions made by this 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.

In-house funds. The majority of investments will be made with reference to the cash flow requirements so invested �for short-term interest rates (i.e. rates for investments up to 12 months). �However, there is a provision of funds that can be used for longer term investments (greater than 12 months) if it deemed to be prudent by the section 151 officer.

4.2 �� Treasury Investment strategy

The Authority measures and manages its exposures to treasury management risks using the following indicators.

Security: The Authority has adopted a voluntary measure of its exposure to credit risk by monitoring the value-weighted average credit score of its investment portfolio.� This is calculated by applying a score to each investment (AAA=1, AA+=2, etc.) and taking the arithmetic average, weighted by the size of each investment. Unrated investments are assigned a score based on their perceived risk.

Credit risk indicator	Target
Portfolio average credit score��	5.0

�� Liquidity: The Authority has adopted a voluntary measure of its exposure to liquidity risk by monitoring the amount of cash available to meet unexpected payments within a rolling three month period, without additional borrowing.

Liquidity risk indicator	Target
Total cash available within 3 months�	�5m

Interest rate exposures: This indicator is set to control the Authority�s exposure to interest rate risk.� The upper limits on the one-year revenue impact of a 1% rise or fall in interest rates will be:

Interest rate risk indicator	Limit
Upper limit on one-year revenue impact of a 1% rise in interest rates�	�50,000
Upper limit on one-year revenue impact of a 1% fall in interest rates��	�50,000

Maturity Structure of Borrowing: This indicator is set to control the Authority�s exposure to refinancing risk. The upper and lower limits on the maturity structure of fixed rate borrowing will be:

	Upper	Lower
Under 12 months	100%	0%
12 months and within 24 months	100%	0%
24 months and within 5 years	100%	0%
5 years and within 10 years	100%	0%
10 years and above	100%	100%

Time periods start on the first day of each financial year.� The maturity date of borrowing is the earliest date on which the lender can demand repayment.

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: -

Maximum principal sums invested > 364 days

2019/20

�000

2020/21 �000

2021/22

�000

2021/22

�000

Principal sums invested > 364 days

5,000

4.3 End of year investment report

At the end of the financial year, the Council will report on its investment activity as part of its Annual Treasury Report as previously stated within 1.2.

4.4 Other Items

Financial Derivatives: Local authorities have previously made use of financial derivatives embedded into loans and investments both to reduce interest rate risk (e.g. interest rate collars and forward deals) and to reduce costs or increase income at the expense of greater risk (e.g. LOBO loans and callable deposits).� The general power of competence in Section 1 of the Localism Act 2011 removes much of the uncertainty over local authorities� use of standalone financial derivatives (i.e. those that are not embedded into a loan or investment).

The Authority will only use standalone financial derivatives (such as swaps, forwards, futures and options) where they can be clearly demonstrated to reduce the overall level of the financial risks that the Authority is exposed to. Additional risks presented, such as credit exposure to derivative counterparties, will be taken into account when determining the overall level of risk. Embedded derivatives, including those present in pooled funds and forward starting transactions, will not be subject to this policy, although the risks they present will be managed in line with the overall treasury risk management strategy.

Financial derivative transactions may be arranged with any organisation that meets the approved investment criteria. The current value of any amount due from a derivative counterparty will count against the counterparty credit limit and the relevant foreign country limit.

Markets in Financial Instruments Directive: The Authority has opted up to professional client status with its providers of financial services, including advisers, banks, brokers and fund managers, allowing it access to a greater range of services but without the greater regulatory protections afforded to individuals and small companies. Given the size and range of the Authority�s treasury management activities, the section 151 officer believes this to be the most appropriate status.

Financial Implications:� The budget for investment income in 2019/20 is �150,000, based on an average investment portfolio of �20million at an interest rate of 0.75%.� If actual levels of investments and borrowing, or actual interest rates, differ from those forecast, performance against budget will be correspondingly different.

Investment Strategy

Maidstone Borough Council

2019/20

Introduction

The Authority invests its money for three broad purposes:

� because it has surplus cash as a result of its day-to-day activities, for example when income is received in advance of expenditure (known as treasury management investments),

� to support local public services by lending to or buying shares in other organisations (service investments), and

� to earn investment income (known as commercial investments where this is the main purpose).

This investment strategy is new for 2019/20, meeting the requirements of statutory guidance issued by the government in January 2018, and focuses on the second and third of these categories.

Treasury Management Investments

The Authority typically receives its income in cash (e.g. from taxes and grants) before it pays for its expenditure in cash (e.g. through payroll and invoices). It also holds reserves for future expenditure and collects local taxes on behalf of other local authorities and central government. These activities, plus the timing of borrowing decisions, lead to a cash surplus which is invested in accordance with guidance from the Chartered Institute of Public Finance and Accountancy. The balance of treasury management investments is expected to fluctuate between �10.8m and �30m during the 2019/20 financial year.

Contribution: The contribution that these investments make to the objectives of the Authority is to support effective treasury management activities.

Further details: Full details of the Authority�s policies and its plan for 2019/20 for treasury management investments are covered in a separate document, the treasury management strategy.

Service Investments: Loans

Contribution: The Council lends money to its subsidiaries, its suppliers, local businesses, local charities, housing associations, local residents and its employees to support local public services and stimulate local economic growth. The Council has made loans to Kent Savers for �25k in 2017/18 which is repayable in 2022/23 at an interest rate of 1% and an interest free loan to One Maidstone CIC Limited for �60,000.� However, loans to Maidstone Property Holdings Limited and Cobtree Manor Estates Trust may also be made in the near future.

Security: The main risk when making service loans is that the borrower will be unable to repay the principal lent and/or the interest due. In order to limit this risk, and ensure that total exposure to service loans remains proportionate to the size of the Authority, upper limits on the outstanding loans to each category of borrower have been set as follows:

Table 1: Loans for service purposes in � millions

Category of borrower	31.3.2018 actual			2019/20
Category of borrower	Balance owing	Loss allowance	Net figure in accounts	Approved Limit
Subsidiaries				1.000
Local businesses	0.085		0.085	0.085
Local charities				0.310
TOTAL	0.085	0	0.085	1.395

Accounting standards require the Authority to set aside loss allowance for loans, reflecting the likelihood of non-payment. The figures for loans in the Authority�s statement of accounts from 2018/19 onwards will be shown net of this loss allowance. However, the Authority makes every reasonable effort to collect the full sum lent and has appropriate credit control arrangements in place to recover overdue repayments.

Risk assessment: The Authority assesses the risk of loss before entering into and whilst holding service loans by assessing the borrower�s ability to repay the loan, based on past financial performance.� This is monitored over the period of the loan in line with the agreed repayment terms.

Commercial Investments: Property

Contribution: The Council does not currently have any investments in property that are considered to be purely commercial in nature.� Acquisitions are limited to properties situated within the borough, with the intention of supporting the local community, housing and regeneration objectives rather than for the exclusive purpose of generating profits.� All property investments are therefore� classified as general fund capital projects.

Third Party Loan Commitments and Financial Guarantees

The Authority has contractually committed to repay the loan on behalf of Serco Paisa for works to the leisure Centre which has a balance as at 31^st March 2018 of� ��3.047m.

Capacity, Skills and Culture

Elected members and statutory officers: The Section 151 Officer has ultimate decision making powers on investment decisions and has a number of key officers with the necessary skills to assess such projects, including the Corporate Property Manager, Head of Finance, as well as the use of external consultants.

Each project is evaluated on its affordability and prudence to bear additional future revenue cost associated with each investment. It is established if the use of new or existing revenue resources to finance capital investment over competing needs for revenue expenditure and the scope for capital investment to generate future revenue savings or income, taking into account the risks associated with each proposal.

Commercial deals: The Section 151 Officer is involved with all decision making for capital projects and is aware of the core principles of the prudential framework in regard to the following:

� „service objectives, eg strategic planning for the authority

� „stewardship of assets, eg asset management planning

� „value for money, eg option appraisal

� prudence and sustainability, eg implications for external debt�� and whole life costing

� „affordability, eg implications for council tax

� „practicality, eg achievability of the forward plan.

Corporate governance: The investment strategy is reviewed by Audit, Governance and Standards Committee prior to approval by full Council.� Investment opportunities will be considered on a case by case basis with reference to the strategy, and a mid-year report will be provided during the year to ensure that the strategy remains fit for purpose.

Investment Indicators

The Authority has set the following quantitative indicators to allow elected members and the public to assess the Authority�s total risk exposure as a result of its investment decisions.

Total risk exposure: The first indicator shows the Authority�s total exposure to potential investment losses. This includes amounts the Authority is contractually committed to lend but have yet to be drawn down and guarantees the Authority has issued over third party loans.

Table 5: Total investment exposure in �millions

Total investment exposure	31.03.2018 Actual	31.03.2019 Forecast	31.03.2020 Forecast
Treasury management investments	10.4	0.00	0.00
Service investments: Loans	0.085	0.085	1.395
TOTAL INVESTMENTS	10.485	0.085	1.395
Commitments to lend (Serco Loan � Leisure Centre)	3.047	2.527	2.010
TOTAL EXPOSURE	13.532	2.612	3.405

How investments are funded: Government guidance is that these indicators should include how investments are funded. Since the Authority does not normally associate particular assets with particular liabilities, this guidance is difficult to comply with. However, the following investments could be described as being funded by borrowing. The remainder of the Authority�s investments are funded by usable reserves and income received in advance of expenditure.

Table 6: Investments funded by borrowing in �millions

Investments funded by borrowing	31.03.2018 Actual	31.03.2019 Forecast	31.03.2020 Forecast
Treasury management investments	0	0	0.000
Service investments: Loans	0	0	1.000
TOTAL FUNDED BY BORROWING	0	0	1.000

The above table does not include investments funded by borrowing which form part of the Council�s capital programme.� Details of this expenditure are included within the Capital Strategy.

Rate of return received: This indicator shows the investment income received less the associated costs, including the cost of borrowing where appropriate, as a proportion of the sum initially invested. Note that due to the complex local government accounting framework, not all recorded gains and losses affect the revenue account in the year they are incurred.

Table 7: Investment rate of return (net of all costs)

Investments net rate of return	2017/18 Actual	2018/19 Forecast	2019/20 Forecast
Treasury management investments	0.44%	0.70%	(1.00)%
Service investments: Loans	1.00%	1.00%	3.00%
ALL INVESTMENTS	1.44%	1.70%	2.00%

Capital Strategy

Maidstone Borough Council

2019/20

Introduction

This capital strategy is new for 2019/20, giving a high-level overview of how capital expenditure, capital financing and treasury management activity contribute to the provision of local public services along with an overview of how associated risk is managed and the implications for future financial sustainability. It has been written in an accessible style to enhance members� understanding of these sometimes technical areas.

The capital strategy is an overarching document linking the TM Strategy, Investment Strategy and also includes the Medium Term Financial Strategy (MTFS) which was agreed by Council on 12^th December 2018.

Capital Expenditure and Financing

Capital expenditure is where the Council spends money on assets, such as property or vehicles, that will be used for more than one year. In local government this includes spending on assets owned by other bodies, and loans and grants to other bodies enabling them to buy assets. The Council has some limited discretion on what counts as capital expenditure, for example assets costing below �10k are not capitalised and are charged to revenue in year.

� For details of the Council�s policy on capitalisation, see: https://www.maidstone.gov.uk/__data/assets/pdf_file/0018/190710/Audited-Annual-Accounts-2017.pdf

In 2019/20, the Council is planning capital expenditure of �23.165m.� Detailed below is a list of proposed capital expenditure to 2021/22:

Table 1: Prudential Indicator: Estimates of Capital Expenditure in � millions

	2017/18 actual	2018/19 forecast	2019/20 budget	2020/21 budget	2021/22 budget
General Fund Services	12.623��	24.066	23.122	18.906	13.683

The main General Fund capital projects include:

Project�� Total Project Cost (�m)

Disabled Facilities Grant�� 5.348

Brunswick/Union Street Developments�� 2.810(Net of contr.)

Housing Delivery Partnership�� 15.000

Indicative Schemes: A, B & C�� 17.000

Mote Park Visitor Centre and Dam Works�� 4.039

Town Centre Regeneration Works�� 2.830

Acquisition of Commercial Assets�� 12.500

Kent Medical Campus - Innovation Centre�� 10.500��

Governance: Service managers submit proposals in October to include projects in the Council�s capital programme. Bids are collated by Corporate Finance who calculates the financing cost (which can be nil if the project is fully externally financed). Each Committee appraises the proposals based on a comparison of corporate priorities. Policy & Resources recommends the capital programme which is then presented to Council in March each year.

Prior to any capital commitment being entered into, a detailed report setting out a full project appraisal and detailed financial projections would be considered by the relevant service committee.

All capital expenditure must be financed, either from external sources (government grants and other contributions), the Council�s own resources (revenue, reserves and capital receipts) or debt (borrowing, leasing and Private Finance Initiative). The planned financing of the above expenditure is as follows:

Table 2: Capital financing in � millions

	2017/18 actual	2018/19 forecast	2019/20 budget	2020/21 budget	2021/22 budget
External sources	9.815	4.991	6.131	1.08	0.863
Own resources	2.808	19.075	8.099	0.000	0.000
Debt	0	0	8.892	18.798	12.820
TOTAL	12.623	24.066	23.122	18.906	13.683

Debt is only a temporary source of finance, since loans and leases must be repaid, and this is therefore replaced over time by other financing, usually from revenue which is known as minimum revenue provision (MRP). Alternatively, proceeds from selling capital assets (known as capital receipts) may be used to replace debt finance. Planned MRP and use of capital receipts are as follows:

Table 3: Replacement of debt finance in � millions

	2017/18 actual	2018/19 forecast	2019/20 budget	2020/21 budget	2021/22 budget
Own resources	0	0	0.446	0.786	1.142

� The Council�s full minimum revenue provision� statement is included within the TM strategy item no. 75 of the Agenda: http://aluminum:9080/ieListDocuments.aspx?CId=585&MId=2870&Ver=4

The Council�s cumulative outstanding amount of debt finance is measured by the capital financing requirement (CFR). This increases with new debt-financed capital expenditure and reduces with MRP and capital receipts used to replace debt. The CFR is expected to increase by �17.035m during 2019/20. Based on the above figures for expenditure and financing, the Council�s estimated CFR is as follows:

Table 4: Prudential Indicator: Estimates of Capital Financing Requirement in � millions

	31.3.2018 actual	31.3.2019 forecast	31.3.2020 budget	31.3.2021 budget	31.3.2022 budget
TOTAL CFR	3.227	22.302	39.293	57.119	69.939

Asset management: To ensure that capital assets continue to be of long-term use, the Council has an asset management strategy in place.

Asset disposals The Council has no plans to sell any of its assets in the forthcoming future, however certain schemes within the capital programme are being partially funded through sale of some of the completed units to partner organisations.� The capital expenditure figures have been shown net of these receipts.

Treasury Management

Treasury management is concerned with keeping sufficient but not excessive cash available to meet the Council�s spending needs, while managing the risks involved. Surplus cash is invested until required, while a shortage of cash will be met by borrowing, to avoid excessive credit balances or overdrafts in the bank current account. The Council is typically cash rich in the short-term as revenue income is received before it is spent, but cash poor in the long-term as capital expenditure is incurred before being financed. The revenue cash surpluses are offset against capital cash shortfalls to reduce overall borrowing.

Borrowing strategy: The Council�s main objectives when borrowing are to achieve a low but certain cost of finance while retaining flexibility should plans change in future. These objectives are often conflicting, and the Council therefore seeks to strike a balance between cheap short-term loans (currently available at around 0.75%) and long-term fixed rate loans where the future cost is known but higher (currently 2.0 to 3.0%).

Projected levels of the Council�s total outstanding debt (which comprises borrowing, PFI liabilities, leases are shown below, compared with the capital financing requirement (see above).

Table 6: Prudential Indicator: Gross Debt and the Capital Financing Requirement in � millions

	31.3.2018 actual	31.3.2019 forecast	31.3.2020 budget	31.3.2021 budget	31.3.2022 budget
Debt (incl. PFI & leases)	0	0	20.931	38.237	50.540
Capital Financing Requirement	3.227	22.302	39.293	57.119	69.939

Statutory guidance is that debt should remain below the capital financing requirement, except in the short-term. As can be seen from table 6, the Council expects to comply with this in the medium term.

Liability benchmark: To compare the Council�s actual borrowing against an alternative strategy, a liability benchmark has been calculated showing the lowest risk level of borrowing. This assumes that cash and investment balances will be fully utilised to fund the capital programme. This benchmark is currently �11m and is forecast to fall to �2m over the next three years.

Table 7: Borrowing and the Liability Benchmark in � millions

	31.3.2018 actual	31.3.2019 forecast	31.3.2020 budget	31.3.2021 budget	31.3.2022 budget
Outstanding borrowing	0	0	17.884	35.710	48.530
Liability benchmark	0	3.986	17.884	35.710	48.530

Affordable borrowing limit: The Council is legally obliged to set an affordable borrowing limit (also termed the authorised limit for external debt) each year. In line with statutory guidance, a lower �operational boundary� is also set as a warning level should debt approach the limit.

Table 7: Prudential Indicators: Authorised limit and operational boundary for external debt in �m

2018/19 limit

2019/20 limit

2020/21 limit

2021/22 limit

Authorised limit � borrowing

Authorised limit � PFI and leases

Authorised limit � total external debt

10.418

�3.568

13.986

36.246

3.047

39.293

54.592

2.527

57.119

67.929

�2.010

69.939

Operational boundary � borrowing

Operational boundary � PFI and leases

Operational boundary � total external debt

3.986

3.568

7.554

17.884

�3.047

20.931

35.710

2.527

38.237

48.530

�2.010

50.540

� Further details on borrowing are in pages 8 to 11 of the treasury management strategy http://aluminum:9080/ieListDocuments.aspx?CId=585&MId=2870&Ver=4

Investment strategy: Treasury investments arise from receiving cash before it is paid out again. Investments made for service reasons or for pure financial gain are not generally considered to be part of treasury management.

The Council�s policy on treasury investments is to prioritise security and liquidity over yield, that is to focus on minimising risk rather than maximising returns. Cash that is likely to be spent in the short term is invested securely, for example with the government, other local authorities or selected high-quality banks, to minimise the risk of loss. Money that will be held for longer terms is invested more widely, including in bonds, shares and property, to balance the risk of loss against the risk of receiving returns below inflation. Both short-term and longer-term investments may be held in pooled funds, where an external fund manager makes decisions on which particular investments to buy and the Council may request its money back at short notice.

Table 8: Treasury management investments in �millions

	31.3.2018 actual�� (m)	31.3.2019 forecast (m)	31.3.2020 budget�� (m)	31.3.2021 budget�� (m)	31.3.2022 budget� (m)
Short-term investments	17.4	9.6	0	0	0
Longer-term investments	0	2.0	2.0	2.0	2.0
TOTAL	17.4	11.6	2.0	2.0	2.0

� Further details on treasury investments are in pages 12 to 19 of the treasury management strategy http://aluminum:9080/ieListDocuments.aspx?CId=585&MId=2870&Ver=4

Governance: Decisions on treasury management investment and borrowing are made daily and are therefore delegated to the Director of Finance and Business Improvement and staff, who must act in line with the treasury management strategy approved by council. Quarterly reports on treasury management activity are included within the budget monitoring reports which are presented to the council Policy & Resources Committee with the half yearly and annual reviews which are scrutinised by Audit, Governance and Standards Committee then recommending to Full council. The Audit, Governance and Standards Committee is responsible for scrutinising treasury management decisions.

Investments for Service Purposes

The Council can make investments to assist local public services, including making loans to local service providers, local small businesses to promote economic growth, Charities and the Council�s subsidiaries that provide services. In light of the public service objective, the Council is willing to take more risk than with treasury investments, however it still plans for such investments to provide value for money to the tax payer.

Governance: Decisions on service investments are made by the relevant service manager in consultation with the Director of Finance and Business Improvement and relevant committee (where appropriate), must meet the criteria and limits laid down in the investment strategy. �Most loans are capital expenditure and purchases will therefore also be approved as part of the capital programme.

� Further details on service investments are in pages 2 to 3 of the investment strategy.

Commercial Activities

The acquisition of commercial investment properties is intended to support the local economy and regeneration objectives so does not qualify as Commercial Investment.

Revenue Budget Implications

Although capital expenditure is not charged directly to the revenue budget, interest payable on loans and MRP are charged to revenue, offset by any investment income receivable. The net annual charge is known as financing costs; this is compared to the net revenue stream i.e. the amount funded from Council Tax, business rates and general government grants.

Table 9: Prudential Indicator: Proportion of financing costs to net revenue stream

	2017/18 actual	2018/19 forecast	2019/20 budget	2020/21 budget	2021/22 budget
Financing costs (�m)	(0.145)	(0.180)	0.208	0.564	0.821
Proportion of net revenue stream	(0.8)%	(0.9)%	1.0%	3.1%	4.5%

Sustainability: Due to the very long-term nature of capital expenditure and financing, the revenue budget implications of expenditure incurred in the next few years will extend beyond 5 years into the future. The Director of Finance and Business Improvement is satisfied that the proposed capital programme is prudent, affordable and sustainable.

Knowledge and Skills

The Council employs professionally qualified and experienced staff in senior positions with responsibility for making capital expenditure, borrowing and investment decisions. For example, the Director of Finance and Business improvement is a qualified accountant with 12 years� experience in local government, the Corporate Property Manager and the team are experienced in Property Management and The Council pays for junior staff to study towards relevant professional qualifications including CIPFA, ACT (treasury),and ACCA.

The Council currently employs Link Asset Services as treasury management advisers, a number of property consultants including Harrisons Property Surveyors Limited and Sibley Pares Limited. This approach is more cost effective than employing such staff directly, and ensures that the Council has access to knowledge and skills commensurate with its risk appetite.

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