Treasury management strategy report 2016-17

This report incorporates a number of Prudential Indicators in relation to treasury management in accordance with the CIPFA Prudential Code for Capital Finance in Local Authorities ('the code').

Regulations to the Local Government Act 2003 lay down that we shall have regard to the prudential code in determining an affordable borrowing limit.

The indicators are intended to demonstrate that we have fulfilled the objective of ensuring that its capital investment decisions are prudent, affordable and sustainable - or in exceptional cases to demonstrate that there is a danger of not ensuring this, so that timely remedial action can be taken. They are further designed to ensure that treasury management decisions are taken in a manner that supports prudence, affordability and sustainability.

Capital prudential indicators

Actual and estimate of capital expenditure

This indicator relating to actual and estimates of capital expenditure is reported separately to the council meeting which sets the general fund revenue budget and the Council Tax (24 February 2016).

Our borrowing need (the capital financing requirement)

The second prudential indicator is our 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 our 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 MRP is a statutory annual revenue charge which broadly reduces the borrowing need in line with each asset's life.

The CFR includes any other long term liabilities (e.g. finance leases). Whilst these increase the CFR, and therefore our borrowing requirement, these types of scheme include a borrowing facility and so we are not required to separately borrow for these schemes.

We were asked to approve the CFR projections below:

31 March 2015 (actual)

(£503,000)

31 March 2016 (estimate)

(£654,000)

31 March 2017 (estimate)

(£654,000)

31 March 2018 (estimate)

£2,000,000

31 March 2019 (estimate)

£4,000,000

The amounts shown above from 2017-18 onwards allow for the possibility that we may need to borrow during those years to finance capital expenditure which cannot be funded from other revenue or capital resources. However, the likelihood of individual schemes, the timings and the amounts involved cannot be assessed with any certainty at this point.

The sale of our assets for capital receipts will have a significant impact upon the CFR, if sales are made, our borrowing requirement will be reduced, if not, our borrowing requirement will be greater.

Affordability prudential indicators

Estimates of the incremental impact of capital investment decisions on Council Tax

This indicator relating to estimates of the incremental impact of capital investment decisions on Council Tax is reported separately to the council meeting which sets the general fund revenue budget and the Council Tax (24 February 2016).

Actual and estimates of the ratio of financing costs to net revenue stream

This indicator identifies the trend in the cost of capital (borrowing and other long term obligation costs net of investment income) against the net revenue stream.

Financing Costs comprise the aggregate of: 

• interest payable on loans and finance leases

• premiums or discounts in relation to premature debt repayment

• interest receivable and investment income

• the amount charged as MRP

• depreciation and impairment charges that have not been reversed out of the revenue account

Net revenue stream is defined as the "amount to be met from government grants and local taxpayers". This is our 'budgetary requirements' figure shown in the general fund revenue budget, being the net expenditure for the year before deducting government grants (revenue support and business rates retention) and adjusting for the collection fund surplus/deficit. The relevant figures for this council are set out below:

Affordability prudential indicators

Estimates of the incremental impact of capital iInvestment decisions on Council Tax

This indicator relating to estimates of the incremental iImpact of capital investment decisions on Council Tax is reported separately to the council meeting which sets the general fund revenue budget and the Council Tax (24 February 2016).

Actual and estimates of the ratio of financing costs to net revenue stream

This indicator identifies the trend in the cost of capital (borrowing and other long term obligation costs net of investment income) against the net revenue stream.

Financing costs comprise the aggregate of: 

• interest payable on loans and finance leases

• premiums or discounts in relation to premature debt repayment

• interest receivable and investment income

• the amount charged as MRP

• depreciation and impairment charges that have not been reversed out of the revenue account

Net revenue stream is defined as the "amount to be met from government grants and local taxpayers". This is our 'budgetary requirements' figure shown in the general fund revenue budget, being the net expenditure for the year before deducting government grants (revenue support and business rates retention) and adjusting for the collection fund surplus/deficit. The relevant figures for this council are set out below:

2014/15 (actual)

• Net revenue stream £13,131,000

• Financing costs (£194,000)

• Ratio (1.48%)

2015/16 (estimate)

• Net revenue stream £12,148,000

• Financing costs (£45,000)

• Ratio (0.37%)

2016/17 (estimate)

• Net revenue stream £11,673,000

• Financing costs (£103,000)

• Ratio (0.88%)

2017/18 (estimate)

• Net revenue stream £11,131,000

• Financing costs (£173,000)

• Ratio (1.55%)

2018/19 (estimate)

• Net revenue stream £10,950,000

• Financing costs (£222,000)

• Ratio (2.03%)

Treasury indicators

Current portfolio position - debt

Currently we have no long-term external debt and we are categorised as a 'debt free' authority. Short term external loans (i.e. repayable on demand or within 12 months) can be taken to fund any temporary capital or revenue borrowing requirement. The amounts involved would fluctuate according to the cash flow position at any one time. Such short term borrowing does not affect our debt free status.

Any surplus funds arising, for example from favourable cash flow or as a result of asset sales, are potentially available for use as an alternative to short term borrowing. Our actual external debt as at the end of the previous financial year is a prudential indicator. This indicator comprises actual borrowing (short and long-term) as shown in our balance sheet. This indicator will reflect the actual position at one point in time. As at 31 March 2015, our actual external debt was nil.

Current portfolio position - investments

It was estimated that the amount of receipts in hand, plus reserve balances, and available for investment at 1 April 2016 would be in the region of £8,000,000, all of which would be managed in-house.

Limits to borrowing activity

The Local Government Act 2003 requires each local authority to determine and keep under review how much money it can afford to borrow. This is determined by the calculation of an affordable borrowing limit which Regulations to the Act specify should be calculated with regard to the CIPFA Prudential Code.

At present borrowing is not being used to fund the capital programme because we have had sufficient reserves and useable capital receipts to finance capital expenditure from these sources. Borrowing may become an option if these resources become sufficiently depleted that they are insufficient to finance proposed capital expenditure deemed to be affordable, if the costs of borrowing compare favourably with those of alternatives such as using unapplied capital receipts, or if in fact there is a sufficient business case to do so.

There may be a requirement to temporarily fund some capital expenditure by means of borrowing during the interim period before a permanent means of finance becomes available, for example whilst awaiting receipt of government grant. As well as temporary borrowing required for capital purposes, it may also be necessary to borrow in order to cover any temporary shortfall in revenue income which may arise owing to either a mismatch between income and expenditure or problems concerning the non payment of amounts due to be paid by our customers. These factors have been taken into account in calculating the prudential indicators referred to below.

Projections of the need for capital investment in projects necessary to ensure operational continuity over the next few years, together with projections of likely capital receipts arising from asset sales and the availability of reserves to finance this expenditure indicate that there is likely at some point to be an adverse gap between expenditure and resources to finance it. This increases the likelihood of borrowing being used over the period of this strategy, particularly as an interim measure to bridge the gap between expenditure being incurred and funds from asset sales being realised. The amounts included for permitted borrowing in the operational boundary and authorised limit below take account of this. It should be noted that this does not indicate a definite intention at this point in time to borrow up to this amount or at all but is required to permit the option of borrowing to be employed, if necessary.

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.

The authorised limit for external borrowing

A further key prudential indicator represents a control on the maximum level of borrowing. This represents a limit beyond which external 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.

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.

We were asked to approve the following authorised limits:

Sources of borrowing

Temporary borrowing can take place via money brokers, from building societies, banks, local authorities, individuals and commercial organisations. If we decide to borrow on a long term basis to fund capital expenditure all borrowing options available will be reviewed.

Interest rates, loan periods and types of loan

The most favourable options will be selected, depending upon market conditions prevailing at the time of borrowing. The aim will be to minimise the impact upon revenue accounts and to achieve efficient management of our debt portfolio. Advice will be taken, as appropriate from our treasury management advisors. We were eligible for loans at a reduced rate, around 20 basis points less than normally available, (the treasury certainty rate) from the PWLB during 2016-17.

Limits on interest rate exposures (fixed and variable interest rates)

The following limits will apply in relation to our interest rate exposure. They relate to interest on both borrowings and investments. These limits are intended to reduce the risk of us suffering unduly from significant adverse fluctuations in interest rates.

Limit on fixed interest rate exposures (as a percentage of total borrowings/investments)

Limit on variable interest rate exposures (as a percentage of total borrowings/investments)

In relation to both investing and borrowing fixed rate investments and loans may be anything between 0% and 100% of the total, with the same proportions being permitted for variable rate loans - in effect there is no limit on each type. This enables maximum flexibility to be afforded to our officers to take advantage of prevailing interest trends to obtain the best deal for us.

Total principal funds invested for periods greater than 364 days

We will determine the maximum periods for which funds may prudently be committed. Investments will be for whatever period is considered appropriate by your officers at the time that the investment is made. Regard will be had to relevant matters such as likely future capital values and our forecast need to realise investments in the future in order to finance capital expenditure or for any other purpose.

There will be a limit placed upon the amount which may be invested for periods in excess of 364 days. Investments will be regarded as commencing on the date the commitment to invest is entered into, rather than on the date on which the funds are paid over to the counterparty.

This treasury indicator is intended to limit our exposure to the possibility of loss that might arise as a result of it having to seek early repayment of sums invested. It consists of the amount that it is considered prudent to have invested for a period greater than 364 days in each of the next three years. The limits as set out in the table below will apply:

It should be noted that in practice the sums available for investment are unlikely to be sufficient to allow amounts of this magnitude to be invested for such extended periods. In fact at present investments are being restricted to periods of 6 months or less due to cash flow fluctuations and on account of continuing uncertainties with regard to the credit worthiness of counterparties with whom investments could be placed.