Overview and Scrutiny Select Committee

Thursday 18 February 2016 at 7.30pm

Council Chamber Runnymede Civic Centre, Addlestone

Members of the Committee Councillors P B Tuley (Chairman), H A Butterfield (Vice-Chairman), A Alderson, I A Chaudhri, Mrs L M Gillham, Miss D Khalique, R J Mackin, A P Tollett and J J Wilson.

AGENDA

Notes:

1) Any report on the Agenda involving confidential information (as defined by section 100A(3)of the Local Government Act 1972) must be discussed in private. Any report involvingexempt information (as defined by section 100I of the Local Government Act 1972), whetherit appears in Part 1 or Part 2 below, may be discussed in private but only if the Overviewand Scrutiny Select Committee so resolves.

2) The relevant 'background papers' are listed after each report in Part 1. Enquiries about anyof the Agenda reports and background papers should be directed in the first instance toMr J Gurmin, Democratic Services Section, Law and Government Business Centre,Runnymede Civic Centre, Station Road, Addlestone (Tel: Direct Line: 01932 425624).(Email: john.gurmin@runnymede.gov.uk).

3) Agendas and Minutes are available on a subscription basis. For details, please ringMr B A Fleckney on 01932 425620. Agendas and Minutes for all the Council's Committeesmay also be viewed on www.runnymede.gov.uk.

4) In the unlikely event of an alarm sounding, members of the public should leave the buildingimmediately, either using the staircase leading from the public gallery or following otherinstructions as appropriate.

'see overleaf'

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5) Filming, Audio-Recording, Photography, Tweeting and Blogging of Meetings

Members of the public are permitted to film, audio record, take photographs or make use ofsocial media (tweet/blog) at Council and Committee meetings provided that this does notdisturb the business of the meeting. If you wish to film a particular meeting, please liaisewith the Council Officer listed on the front of the Agenda prior to the start of the meeting sothat the Chairman is aware and those attending the meeting can be made aware of anyfilming taking place.

Filming should be limited to the formal meeting area and not extend to those in the publicseating area.

The Chairman will make the final decision on all matters of dispute in regard to the use ofsocial media audio-recording, photography and filming in the Committee meeting.

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If you need help reading this document please contact the Council on 01932 838383. We will try to provide a reading service, a large print version, or another format.

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LIST OF MATTERS FOR CONSIDERATION

PART I

Matters in respect of which reports have been made available for public inspection

Page

1. FIRE PRECAUTIONS 5

2. NOTIFICATION OF CHANGES TO COMMITTEE MEMBERSHIP 5

3. MINUTES 5

4. APOLOGIES FOR ABSENCE 5

5. DECLARATIONS OF INTEREST 5

6. 2016/17 TREASURY MANAGEMENT STRATEGY, ANNUAL INVESTMENTSTRATEGY, PRUDENTIAL AND TREASURY MANAGEMENTINDICATORS AND MINIMUM REVENUE PROVISION STATEMENT

7. FUTURE ITEMS FOR THE COMMITTEE

5

15

8. EXCLUSION OF PRESS AND PUBLIC 16

PART II

Matters involving Exempt or Confidential Information in respect of which reports have not been made available for public inspection.

a) Exempt Information

(No reports to be considered under this heading)

b) Confidential Information

(No reports to be considered under this heading)

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1. FIRE PRECAUTIONS

The Chairman will read the Fire Precautions which set out the procedures to be followed inthe event of fire or other emergency.

2. NOTIFICATION OF CHANGES TO COMMITTEE MEMBERSHIP

3. MINUTES

To confirm and sign, as a correct record, the Minutes of the Overview and Scrutiny SelectCommittee meeting held on 3 December 2015 (at Appendix 'A').

4. APOLOGIES FOR ABSENCE

5. DECLARATIONS OF INTEREST

If Members have an interest in an item please record the interest on the form circulated withthis Agenda and hand it to the Legal Representative or Committee Administrator at the startof the meeting. A supply of the form will also be available from the Committee Administratorat meetings.

Members who have previously declared interests which are recorded in the Minutes to beconsidered at this meeting need not repeat the declaration when attending the meeting.Members need take no further action unless the item in which they have an interestbecomes the subject of debate, in which event the Member must leave the room if theinterest is a disclosable pecuniary interest or if the interest could reasonably be regarded asso significant as to prejudice the Member’s judgement of the public interest.

6. 2016/17 TREASURY MANAGEMENT STRATEGY, ANNUAL INVESTMENT STRATEGY,PRUDENTIAL AND TREASURY MANAGEMENT INDICATORS AND MINIMUM REVENUEPROVISION STATEMENT (RESOURCES)

Synopsis of report:

This report sets out the Treasury Management Strategy, Prudential and Treasury Management Indicators and Minimum Revenue Provision Statement for 2016/17.

Recommendations:

i) the proposed 2016/17 Treasury Management Strategy encompassingthe Annual Investment Strategy and Property Investment Strategy asset out in this report be approved.

ii) The Prudential and Treasury Management Indicators for 2016/17 set outin this report be approved.

iii) The authorised limit for external borrowing by the Council in 2016/17,be set at £195,181,000 (this being the statutory limit determined underSection 3 (1) of the Local Government Act 2003).

iv) That there be no change to the previously adopted MRP policy as setout below:

The Council will use the asset life method as its main method for calculating MRP.

In normal circumstances, MRP will be set aside from the date of acquisition. However, in relation to capital expenditure on

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property purchases and/or development, we will start setting aside MRP from the date that the asset becomes operational and/or revenue income is generated. Where schemes require interim financing by loan, pending receipt of an alternative source of finance (for example, capital receipts) no MRP charge will be applied.

2. Context of report

2.1 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 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.

2.2 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.

2.3 The Chartered Institute of Public Finance Accountants (CIPFA) define 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.”

2.4 The Council is required to receive and approve, as a minimum, three main reports each year, which incorporate a variety of policies, estimates and actuals. These are:

• Prudential and Treasury Indicators and Treasury Strategy (this report)• A mid year Treasury Management Report• An annual Treasury Report

2.5 These reports are required to be adequately scrutinised before being recommended to the Council. This role is undertaken by this Committee. The comments of this Committee on this report will be considered by the Corporate Management Committee at its meeting on 25 February 2016. The Council has adopted both the CIPFA Treasury Management in the Public Services: Code of Practice and Cross-Sectoral Guidance Notes – 2011 Edition (the CIPFA Code) and the Prudential Code (the Code) and this report fulfils the Council’s legal obligation under the Local Government Act 2003 to have regard to both the relevant CIPFA Codes and DCLG Guidance.

3 Treasury Management Strategy (TMS)

3.1 The Treasury Management Strategy (TMS) sets out the framework each year for the Council’s treasury operations. It covers:

• The economy and prospects for interest rates• The current treasury position• Borrowing strategy• Policy on borrowing in advance of need• Debt restructuring• Annual investment strategy• Other treasury matters (required under DCLG Investment Guidance)

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These issues are covered in the following paragraphs.

The economy and prospects for interest rates

3.2 The Council has appointed Capita Asset Services (Capita) as its treasury advisor and part of their service is to assist the Council to formulate a view on interest rates. The following table and paragraphs give Capita’s view on interest rates and the ecomony:

3.3 UK GDP growth rates in 2013 of 2.2% and 2.9% in 2014 were the strongest growth rates of any G7 country; the 2014 growth rate was also the strongest UK rate since 2006 and although the 2015 growth rate is likely to be a leading rate in the G7 again, it looks likely to disappoint previous forecasts and come in at about 2%. Quarter 1 of 2015 was weak at +0.4% though there was a rebound in quarter 2 to +0.7% before weakening again to +0.5% in quarter 3. The November Bank of England Inflation Report included a forecast for growth to remain around 2.5 – 2.7% over the next three years, driven mainly by strong consumer demand as the squeeze on the disposable incomes of consumers has been reversed by a recovery in wage inflation at the same time that CPI inflation has fallen to, or near to, zero since February 2015 this year. Investment expenditure is also expected to support growth. However, since the August Inflation report was issued, worldwide economic statistics have been weak and financial markets have been particularly volatile. The November Inflation Report flagged up particular concerns for the potential impact of these factors on the UK.

3.4 The Inflation Report was also notably subdued in respect of the forecasts for inflation; this was expected to barely get back up to the 2% target within the 2-3 year time horizon. The increase in the forecast for inflation at the three year horizon was the biggest in a decade and at the two year horizon was the biggest since February 2013. However, the first round of falls in oil, gas and food prices over late 2014 and also in the first half of 2015, will fall out of the 12 month calculation of CPI during late 2015 / early 2016 but a second, more recent round of falls in fuel and commodity prices will delay a significant pick up in inflation from around zero: this is now expected to get back to around 1% by the end of 2016 and not get to near 2% until the second half of 2017, though the forecasts in the Report itself were for an even slower rate of increase. However, more falls in the price of oil and imports from emerging countries in early 2016 will further delay the pick up in inflation. There is therefore considerable uncertainty around how quickly pay and CPI inflation will rise in the next few years and this makes it difficult to forecast when the MPC will decide to make a start on increasing Bank Rate.

3.5 The weakening of UK GDP growth during 2015 and the deterioration of prospects in the international scene, especially for emerging market countries, have consequently led to forecasts for when the first increase in Bank Rate would occur being pushed back to quarter 4 of 2016. There is downside risk to this forecast i.e. it could be pushed further back.

3.6 The American economy made a strong comeback after a weak first quarter’s growth at +0.6% (annualised), to grow by no less than 3.9% in quarter 2 of 2015, but then weakened again to 2.1% in quarter 3. The downbeat news in late August and in September about Chinese and Japanese growth and the knock on impact on emerging countries that are major suppliers of commodities, was cited as the main reason for the Fed’s decision at its September meeting to pull back from a first rate increase. However, the nonfarm payrolls

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figure (a measure of employees in goods, construction and manufacturing companies in the US) for growth in employment in October was very strong and, together with a likely perception by the Fed. that concerns on the international scene have subsided, a first increase in the U.S. rate for nearly 10 years was announced in December 2015.

3.7 In the Eurozone (EZ), the ECB unleashed a massive €1.1 trillion programme of quantitative easing (QE) in January 2015 to buy up high credit quality Government and other debt of selected EZ countries. This programme of €60bn of monthly purchases started in March 2015 and it was intended to run initially to September 2016. This appears to have had a positive effect in helping a recovery in consumer and business confidence and a start to a significant improvement in economic growth. GDP growth rose to 0.5% in quarter 1 2015 but came in at +0.4% in quarter 2 and +0.3% in quarter 3. However, the recent downbeat Chinese and Japanese news has raised questions as to whether the ECB will need to boost its QE programme if it is to succeed in significantly improving growth in the EZ and getting inflation up from the current level of around zero to its target of 2%.

3.8 During July, Greece finally accepted EU demands to implement a major programme of austerity and is now cooperating fully. A €86bn third bailout package has since been agreed though it did nothing to address the unsupportable size of total debt compared to GDP. However, huge damage has been done to the Greek banking system and economy by the resistance of the Syriza Government, elected in January, to EU demands. The surprise general election in September gave the Syriza government a mandate to stay in power to implement austerity measures. However, there are major doubts as to whether the size of cuts and degree of reforms required can be fully implemented and so Greek exit from the euro may only have been delayed by this latest bailout.

3.9 The current economic outlook and structure of market interest rates and Government debt yields have several key treasury management implications:

• Investment returns are likely to remain relatively low during 2016/17 and beyond;

• Borrowing interest rates have been highly volatile during 2015 as alternating bouts ofgood and bad news have promoted optimism, and then pessimism, in financialmarkets. Gilt yields have continued to remain at historically phenomenally low levelsduring 2015. The policy of avoiding new borrowing by running down spare cashbalances, has served well over the last few years. However, this needs to be carefullyreviewed to avoid incurring higher borrowing costs in later times, when authorities willnot be able to avoid new borrowing to finance new capital expenditure and/or torefinance maturing debt;

• There will remain a cost of carry to any new borrowing which causes an increase ininvestments as this will incur a revenue loss between borrowing costs and investmentreturns.

Current treasury position

3.10 In accordance with the CIPFA Code, it is the Council’s priority to ensure security of capital and liquidity, and to obtain an appropriate level of return which is consistent with the Council’s risk appetite. The potential for a prolonging of the Eurozone sovereign debt crisis, and its impact on banks, prompts a low risk and short term strategy.

3.11 A full list of investments and borrowings as at 31 December 2016 is set out at Appendix ‘B’.

3.12 The main changes to the Council’s treasury position for 2016/17 will revolve around the timing of the payments and associated borrowings in relation to the Addlestone One development and further property purchases. Whilst the Addlestone payments should follow an agreed payment schedule, further property purchases will only be undertaken as and when suitable properties become available on the market. Another factor will be the delivery and timing of the Council’s capital receipts programme.

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Investment income

3.13 It is currently a very difficult investment market in terms of earning the level of interest rates commonly seen in previous decades. Investment rates available in the market have been broadly stable during the year and have continued at historically low levels as a result of the ultra-low Bank Rate and other extraordinary measures such as the Funding for Lending Scheme.

3.14 Investments will be made with reference to the core balance and cash flow requirements and the outlook for short term interest rates (i.e. rates for up to 12 months). The Bank Rate is forecast to remain unchanged at 0.5% before starting to rise from quarter 4 of 2016. Bank Rate forecasts for the financial year end (March) and the assumed budgeted investment earning rates for returns on investments are as follows:

Financial year

Year end base rate forecast

Assumed investment

returns 2016/17 0.75% 0.60% 2017/18 1.25% 1.10% 2018/19 1.75% 1.60%

3.15 There are downside risks to these forecasts (i.e. if the start of increases in Bank Rate occurs later) if economic growth weakens. However, should the pace of growth quicken, there could be an upside risk.

3.16 Based on the above forecasts, the 2016/17 estimate for investment income split between the General Fund and Housing Revenue Account (HRA) is as follows:

General Fund £’000

HRA £’000

Total £’000

Gross external investment income 150 83 233 Interest paid on deposits and other balances (2) - (2) Net Investment Income 148 83 231 Debt Interest (1,254) (3,458) (4,712) Net Investment Income / (Debt interest) (1,106) (3,375) (4,481)

3.17 The estimate is based on achieving the assumed investment returns set out in paragraph 3.14, using the level of revenue and capital reserves for 2016/17 as set out in the latest capital and revenue budgets contained in the Medium Term Financial Strategy.

Borrowing Strategy

3.18 The Council is currently maintaining an under-borrowed position. This means that the capital borrowing need (the Capital Financing Requirement), has not been fully funded with loan debt as cash supporting the Council’s reserves, balances and cash flow has been used as a temporary measure. This strategy is prudent as investment returns are low and counterparty risk is relatively high.

3.19 Against this background and the risks within the economic forecast, caution will be adopted with the 2016/17 treasury operations. The Corporate Head of Resources will monitor interest rates in financial markets and adopt a pragmatic approach to changing circumstances:

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• if it is felt that there is a significant risk of a sharp FALL in long and short term rates(e.g. due to a marked increase of risks around relapse into recession or of risks ofdeflation), then long term borrowings will be postponed and short term borrowing will beconsidered.

• if it is felt that there is a significant risk of a much sharper RISE in long and short term ratesthan that currently forecast, perhaps arising from an acceleration in the start date and inthe rate of increase in central rates in the USA and UK, an increase in world economicactivity or a sudden increase in inflation risks, then the portfolio position will be re-appraised with the likely action that fixed rate funding will be drawn whilst interest rates arestill lower than they will be in the next few years.

3.20 The Council’s strategy for long term borrowing is as follows:

Sources of borrowing The approved sources of long-term and short-term borrowing will be: • Public Works Loan Board (PWLB)• any institution approved for investments• any other bank or building society approved by the Financial Conduct Authority• Capital market bond investors• Special purpose companies created to enable joint local authority bond issues.

Debt instruments Borrowing will be arranged by one of the following debt instruments: • fixed term loans at fixed or variable rates of interest, subject to the limits in the treasury

management indicator, below • lender’s option borrower’s option (LOBO) loans, subject to a maximum of £10 million• bonds

3.21 Any proposed borrowing will only be undertaken on a phased basis in accordance with agreed plans and requirements at that time.

3.22 On 22 December 2014 the Government gave notice that the PWLB was to be restructured. No further details have been forthcoming since that date but it is assumed that the Government will set up similar structures to those currently in place for lending to local authorities.

3.23 It is likely that the Municipal Bond Agency, currently in the process of being set up, will be offering loans to local authorities in the near future. It is also hoped that the borrowing rates will be lower than those offered by the Public Works Loan Board (PWLB). Depending on the outcome the Council may wish to make use of this new source of borrowing as and when appropriate.

Policy on Borrowing in Advance of Need

3.24 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 considered carefully to ensure that value for money can be demonstrated and that the Council can ensure the security of such funds.

3.25 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. In determining whether borrowing will be undertaken in advance of need the Council will:

• Ensure that there is a clear link between the capital programme and maturity profileof the existing debt portfolio which supports the need to take funding in advance ofneed.

• Ensure the ongoing revenue liabilities created, and the implications for the futureplans and budgets have been considered.

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• Evaluate the economic and market factors that might influence the manner andtiming of any decision to borrow.

• Consider the merits and demerits of alternative forms of funding.

3.26 The total amount borrowed will not exceed the authorised borrowing limit. The maximum period between borrowing and expenditure is expected to be no more than six months, although the Council does not link particular loans with particular items of expenditure.

Debt restructuring

3.27 From time to time there may be potential opportunities to generate savings by switching from long term debt to short term debt and vice versa. Any such debt restructuring will need to be considered in the light of the current treasury position and the size of the cost of debt repayment (premiums incurred).

3.28 The reasons for any rescheduling to take place will include:

• the generation of cash savings and / or discounted cash flow savings;• helping to fulfil the treasury strategy;• to enhance the balance of the portfolio (amend the maturity profile and/or the balance of

volatility).

3.29 Consideration will also be given to identify if there is any residual potential for making savings by running down investment balances to repay debt prematurely as short term rates on investments are likely to be lower than rates paid on current debt.

3.30 All rescheduling will be reported to the Council, at the earliest meeting following its action.

Annual Investment Strategy

3.31 Local authorities must draw up an “Annual Investment Strategy” for the following financial year. This strategy may be revised at any time, but full Council must approve the revisions. Both the CIPFA Code and the DCLG Guidance require the Council 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. This approach is inherent in our treasury management strategy.

3.32 The DCLG Guidance requires local authorities to cover a number of issues in their Annual Investment Strategy and the Council’s strategy fully complies with these requirements.

3.33 The Council approved its Annual Investment Strategy for 2015/16 in March 2015. As reported to this Committee and the Corporate Management Committee in December 2015, there were two departures from the Council’s approved investments strategy during the period in that investments exceeding £5m were placed with the Government’s Debt Management Office (DMO) which is in contravention to paragraph 16 of the strategy “No investment with any one provider/organisation will exceed £5m in total”, and paragraph 17 “No one individual term deposit to exceed £2.5m in total”

3.34 These departures were necessary in order to ensure investments matured on certain days to pay for the first instalment of the Addlestone One development (£13m) and the investment in the Egham Town Centre properties (£8m). These departures were all placed with the Debt Management Office (DMO) - representing the lowest risk to the Council - because all the Council’s call accounts were full and there was (and still is) no market for 1 to 2 month money.

3.35 In December 2015, the Corporate Management Committee considered that it would be appropriate to alter the policy on investment limits in view of the lack of a market for short term money. Whilst there is no indication that the circumstances described in paragraphs 3.33 and 3.34 will reoccur in the future, it is prudent to amend the existing strategy to allow such investments with the DMO going forward and amendments to paragraphs 16 and 17 have been

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made in next year’s Strategy accordingly. The proposed Annual Investment Strategy for 2016/17 is shown at Appendix ‘C’. The changes made are shown underlined in Appendix ‘C’.

Property Investment Strategy

3.36 In addition to its cash investment funds the Council also owns a significant investment property portfolio. Properties have been purchased and these generate a significant rental stream exceeding the rates the Council is able to get with its cash investments. The Council has taken a proactive stance in investing in property and property development to achieve a number of aims including diversification of assets, potential capital appreciation and higher returns than can be achieved through cash investments.

3.37 The Council’s Property Investment Strategy was approved by the Council on 18 November 2014 with the requirement for an annual review at the same time as the Annual Investment Strategy. There have been no changes made to this strategy for the 2016/17 financial year. The strategy is set out in Exempt Appendices ‘1’ and ‘2’.

4. Prudential and Treasury Management Indicators 2016/17

4.1 The key objectives of the Prudential Code are to ensure, within a clear framework, that the capital investment plans of local authorities are affordable, prudent and sustainable; that treasury management decisions are taken in accordance with good professional practice; and that local strategic planning, asset management planning and proper option appraisal are supported.

4.2 In setting or revising their prudential indicators, local authorities must have regard to:

• Service objectives e.g. strategic planning for the authority • Stewardship of assets e.g. asset management planning • Value for money e.g. option appraisal • Prudence and sustainability e.g. implications for external borrowing• Affordability e.g. implications for Council Tax • Practicality e.g. achievability of the forward plan.

4.3 To demonstrate that these objectives are being fulfilled the Prudential Code operates through the provision of prudential indicators which highlight particular aspects of capital expenditure planning. Each indicator is annually updated as part of the budget process and projected forward for the next three years. The Code requires that the Council approves as a minimum certain mandatory prudential indicators.

4.4 Prudential Indicators are designed to support and record local decision making. They are not performance indicators and are not comparable between authorities. In addition the indicators should not be taken individually; the benefit from monitoring will arise from following the movement in indicators and the year on year changes over time.

4.5 Both the Prudential and Treasury Management Codes set definitions for the terms used and the method of calculating the indicators. A complete set of all indicators, which are a mix of estimated and actual figures, ratios, and limits, is set out in Appendix ‘D’.

5 Minimum Revenue Provision (MRP) Policy Statement 5.1 When a Council funds capital expenditure by borrowing, the costs are charged to the

Council Tax payer in future years, reflecting the long-term use of the assets. Unlike a mortgage where amounts of principal are repaid each month, the borrowing undertaken by a Council is usually repayable on maturity at an agreed future date. The interest on borrowing is charged in the year it is payable.

5.2 To reflect this, the Council is required to pay off an element of the accumulated General Fund capital spend each year (the Capital Financing Requirement - CFR) through a revenue charge (the minimum revenue provision - MRP), although it is also allowed to undertake

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additional voluntary payments if required (voluntary revenue provision - VRP). The MRP exists as a charge to revenue each year in order to have sufficient monies set aside to meet the future repayment of principal on any borrowing undertaken.

5.3 There is no requirement on the HRA to make a minimum revenue provision.

5.4 DCLG regulations have been issued which require the full Council to approve an MRP Statement in advance of each year. The aim of the CLG Guidance is to ensure that debt is repaid over a period that is reasonably commensurate with that over which the capital expenditure provides benefits. The guidance recommends 4 options for calculating a prudent MRP as follows:

1. Regulatory Method2. CFR Method3. Asset Life Method (repayment over the useful life of the asset on an asset life basis)4. Depreciation Method (cost less estimated residual value)

Opitons 1 and 2 should normally only be used for Government-supported borrowing with options 3 and 4 being used for self-financed borrowing.

5.5 In December 2014 the Council set a new MRP Statement to reflect impending property transactions. There are currently no plans to amend this at the present time. The Council’s MRP statement for 2016/17 will therefore be as follows:

“The Council will use the asset life method as its main method for calculating MRP.

In normal circumstances, MRP will be set aside from the date of acquisition. However, in relation to capital expenditure on property purchases and/or development, we will start setting aside an MRP provision from the date that the asset becomes operational and/or revenue income is generated. Where schemes require interim financing by loan, pending receipt of an alternative source of finance (for example capital receipts) no MRP charge will be applied”.

6 Treasury Management consultants and training 6.1 The Council recognises that there is value in employing external providers of treasury

management services in order to acquire access to specialist skills and resources. Capita Asset Services, Treasury Solutions (Capita) provide this service to the Council, although responsibility for final decision making remains with the Council and its Officers at all times. The services received include:

• advice and guidance on relevant policies, strategies and reports,• advice on investment decisions,• notification of credit ratings and changes,• other information on credit quality,• advice on debt management decisions,• accounting advice,• reports on treasury performance,• forecasts of interest rates, and• training courses.

6.2 The quality of this service is controlled by the Corporate Head of Resources assessing the quality of advice offered and other services provided by Capita. In particular, the Corporate Head of Resources holds regular (normally 3 to 4 times a year) meetings with Capita where, in addition to discussing treasury strategy, the performance of the consultants is reviewed.

6.3 A market testing exercise is conducted every three years when other treasury consultants are invited to submit proposals to carry out the service. These proposals are analysed for quality and price in accordance with the procedures set out in the rules on the use of professional and consultancy services published in the Council’s Constitution (as part of

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Standing Orders for Contracts). Capita won a three year contract which ends on 30 September 2016.

6.4 The needs of the Council’s treasury management staff for training in investment management are assessed every year as part of the staff appraisal process, and additionally when the responsibilities of individual members of staff change. Relevant training courses, seminars and conferences are provided by a range of organisations including Capita and CIPFA.

7 Policy on charging interest to the Housing Revenue Account (HRA)

7.1 The Council operates a two-pooled approach to its loans portfolio, which means we separate HRA and General Fund long-term loans. Interest payable and other costs or income arising from long-term loans (for example premiums and discounts on early redemption) are charged or credited to the respective revenue account.

7.2 Differences between the value of the HRA loans pool and the HRA’s underlying need to borrow (adjusted for HRA balance sheet resources available for investment) will result in a notional cash balance which may be positive or negative. We will calculate an average balance for the year and interest will be transferred between the General Fund and HRA at the Council’s weighted average return on all its investments, adjusted for credit risk. This credit risk adjustment reflects the risk that any investment default will be a charge to the General Fund and cannot be applied to the HRA.

8 Legal Implications

8.1 The powers for a local authority to borrow and invest are governed by the Local Government Act 2003 (LGA 2013) and associated Regulations. A local authority may borrow or invest for any purpose relevant to its functions, under any enactment, or for the purpose of the prudent management of its financial affairs. The Regulations also specify that authorities should have regard to the CIPFA Treasury Management Code and the Department for Communities and Local Government (DCLG) Investments Guidance when carrying out their treasury management functions.

8.2 Part 1 of the LGA 2003 established the legislative framework for the prudential capital finance system for local authorities.

8.3 The LGA 2003 requires each Council to set an affordable borrowing limit. The Full Council must carry out this duty; it cannot be delegated. Having set this limit the Council may not exceed it except for specified temporary purposes. However, the Council can make a new limit at any time.

8.4 Regulations require local authorities to have regard to The Prudential Code when carrying out their duties under Part 1 of the LGA 2003. The Code requires that all prudential indicators are set, and revised, only by the Full Council. This is because the need for Members to approve prudential indicators for capital finance is regarded as an important part of the governance responsibilities of a local authority.

8.5 The LGA 2003 provides the Government with reserve powers to set borrowing limits for local authorities that override their locally determined limits. This could be in the form of a national limit – this can only be imposed for national economic reasons – or a specific limit to prevent an individual authority borrowing more than it could afford.

8.6 The Local Authorities (Capital Finance and Accounting) (England) Regulations 2003 (as amended) state:

"A local authority shall determine for the current financial year an amount of minimum revenue provision which it considers to be prudent."

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9. Conclusions

9.1 The Annual Investment Strategy provides that the management of counterparty risk is the treasury management priority.

9.2 We remain in a very difficult investment environment. Whilst counterparty risk appears to have eased, market sentiment has still been subject to bouts of, sometimes, extreme volatility and economic forecasts abound with uncertainty. As a result, the bank base rate has remained at 0.5% and is forecast to do so until the end of the year. As a consequence, the Council is not getting much of a return on its deposits.

9.3 The estimate for investment returns in 2016/17 is based on achieving an overall return on investments of 0.6%. This was reduced from 0.9% following revised forecasts and advice after the turmoil in the financial markets at the end of January. This means that the investment income shown in the budget recently approved by full Council for next year is highly unlikely to be met with an anticipated shortfall of £76,000 for the General Fund and £40,000 for the HRA. Officers will keep an eye on the situation in the coming months and will report back in the new financial year, once markets have settled, with any mitigating measures to reduce these potential losses.

9.4 The MRP Statement and the Prudential Indicators set out in this report are consistent with the Council’s policies aims and objectives.

(To recommend to Corporate Management Committee)

Background Papers

1. Treasury Management in the Public Services – Code of Practice and Cross-Sectoral GuidanceNotes – 2011 Edition – CIPFA

2. Treasury Management in the Public Services – Guidance Notes for Local Authorities includingPolice Authorities and Fire Authorities – CIPFA

3. Guidance on Local Government Investments – DCLG, 2010

7. FUTURE ITEMS FOR THE COMMITTEE (LAW AND GOVERNANCE)

Recommendation:

The Committee is invited to indicate any issues that it wishes to discuss at future meetings.

1. Each year at its February meeting the Committee considers items for discussion infuture meetings.

2. The Committee is invited to indicate any issues that it wishes to discuss at futuremeetings.

(For consideration)

Background Papers

None

- 15 -

8. EXCLUSION OF PRESS AND PUBLIC

OFFICERS' RECOMMENDATION that –

where appropriate, the press and public be excluded from the meeting during discussion of the following report(s) under Section 100A(4) of the Local Government Act 1972 on the grounds that the report(s) in question would be likely to involve disclosure of exempt information of the description specified in appropriate paragraphs of Part 1 of Schedule 12A of the Act.

(To resolve)

PART II

Matters involving Exempt or Confidential Information in respect of which reports have not been made available for public inspection

a) Exempt Information

(No reports to be considered under this heading)

b) Confidential Information

(No reports to be considered under this heading)

- 16 -

OVERVIEW AND SCRUTINY SELECT COMMITTEE

18 FEBRUARY 2016

APPENDICES APPENDIX REPORT PAGE NOS

A MINUTES OF OVERVIEW AND SCRUTINY SELECT COMMITTEE MEETING HELD ON 3 DECEMBER 2015

1

B

C

D

INVESTMENTS AND BORROWINGS AS AT 31 JANUARY 2016

ANNUAL INVESTMENT STRATEGY 2016/17

PRUDENTIAL AND TREASURY MANAGEMENT INDICATORS 2016/17

5

8

17

\\rbcnetapp2\userfolders_root$\carol.holehouse\Documents\My documents\Working on web\Appendices Cover.docx

Appendix 'A'

Runnymede Borough Council

OVERVIEW AND SCRUTINY SELECT COMMITTEE

3 December 2015 at 7.30.p.m.

Members of the Committee present: Councillors H A Butterfield (Vice-Chairman in the Chair), A Alderson, I A

Chaudhri, Mrs L M Gillham, Miss D Khalique, M J Maddox, M G Nuti, A P Tollett and J J Wilson

Members of the Committee absent: None

Councillor M T Kusneraitis also attended.

379 FIRE PRECAUTIONS

The Chairman read out the Fire Precautions.

380 NOTIFICATION OF CHANGES TO COMMITTEE MEMBERSHIP

The Group mentioned below had notified the Chief Executive of its wish that the changes listed below be made to the membership of the Committee. The changes were for a fixed period ending on the day after the meeting and thereafter the Councillors removed would be reappointed.

Group Remove From Membership Appoint Instead

Conservative Councillor R J Mackin Councillor M J Maddox

Conservative Councillor P B Tuley (Chairman)

Councillor M G Nuti

The Chief Executive had given effect to these requests in accordance with Section 16(2) of the Local Government and Housing Act 1989.

381 MINUTES

The Minutes of the meeting of the Committee held on 1 October 2015 were confirmed and signed as a correct record.

382 DECLARATION OF INTEREST

Councillor A Alderson, the Deputy Mayor, declared a non-pecuniary interest in item 8 on the agenda on Proposals For Officer Support For The Mayor and remained in the meeting for this item as the Committee would not be making any financial decision on this item.

383 TREASURY MANAGEMENT MID-YEAR REPORT 2015/16

The Committee considered the Council’s treasury activity for the first six months of the 2015/16 financial year as set out in the Treasury Management Mid – Year report 2015/16.

- 1-

RBC OSSC 3.12.15

The total investments held at 30 September 2015 were £55.75 million. This had reduced significantly during October because of large payments for the Addlestone One development and for the purchase of property in Egham, the precepts to Surrey County Council and Police and payment of net business rates to the Government and Surrey County Council. Investments were primarily short term in money market and call accounts because of uncertainty surrounding the timing of the first payment in relation to the Addlestone One development and other proposed property purchases. Borrowings at 30 September 2015 were noted. The Council’s treasury advisor had forecast a first increase in the Bank Rate in quarter 2 of 2016 and had provided an economic update which was noted by the Committee. Results for Treasury management indicators were all within the limits set.

It was noted that there had been two departures from the Council’s approved investments strategy during the first six months of the 2015/16 financial year. In August 2015 investments exceeding £5m had been placed with the Government’s Debt Management Office (DMO) which was in contravention to paragraph 16 of the strategy which stated that no investment with any one provider/organisation would exceed £5m in total and paragraph 17 which stated that no one individual term deposit would exceed £2.5m in total. These departures were necessary in order to ensure investments matured on certain days to pay for the first instalment of the Addlestone One development and investment in Egham Town Centre properties. These investments had all been placed with the Debt Management Office (DMO) which represented the lowest risk to the Council because all of the Council’s call accounts at that time were full and there were no available counterparties for 1 to 2 month money. All future payments in relation to the Addlestone One development were at manageable sizes and it was not envisaged that these breaches would be repeated as such a set of circumstances was unlikely to occur in the future. There was no need to amend the Treasury Strategy at this time.

The £15m new borrowing undertaken in August 2015 for the impending first set of payments for the Addlestone One development had been undertaken swiftly following a sharp drop in Public Works Loan Board rates following concerns in the Asian market and rates had been locked into with the DMO of 1.97% for 5 years (£5m) and 2.56% for 10 years (£10m). For comparative purposes, the Public Works Loan Board certainty rates for 1 April 2015 to 30 September 2015 were noted. The Committee was informed that, on the advice of the Council’s treasury advisers, the Council had that day arranged to borrow a further £15m on 4 December 2015 for a period of 15 years (at a rate of 2.76%). This was because the rates had dropped considerably following some worse than expected data coming from the USA. This money would be used to fund the next six months of the Addlestone development payments and it was anticipated that by borrowing in advance, the Council would save approximately £30,000 a year in interest payments going forward.

The Overview and Scrutiny Select Committee commended the Council’s Finance section on the clarity of the mid year report and on achieving favourable interest rates for the borrowing required to facilitate the Addlestone One redevelopment which would be of benefit to Runnymede.

384 PROPOSALS FOR OFFICER SUPPORT FOR THE MAYOR

By resolution of the Committee, the press and public were excluded from the meeting during the consideration of this matter under Section 100A(4) of the Local Government Act 1972 on the grounds that the discussion would be likely to involve the disclosure of exempt information of the description specified in paragraphs 1 and 3 of Schedule 12A to Part 1 of the Act.

The Committee noted that at its meeting on 8 December 2015, the Corporate Management Committee would be considering an exempt report in Part II of the Agenda for that meeting on Council Officer Reorganisation which contained various proposals for Officer

- 2 -

RBC OSSC 3.12.15

restructuring. This report contained proposals for future Officer support for the Mayor as part of an overall package. While there would be cost implications arising from the proposals for future Officer support for the Mayor, the savings resulting from the posts proposed to be deleted in the report on Council Officer Reorganisation would be greater than the combined costs associated with the posts proposed to be created and the posts proposed to be redesignated and/or upgraded. Therefore the overall package being put forward to the Corporate Management Committee made a net saving of approximately £88,000.

The Secretary to the Chief Executive and Mayor had retired in May 2015. This full time dual role had supported the Chief Executive and the Mayor and the time allocation for each of those two roles had been in the ratio 50:50. Following the retirement of the Secretary to the Chief Executive and Mayor, on an interim basis, the Executive Assistant had carried out the duties of Secretary to the Mayor and had managed the Word Processing Manager (now retired), the Office Assistant (in post) and the Secretary/Receptionist (in post), along with other duties. During this interim period, the Secretary/Receptionist had provided administrative and secretarial support to the Chief Executive, along with other duties. The Executive Assistant would retire in December 2015.

As this interim structure had been tested and found to be robust, in his report to the Corporate Management Committee on 8 December 2015, the Chief Executive had recommended that the full time role of Assistant to the Chief Executive and Mayor be deleted and replaced with a new part time role of Mayoral Secretary. The post of Mayoral Secretary would be for 25 hours per week with a requirement for the successful candidate to work Monday to Friday for 5 hours each day. Given the time allocation of the previous post of Secretary to the Chief Executive and Mayor as referred to above, this represented an increase in the weekly hours of Officer support to the Mayor. The post of Secretary/Receptionist would be reassigned and upgraded to the new post of Personal Assistant (PA) to the Chief Executive. This new post would be sufficiently close to the duties of the current postholder’s job to allow for the assimilation of the current postholder.

In addition, within the Law and Governance Business Centre, there was the intention to upgrade the post of Office Assistant to Legal and Governance Services Administrator and to create a new post of Administrative Assistant. It was the intention that all four of these posts (i.e. the Mayor’s Secretary, the PA to the Chief Executive, the Legal and Governance Services Administrator and the Administrative Assistant) would support each other especially at times of peak workload (e.g. Mayor Making, Civic Reception).

The Overview and Scrutiny Select Committee was pleased to note that the new Mayor’s Secretary would work for five days a week as it would be advantageous for the Mayor to be able to contact a support Officer on each working day. It was suggested that it would be helpful if the person selected as the Mayor’s Secretary had some previous experience of local government. The Overview and Scrutiny Select Committee supported the Chief Executive’s proposals for future Officer support for the Mayor.

A Member who was present at the meeting who was not a Member of the Overview and Scrutiny Select Committee noted that at its last meeting the Committee had decided that an advisory panel/Member Working Group including the last four Mayors of the borough would be set up to review the Mayor’s role and to make recommendations on future Officer support and allowances for the Mayor. That Member asked about the proposed arrangements for this Member Working Group. It was noted that the Chief Executive would be consulting the Chairman of the Committee to agree items for this Member Working Group which had not yet met. There were no financial implications associated with this Member Working Group which would have no decision making powers and could only make recommendations. Any Member could attend this Member Working Group if they wished to do so. All Members would be kept informed of the work of the Member Working

- 3 -

RBC OSSC 3.12.15

Group. The arrangements for the appointment of the Mayor and Deputy Mayor were set out in the Council’s Constitution and the Member Working Group would have no role to play in making those appointments. It was noted that a Member did not have to serve as a Councillor for any particular length of time or satisfy any qualification criteria apart from being a Councillor before they could be nominated for the office of Mayor or Deputy Mayor.

A Mayoral protocol/handbook had been drawn up by the Council’s Executive Assistant in consultation with the current Mayor which the Committee agreed would be circulated to all Members of the Council. This protocol, which would be updated regularly and would evolve continually, set out the role of the Mayor and included what to do and what not to do in particular circumstances, e.g. when attending funerals or meeting royalty. It was suggested that the Member Working Group referred to above could augment the guidance provided in the protocol by putting forward suggestions on issues relating to the work of the Mayor.

Chairman

(The meeting ended at 8.00.p.m.)

- 4 -

APPENDIX 'B'

Investments as at 31 January 2016

ORIGINAL

£'000 TERM MATURITY % Banks

Term Deposits

Santander Business Reserve Account 4,000 **** 95 Day Notice AJC **** 0.900

Close Brothers 4,000 ****** 1 Month Notice ****** 1.000

Bank of Scotland 1,000 6 mth 04 Apr 2016 0.750

Bank of Scotland 1,000 6 mth 15 Feb 2016 0.700

Bank of Scotland 1,000 6 mth 18 Jul2016 0.750

Bank of Scotland 1,000 3 mth 21 Mar 2016 0.570

Certificates of Deposit

Standard Chartered Bank 2,000 6 mth 19 Feb 2016 0.700

Standard Chartered Bank 2,500 6 mth 03 Jun 2016 0.760

Total Banks 16,500 38%

Building Societies

Cambridge BS 1,000 3 mth 21 Mar2016 0.530

Coventry BS 1,500 6 mth 11 Jul 2016 0.600

Coventry BS 1,000 3 mth 30 Mar 2016 0.490

Cumberland B S 1,000 3 mth 17 Feb 2016 0.550

National Counties BS 1,000 3 mth 31 Mar 2016 0.540

Nationwide BS 1,000 9 mth 06 May 2016 0.800

Nationwide BS 1,500 6 mth 29 Jul2016 0.710

Nottingham BS 1,000 6 mth 04 Feb 2016 0.720

Nottingham BS 500 6 mth 19 Feb 2016 0.700

Principality BS 1,000 3 mth 21 Mar 2015 0.560

Progressive B S 1,000 4 mth 16 May 2016 0.550

Skipton BS 1,000 3 mth 31 Mar 2016 0.500

Yorkshire B S 1,000 3 mth 08 Apr 2016 0.470

Yorkshire B S 1,500 3 mth 11 Mar 2016 0.470

Total Building Society 15,000 34% (50% Limit)

Mone)£ Market Funds

Instant Access Funds

A viva Investors Sterling Liquidity Fund - Class 2 300 ********** On Call ********** Variable

CCLA - Public Sector Deposit Fund 340 ********** On Call ********** Variable

Deutsche Global Liquidity Managed GBP - Class B 25 ********** On Call ********** Variable

Goldman Sachs Sterling Liquid Reserves Institutional 4,000 ********** On Call ********** Variable

4,665

Longer duration "Enhanced" Funds

Insight GBP Liquidity Plus Fund - Class 3 2,000 **** 4 day settlement **** Variable

Payden Sterling Reserve Fund 1,000 **** 3 day settlement **** Variable

Aberdeen Sterling Investment Cash Fund 2,000 **** 2 day settlement **** Variable

5,000

Money Market Funds 9,665 22%

Pooled Funds

CCLA Property Fund 2,000 **** 1 mth settlement **** Variable

Total Pooled Funds 2,000 5%

Funding Circle

Lending to small and medium sized companies 420 **** up to 5 years **** Variable

Total Other Investments 420 1% (with the ability to sell loans)

Total Investments 43,585 ,

Amount Invested Sum Invested ~ "' "' ... Ul <J) 0 0 0 0 0 0

"' ... <J) "' 0 0 0 0 0 "o l"'l ·o 0 ·o 0 l"'l 0 0 0 0 0 0 c5 0 0 0 0 c5 0 0 0 0 0 0 0 0 0 0 0

0 0 0

Dec-14 Instant Access

Jan-15 7 Day Notice

Feb-15 1 Month Notice

Mar-15 ::l 3 Month Notice

::l < :s: < CD Apr-15 til 0 Up to 5 years CD - :::s

::l til 3 - -::J'" < 3 CD :E CD May-15 ::l til CD - ::J'" - ::l "'0 CD 3 ut :::s :s: Jun-15 ""'' Feb-16 CD

0 0 :::s ::l t\) :::s :::!l < - til - CD CD s: t\) ::J'" Jul-15 C/1 Mar-16 - t\) -~ I m t\) 3 -:::s - s:::: w c. CD ....:.. CD :::s ""'' Aug-15 ::l - Apr-16 ;::;: (... c. :E '< t\)

0 :s: "'0 :I Sep-15 - May-16 ""'' c - Ill 0 t\) :::r - :::!l !:

~ CD ... (j) Oct-15 CD Jun-16 s: ~ 0 0

....:.. Nov-15 I ::l Jul-16 0') -i :::r Dec-15

Jan-16 Sep-16

Feb-16

I Oct-16

Mar-16 I I Nov-16

Borrowings as at 31 January 2016

ORIGINAL £'000 TERM MATURITY %

(Years) PWLB

Housing Revenue Account

500502 (part) - HRA Financing Settlement 1,956 10 28 Mar2022 2.40%

500495 - HRA Financing Settlement 10,000 15 28 Mar 2027 3.01%

500498 - HRA Financing Settlement 10,000 20 29 Mar 2032 3.32%

500500- HRA Financing Settlement 10,000 20 29 Mar 2032 3.32%

500501 - HRA Financing Settlement 10,000 20 29 Mar 2032 3.32%

500493 - HRA Financing Settlement 10,000 25 27 Mar 2037 3.44%

500496- HRA Financing Settlement 10,000 25 27 Mar 2037 3.44%

500503- HRA Financing Settlement 10,000 25 27 Mar 2037 3.44%

500494- HRA Financing Settlement 10,000 30 28 Mar 2042 3.50%

500497- HRA Financing Settlement 10,000 30 28 Mar 2042 3.50%

500499 - HRA Financing Settlement 10,000 30 28 Mar 2042 3.50%

101,956

General Fund

500502 (part) - St Judes Appropriation 400 10 28 Mar 2022 2.40%

500502 (part) - Middlesex Crt Appropriation 506 10 28 Mar 2022 2.40%

500502 (part) - Ashdene Appropriation 430 10 28 Mar 2022 2.40%

504311 - AddlestoneONE 5,000 5 17 Aug 2020 1.97%

504312- AddlestoneONE 10,000 10 17 Aug 2025 2.56%

504520- AddlestoneONE 15,000 15 04 Dec 2030 2.76%

31,336

Total PWLB 133,292 94%

Local Authorities Oxfordshire CC - Investment Properties 5,000 3 09 Feb 2018 1.30%

Hampshire CC (M3 LEP) - AddlestoneONE 3,000 3 30 Sep 2018 0.00%

Total Local Authorities 8,000 6%

Total Borrowings 141,292

£'000 Borrowing Maturity Profile

35000

30000 "C Ql

3: 25000 0 ... ... 20000 0

a:l o+J 15000 s:::: ::I 0 10000 E <t 5000

0

"' .. I I I

7

Annual investment strategy for the 2016/17 financial year

Introduction 1. The Council’s investment policy has regard to the CLG’s Guidance on Local Government

Investments (“the Guidance”) and the revised CIPFA Treasury Management in Public Services Code of Practice and Cross Sectoral Guidance Notes (“the CIPFA Code”). The Council’s investment priorities will be security first, liquidity second, then return.

2. This strategy applies to both in-house and externally managed funds. External managersmust confirm the acceptability of a counterparty before an investment is made.

3. The Council approved the Annual Investment Strategy for 2016/17 on 3 March 2016.

Investment Policy 4. In accordance with the above guidance from the CLG and CIPFA, and in order to minimise the

risk to investments, the Council has below clearly stipulated the minimum acceptable credit quality of counterparties for inclusion on the lending list. The creditworthiness methodology used to create the counterparty list fully accounts for the ratings, watches and outlooks published by all three ratings agencies with a full understanding of these reflected in the eyes of each agency. Using our ratings service, potential counterparty ratings are monitored on a real time basis with knowledge of any changes notified electronically as the agencies notify modifications.

5. Further, the Council’s Officers recognise that ratings should not be the sole determinant of thequality of an institution and that it is important to continually assess and monitor the financialsector on both a micro and macro basis and in relation to the economic and politicalenvironments in which institutions operate. The assessment will also take account of informationthat reflects the opinion of the markets. To this end the Council will engage with its advisors tomaintain and monitor market pricing such as “credit default swaps” and overlay that informationon top of the credit ratings.

6. Other information sources used will include the financial press, share price and other suchinformation pertaining to the banking sector in order to establish the most robust scrutinyprocess on the suitability of potential investment counterparties.

7. The aim of the strategy is to generate a list of highly creditworthy counterparties which will alsoenable diversification and thus avoidance of concentration of risk.

8. The intention of the strategy is to provide security of investment and minimisation of risk.

Creditworthiness Policy 9. The primary principle governing the Council’s investment criteria is the security of its

investments, although the yield or return on the investment is also a key consideration. After this main principle, the Council will ensure that:

● It maintains a policy covering the categories of investment types it will invest in,criteria for choosing investment counterparties with adequate security, andmonitoring their security; and

● It has sufficient liquidity in its investments. For this purpose it will set outprocedures for determining the maximum periods for which funds may prudently becommitted. These procedures also apply to the Council’s prudential indicatorscovering the maximum principal sums invested.

Appendix 'C'

8

10. The Corporate Head of Resources will maintain a counterparty list in compliance with thefollowing criteria and will revise the criteria and submit them to Council for approval asnecessary. These criteria are separate to that which determines which types of investmentinstrument are either specified or non-specified as it provides an overall pool of counterpartiesthat are considered high quality which the Council may use, rather than defining what types ofinvestment instruments are to be used.

11. The minimum rating criteria uses the lowest common denominator method of selectingcounterparties and applying limits. This means that the application of the Council’s minimumcriteria will apply to the lowest available rating for any institution. For instance, if an institution israted by two agencies and one meets the Council’s criteria, and the other does not, theinstitution will fall outside the lending criteria. Credit rating information is supplied by CapitaAsset Services, the Council’s treasury consultants, on all active counterparties that comply withthe criteria below. Any counterparty failing to meet the criteria would be omitted from thecounterparty (dealing) list. Any rating changes, rating watches (notification of a likely change),rating outlooks (notification of a possible longer term change) are provided to Officers almostimmediately after they occur and this information is considered before dealing. For instance, anegative rating watch applying to a counterparty at the minimum Council criteria will besuspended from use.

12. Additional requirements under the Code require the Council to supplement credit ratinginformation. Whilst the above criteria relies primarily on the application of credit ratings toprovide a pool of appropriate counterparties for Officers to use, additional operational marketinformation will be applied before making any specific investment decision from the agreed poolof counterparties. This additional market information (for example Credit Default Swaps,negative rating watches/outlooks) will be applied to compare the relative security of differinginvestment counterparties.

Investment criteria and limits 13. The Guidance defines specified investments as those expected to offer relatively high

security and liquidity, and can be entered into with the minimum of formalities. The Guidance defines specified investments as those:

• denominated in pound sterling,

• due to be repaid within 12 months of arrangement,

• not defined as capital expenditure by legislation, and

• invested with one of:

o the UK Government,

o a UK local authority, parish council or community council, or

o a body or investment scheme of “high credit quality”.

The Council defines the following as being of “high credit quality” (as per the Guidance), subject to the monetary and time limits shown.

9

Specified investments Paragraph

(where applicable)

Fitch Long term Rating

(or equivalent)

£ Limit Duration

Banks 1 18 A+ £5.0m 364 days

A £4.0m 189 days

A- £3.0m 98 days

Banks 2 (Part nationalised) 19 N/A £3.0m 364 days

Banks 3 (Council’s own bankers) 20 N/A £1.0m 1 day

Building Societies 21 A- £2.5m 364 days

BBB+ £1.5m 189 days

BBB £1.0m 189 days

No credit rating but with assets

in excess of £1bn

£1.0m 128 days

DMADF (Debt Management Agency Deposit Facility)

AAA Unlimited 189 days

Local, Police, Fire, Civil Defence & Transport Authorities

N/A £2.0m 364 days

Money Market Funds (Liquid Funds)

23 AAA £4.0m Liquid

Enhanced Money Market Funds (Longer duration)

23 AAA £2.0m 189 days

Government bonds (gilts) and treasury bills

26 N/A No limit 364 days

Multinational Development Banks AAA £1.0m 364 days

14. Investments in any parent and its wholly owned subsidiaries are to be aggregated for thepurpose of calculating the limit of investment to that parent or its subsidiaries.

15. As far as reasonably possible, no more than 50% of total investments made are to be lent tobuilding societies at any one time.

16. No investment with any one provider/organisation will exceed £5m in total, with the exceptionof investments with the UK Government

17. No one individual term deposit to exceed £2.5m in total, with the exception of investmentswith the UK Government.

10

Banks 18. Banks 1 – Banks will be regarded as having good credit quality if they meet the following

criteria:

i) are UK banks (no country limit will apply to investments in the UK, irrespective ofthe sovereign credit rating); and/or

ii) are non-UK and domiciled in a country which has a minimum sovereign long termrating of AAA or AA+

and have, as a minimum, the following Fitch, Moody’s and Standard and Poors credit ratings (where rated):

i) Short term – F1 / P-1 / A-1

ii) Long term – A- / A3 / A-1

19. Banks 2 - Part nationalised UK banks – Lloyds Banking Group and Royal Bank of Scotland.These banks can be included if they continue to be part nationalised or they meet the ratings inBanks 1 above.

20. Banks 3 - The Council’s own banker for transactional purposes if the bank falls below the abovecriteria. This is because it is needed to facilitate short term liquidity requirements (overnight andweekend) and to provide business continuity..

Building societies 21. UK building societies without credit ratings will be considered to be of “high credit quality”,

but subject to a lower cash limit and shorter time limit than rated societies. The Council takes additional comfort from the building societies’ regulatory framework and insolvency regime where, in the unlikely event of a building society liquidation, the Council’s deposits would be paid out in preference to retail depositors. The Government has announced plans to amend the building society insolvency regime alongside its plans for wide ranging banking reform, and investments in lower rated and unrated building societies will therefore be kept under continuous review.

22. However, no investments will be made with building societies that hold a long-term creditrating lower than BBB or equivalent, due to the increased likelihood of default implied by thisrating.

Money market funds 23. Money market funds are pooled investment vehicles consisting of instruments similar to

those used by the Council. They have the advantage of providing wide diversification of investment risks, coupled with the services of a professional fund manager. Fees of between 0.10% and 0.20% per annum are deducted from the interest paid to the Council.

24. Funds that offer same-day liquidity will be used as an alternative to instant access depositaccounts, while funds which have a notice period (known as longer duration or enhancedfunds) will be used for longer investment periods.

25. Our practice is to have more than one money market account available to ensure that thereis sufficient flexibility to move funds if circumstances require, and to achieve a wide spread ofinvestments.

Government bonds (gilts) and treasury bills (T-bills)

11

26. Conventional gilt is a liability of the Government which guarantees to pay the holder of the gilt afixed cash payment (coupon) every six months until the maturity date, at which point the holderreceives the final coupon payment and the return of the principal.

27. T-Bills are short term securities issued by HM Treasury on a discount basis. For example a£100 coupon will be issued below its value to the investor and on maturity the investor willreceive £100. The difference will be the interest received. The security can also be cashedbefore maturity in the active secondary market giving the lending party more freedom to cash inthe T-bill before maturity date.

Foreign countries 28. The Council has determined that it will only use approved counterparties from countries with

a minimum sovereign credit rating of AA+ from Fitch. This list will be added to, or deducted from, by Officers should ratings change in accordance with this policy.

29. Due care will be taken to consider the country, group and sector exposure of the Council’sinvestments. In part, the country selection will be chosen by the credit rating of thesovereign state in Banks 1 (paragraph 17) above and will be limited to a maximum of £1million to be placed with any non-UK country at any time;

30. Sovereign credit rating criteria and foreign country limits will not apply to investments inmultilateral development banks (e.g. the European Investment Bank and the World Bank) orother supranational organisations (e.g. the European Union).

Non-specified investments 31. Any investment not meeting the definition of a specified investment (see paragraph 13) is

classed as non-specified. The Council does not intend to make any investments denominated in foreign currencies, nor any with low credit quality bodies, nor any that are defined as capital expenditure by legislation, such as company shares. Non-specified investments will therefore be limited to long-term investments, i.e. those that are due to mature 12 months or longer from the date of arrangement.

32. The limit on the amount that may be held in non-specified investments, these being long-term investments only, at any time in the financial year is £5 million (excluding any accruedinterest).

33. The advice of our treasury management consultants will be sought prior to making any long-term investment as to appropriateness of the investment.

Non Specified investments Paragraph

(where applicable)

Fitch Long term Rating

(or equivalent)

£ Limit Duration

Any bank or building society (including forward deals in excess of one year from inception to repayment).

AAA

AA+

AA

AA-

£1.0m

£1.0m

£1.0m

£1.0m

3 years

3 years

3 years

2 years

Gilt edged securities. N/A £1.0m 3 years

\ 12

Supranational bonds greater than 1 year to maturity

a) Multilateral developmentbank bonds

b) A financial institution that isguaranteed by the UnitedKingdom Government

34

AAA

N/A

£1.0m

£1.0m

3 years

3 years

UK Small & Medium Sized Enterprises via the Funding Circle

35 N/A £5,000 per organisation subject to an overall limit of

£0.5m

5 years

Pooled Funds and Collective Investment Schemes

36 AAA £2.0m N/A

Investment in Property 37 Subject to the limits set out in the Property Investment Strategy

Supranational bonds 34. The Council will invest in two types of bonds:

a) Multilateral development bank bonds are bonds defined as an international financialinstitution having as one of its objects economic development, either generally or in anyregion of the world (e.g. European Investment Bank etc.).

b) A financial institution that is guaranteed by the United Kingdom Government (e.g.The Guaranteed Export Finance Company {GEFCO}). The security of interest andprincipal on maturity is on a par with the Government and so very secure. These bondsusually provide returns above equivalent gilt edged securities. However the value of thebond may rise or fall before maturity and losses may accrue if the bond is sold beforematurity

UK Small & Medium Sized Enterprises via the Funding Circle 35. The Council will make loans for periods of up to three years to small and medium sized

enterprises (SME) in the UK that have been independently assessed as being of suitable credit quality. Nevertheless, it is anticipated that such companies will, on occasion, fail to repay the money lent. The Council will therefore ensure that the interest rate secured on such loans is high enough to cover the cost of defaults in all but the most exceptional circumstances. To this end, the Council will build a diversified portfolio of SME loans, with a maximum limit on the size of loan of £5,000 per company and a maximum limit of £500,000 in total to SMEs.

Pooled Funds 36. The Council will use pooled funds, for example pooled bond, equity and property funds, that

offer enhanced returns over the longer term but are potentially more volatile over the shorter term. These allow the Council to diversify into asset classes other than cash without the need to own and manage the underlying investments. Because these funds have no defined maturity date, but are available for withdrawal after a notice period, their performance and continued stability in meeting the Council’s investment objectives will be monitored regularly.

Property Investments 37. In addition to its cash investment funds the council also owns a significant investment

property portfolio. Properties have been purchased and these generate a significant rental stream exceeding the rates the Council is able to get with its cash investments. The Council

13

has taken a proactive stance in investing in property and property development to achieve a number of aims including diversification of assets, potential capital appreciation and higher returns than can be achieved through cash investments. These investments are monitored through a separate Property Investment Stratagy,

Liquidity management 38. The proportion of the in-house portfolio that may be held in short-term and long-term

investments will vary at any one time dependant on the cash flow position of the Council. The Council uses a manual cash book and spreadsheets to determine the maximum period for which funds may prudently be committed. The forecast is compiled on a pessimistic basis, with receipts under-estimated and payments over-estimated to minimise the risk of the Council being forced to borrow on unfavourable terms to meet its financial commitments.

39. Limits on long-term investments are set by reference to the Council’s medium term financialplan and cash flow forecast.

40. The amount of investments (both managed in house and externally) that may be held inlong-term investments will be, measured on a rolling basis, at any point in time:

• No more than £1 million of outstanding investments are to be over 3 years untilmaturity, and

• No more than £5 million of outstanding investments are to be over 1 year untilmaturity.

41. The maximum term of any one investment is 3 years with the exception of those loansinvested via the Funding Circle (see paragraph 35).

Planned investment strategy for 2016/17 42. Investments will be made with reference to the core balance and cash flow requirements and

the outlook for short-term interest rates (i.e. rates for investments up to 12 months). The cash flow forecast will be used to divide surplus funds into three categories:

• Short-term – cash required to meet known cash outflows in the next month, plus acontingency to cover unexpected cash flows over the same period.

• Medium-term – cash required to manage the annual seasonal cash flow cycle,including amounts to cover forecast shortages, planned uses of reserves, and alonger-term contingency.

• Long-term – cash not required to meet cash flows, and used primarily to generateinvestment income.

43. Short-term funds are required to meet cash flows occurring in the next month or so, and thepreservation of capital and liquidity is therefore of paramount importance. Generatinginvestment returns is of limited concern here, although it should not be ignored. Instantaccess AAA-rated money market funds and bank deposit accounts will be the main methodsused to manage short-term cash.

44. Medium-term funds which may be required in the next one to twelve months will be managedconcentrating on security, with less importance attached to liquidity but a slightly higheremphasis on yield. The majority of investments in this period will be in the form of fixed termdeposits with banks and building societies. A wide spread of counterparties and maturitydates will be maintained to maximise the diversification of credit and interest rate risks; thismay be achieved by the use of suitable medium-term money market funds. Deposits withlower credit quality names will be made for shorter periods only, while deposits with higherquality names can be made for longer durations.

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45. Cash that is not required to meet any liquidity need can be invested for the longer term witha greater emphasis on achieving returns that will support spending on local authorityservices. Security remains important, as any losses from defaults will impact on the totalreturn, but fluctuations in price and even occasional losses can be managed over the longterm within a diversified portfolio. Liquidity is of lesser concern, although it should still bepossible to sell investments, with due notice, if large spending commitments ariseunexpectedly. A wider range of instruments, including structured deposits, certificates ofdeposit, gilts and corporate bonds will be used to diversify the portfolio. The Council willconsider employing external fund managers that have the skills and resources to managethe risks inherent in a portfolio of long-term investments.

Derivative counterparties 46. Financial derivative transactions may be arranged with any organisation that meets the

approved investment criteria. The current value of any amount due from a derivativecounterparty will count against the counterparty credit limit and the relevant foreign countrylimit.

Forward deals up to one year 47. Forward deals may be entered into with banks and building societies that meet the

appropriate credit rating criteria for specified investments where the total period of theinvestment (i.e. negotiated deal period plus period of deposit) is less than one year.

.

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48. Annex A

Credit ratings and definitions

The Council uses long-term credit ratings from the three main rating agencies Fitch Ratings Ltd, Moody’s Investors Service Inc and Standard & Poor’s Financial Services LLC to assess the risk of investment default.

Table A: Comparison of long-term credit ratings Moody’s S&P Fitch

Investment grade Aaa AAA AAA Aa1 AA+ AA+ Aa2 AA AA Aa3 AA- AA- A1 A+ A+ A2 A A A3 A- A-

Baa1 BBB+ BBB+ Baa2 BBB BBB Baa3 BBB- BBB-

Speculative grade Ba1 BB+ BB+ Ba2 BB BB

Ba3 and below BB- and below BB- and below

(Negative) Rating Watch – Fitch Ratings Rating Watches indicate that there is a heightened probability of a rating change and the likely direction of such a change. These are designated as “Positive”, indicating a potential upgrade, “Negative”, for a potential downgrade, or “Evolving”, if ratings may be raised, lowered or affirmed. However, ratings that are not on Rating Watch can be raised or lowered without being placed on Rating Watch first, if circumstances warrant such an action.

Review for possible downgrade - Moody's (Standard & Poor’s is very similar) Moody's uses the ‘Watchlist’ to indicate that a rating is under review for possible change in the short-term. A rating can be placed on review for possible upgrade (UPG), on review for possible downgrade (DNG), or more rarely with direction uncertain (UNC). A credit is removed from the Watchlist when the rating is upgraded, downgraded or confirmed

(Negative) Rating Outlook – Fitch Ratings (Moody’s and Standard & Poor’s are similar) Rating Outlooks indicate the direction a rating is likely to move over a one- to two-year period. They reflect financial or other trends that have not yet reached the level that would trigger a rating action, but which may do so if such trends continue. The majority of Outlooks are generally Stable, which is consistent with the historical migration experience of ratings over a one- to two-year period. Positive or Negative rating Outlooks do not imply that a rating change is inevitable and, similarly, ratings with Stable Outlooks can be raised or lowered without a prior revision to the Outlook, if circumstances warrant such an action. Occasionally, where the fundamental trend has strong, conflicting elements of both positive and negative, the Rating Outlook may be described as Evolving.

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PRUDENTIAL AND TREASURY MANAGEMENT INDICATORS 2016/17

CAPITAL & AFFORDABILITY RELATED INDICATORS

1 Capital Expenditure - This prudential indicator is a summary of the Council’s capital expenditure plans, and financing requirements which have been updated in line with the phased borrowing requirements of the new property investment plans. Any shortfall of resources results in a funding borrowing need.

Capital Expenditure 2014/15 Actual £000s

2015/6 Probable

£000s

2016/17 Estimate

£000s

2017/18 Estimate

£000s

2018/19 Estimate

£000s Housing Services 545 1,062 900 917 934 Environment & Sustainability 303 649 450 300 300 Community Services 436 723 200 268 120 Corporate & Business 8,401 44,477 48,860 27,660 24,536 Non-HRA 9,685 46,911 50,410 29,145 35,890 HRA 1,126 1,550 3,997 1,300 1,300 Total 10,811 48,461 54,407 30,445 37,190

Financed by: Capital Receipts 4,419 3,339 12,265 19,360 2,980 Earmarked Reserves 152 - - - - Capital Grants 266 849 140 - - Revenue 974 1,263 3,123 1,085 1,085 Minimum Revenue Provision - - 198 527 640 Net financing need for the year 5,000 43,010 38,681 9,473 32,485

2 The Council’s borrowing need (the Capital Financing Requirement) - The Council’s Capital Financing Requirement (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 assets life.

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

The Council is asked to approve the CFR projections below:

2014/15 Actual £000s

2015/6 Probable

£000s

2016/17 Estimate

£000s

2017/18 Estimate

£000s

2018/19 Estimate

£000s Capital Financing Requirement CFR – non housing 5,400 49,346 88,225 98,225 131,350 CFR – housing 102,892 101,956 101,956 101,956 101,956 Total CFR 108,292 151,302 190,181 200,181 233,306 Movement in CFR 5,000 43,010 38,879 10,000 33,125 Movement in CFR represented by: Net financing need for the year (above) 5,000 43,010 38,681 9,473 32,485 Less MRP/VRP and other financing movements 0 - 198 527 640 Movement in CFR 5,000 43,010 38,879 10,000 33,125

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Appendix 'D'

PRUDENTIAL AND TREASURY MANAGEMENT INDICATORS 2016/17

3 Core funds and expected investment balances - The application of resources (capital receipts, reserves etc.) to either finance capital expenditure or other budget decisions to support the revenue budget will have an ongoing impact on investments unless resources are supplemented each year from new sources (asset sales etc.). Detailed below are estimates of the year end balances for each resource and anticipated day to day cash flow balances.

2014/15 Actual £000s

2015/6 Probable

£000s

2016/17 Estimate

£000s

2017/18 Estimate

£000s

2018/19 Estimate

£000s Fund balances / reserves 25,439 27,504 30,470 37,900 35,685 Working capital 7,749 7,749 7,749 7,749 7,749 Under/(over) borrowing 153 153 (10,526) (12,875) (13,500) Expected investments 33,341 35,406 27,693 32,774 29,934

4 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. The Council is asked to approve the following indicators:

5 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. The net revenue stream is a term used to describe the amount in the General Fund to be met from Government grant and local taxpayers. For the HRA it is the total HRA income shown in the accounts i.e. rent and other income.

2014/15 Actual

%

2015/6 Probable

%

2016/17 Estimate

%

2017/18 Estimate

%

2018/19 Estimate

% Non-HRA -1.21 2.84 16.13 26.74 36.72 HRA 37.84 37.79 37.48 36.78 36.06

The General Fund is a negative percentage in 2014/15 because investment income significantly exceeded any marginal borrowing costs. From 2015/16 borrowing costs outweigh investment income.

6 Incremental impact of capital investment decisions on Council Tax - This indicator identifies the revenue costs associated with proposed changes to the capital programme recommended in the budget report compared to the Council’s existing approved commitments and current plans. The assumptions are based on the budget, but will invariably include some estimates, such as the level of Government support.

2014/15 Actual

£

2015/6 Probable

£

2016/17 Estimate

£

2017/18 Estimate

£

2018/19 Estimate

£ Council Tax - Band D -10.83 6.32 9.74 -4.35 24.66

The increase in 2015/16 and 2016/17 relate to the proposed new borrowing costs required before the acquisitions and developments start generating income. Additional expenditure in 2018/19 which will subsequently be income generating results in increased charge. It is anticipated that a positive figure (i.e. income outweighing costs) will be generated in future years.

7 Estimates of the incremental impact of capital investment decisions on housing rent levels - Similar to the council tax calculation, this indicator identifies the trend in the cost of proposed changes in the housing capital programme recommended in the budget report compared to the Council’s existing commitments and current plans, expressed as a discrete impact on weekly rent levels.

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PRUDENTIAL AND TREASURY MANAGEMENT INDICATORS 2016/17

2014/15 Actual £000s

2015/6 Probable

£000s

2016/17 Estimate

£000s

2017/18 Estimate

£000s

2018/19 Estimate

£000s Weekly Housing Rent Levels 0.00 0.01 0.10 0.10 0.10

This indicator shows the revenue impact on any newly proposed changes, although any discrete impact will be constrained by rent controls.

TREASURY RELATED INDICATORS

8 Borrowing - The treasury management function ensures that the Council’s cash is organised in accordance with the 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.

9 Current Portfolio Position - The Council’s predicted treasury portfolio position at 31 March 2016, with forward projections are summarised below. The table shows the actual external debt (the treasury management operations), against the underlying capital borrowing need (the Capital Financing Requirement - CFR), highlighting any over or under borrowing.

2014/15 Actual £000s

2015/6 Probable

£000s

2016/17 Estimate

£000s

2017/18 Estimate

£000s

2018/19 Estimate

£000s External Debt Debt at 1 April 108,292 108,445 151,455 179,655 187,306 Expected change in Debt - 43,010 28,200 7,651 32,500 Other long-term liabilities (OLTL)

- - - - -

Expected change in OLTL - - - - - Actual gross debt at 31 March 108,445 151,455 179,655 187,306 219,806 Capital Financing Requirement

108,292 151,302 190,181 200,181 233,306

Under/ (over) borrowing (153) (153) 10,526 12,875 13,500

The negative differences in 2014/15 and 2015/16 represent the value of balances held on behalf of local Trusts (e.g. Cabrera Recreation Ground Trust, Runnymede Pleasure Ground Trust etc). This gives the Trusts certainty of income and quick access if needed. From 2016/17 the under-borrowing figure represents potential internal borrowing to fund capital expenditure.

The positive balances show that the Council is under borrowing (i.e. borrowing internally using cash balances).

Within the prudential indicators there are a number of key indicators to ensure that the Council operates its activities within well-defined limits. One of these is that the Council needs to ensure that its gross debt does not, except in the short term, exceed the total of the CFR in the preceding year plus the estimates of any additional CFR for 2016/17 and the following two financial years. This allows some flexibility for limited early borrowing for future years, but ensures that borrowing is not undertaken for revenue purposes.

The Corporate Head of Resources reports that the Council has so far complied with this prudential indicator in the current year and does not envisage difficulties for the future. This view takes into account current commitments, existing plans, and the proposals in the budget report.

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PRUDENTIAL AND TREASURY MANAGEMENT INDICATORS 2016/17

11 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 2014/15 Actual £000s

2015/6 Probable

£000s

2016/17 Estimate

£000s

2017/18 Estimate

£000s

2018/19 Estimate

£000s Debt 108,292 151,302 190,181 200,181 233,306 Other long term liabilities 2,000 2,000 2,000 2,000 2,000 Total 110,292 153,302 192,181 202,181 235,306

12 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 Act2003. 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 2014/15 Actual £000s

2015/6 Probable

£000s

2016/17 Estimate

£000s

2017/18 Estimate

£000s

2018/19 Estimate

£000s Debt 108,292 151,302 190,181 200,181 233,306 Other long term liabilities 3,000 5,000 5,000 5,000 5,000 Total 111,292 156,302 195,181 205,181 238,306

Separately, the Council is also limited to a maximum HRA CFR through the HRA self-financing regime. This limit is currently:

HRA Debt Limit 2014/15 Actual £000s

2015/6 Probable

£000s

2016/17 Estimate

£000s

2017/18 Estimate

£000s

2018/19 Estimate

£000s HRA debt cap 103,647 103,647 103,647 103,647 103,647 HRA CFR 102,892 101,956 101,956 101,956 101,956 HRA headroom 755 1,691 1,691 1,691 1,691

13 Treasury Management Limits on Activity

There are three debt related treasury activity limits. The purpose of these are to restrain the activity of the treasury function within certain limits, thereby managing risk and reducing the impact of any adverse movement in interest rates. However, if these are set to be too restrictive they will impair the opportunities to reduce costs / improve performance. The indicators are:

• Upper limits on variable interest rate exposure. This identifies a maximum limit forvariable interest rates based upon the debt position net of investments;

• Upper limits on fixed interest rate exposure. This is similar to the previous indicator andcovers a maximum limit on fixed interest rates; and

• Maturity structure of borrowing. These gross limits are set to reduce the Council’sexposure to large fixed rate sums falling due for refinancing, and are required for upperand lower limits.

The Council is asked to approve the following treasury indicators and limits:

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PRUDENTIAL AND TREASURY MANAGEMENT INDICATORS 2016/17

2015/16 £000s

2016/17 £000s

2017/18 £000s

Interest rate exposures Upper Limits on fixed interest rates based on net debt

156,302 195,081 204,081

Upper Limits on variable interest rates based on net debt - - -

Maturity structure of fixed interest rate borrowing 2016/17 Lower Upper

Under 12 months 0% 25%

12 months to 2 years 0% 25% 2 years to 5 years 0% 25% 5 years to 10 years 0% 50% 10 years and above 0% 100%

Maturity structure of variable interest rate borrowing 2016/17 Lower Upper

Under 12 months 0% 0% 12 months to 2 years 0% 0% 2 years to 5 years 0% 0% 5 years to 10 years 0% 0% 10 years to 20 years 0% 0% 20 years to 30 years 0% 0% 30 years to 40 years 0% 0% 40 years to 50 years 0% 0%

This indicator is set to control the Council’s net exposure (taking borrowings and investments together) to interest rate risk. Its intention is to ensure that the Council is not exposed to interest rate rises which could adversely impact the revenue budget. The upper limits proposed on fixed and variable rate interest rate exposures, expressed as the principal sums outstanding in respect of borrowing.

Fixed rate investments and borrowings are those where the rate of interest is fixed for the whole financial year. Instruments that mature during the financial year are classed as variable rate. If it is not clear whether an instrument should be treated as fixed or variable rate, then it is treated as variable rate.

The variable rate upper limit of zero means that the Council is minimising its exposure to uncertain future interest rates on its debt. This will still allow a proportion of the debt to be taken as variable as fixed term investments maturing within one year are classified as variable for the purposes of this indicator.

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