treasury management strategy

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These types of account would come under the scope of Short Term Sterling Deposits in the Treasury Policy Statement. The maximum investment term for any ?2


     thCABINET COMMITTEE - 18 March 2002

     Agenda item number


     DRN: CC197/01-02

     SUBJECT: Treasury Management Strategy 2002/03 and 2001/02 Update

SOURCE: Director of Finance

Wards Affected: ALL

Purpose of report:

This report sets out:-

? The Treasury Management Strategy for 2002/03 including statutory determinations

    ? An update on Treasury Activity in 2001/02 to date


Cabinet is asked to agree the following for recommendation to Council :-

1. The Annual Strategy Document 2002/03 (Appendix A)

    2. The following determinations as set out in the Annual Strategy Document 2002/03

     a) An overall borrowing limit of ?720m.

     b) A 35% short-term borrowing limit of ?238m.

     c) A variable rate borrowing limit of 35%

    3. Note the update on Treasury Management activity in 2001/02

     Bob Heaton

     Director of Finance


    Originator of report: Bob Heaton

    Job Title: Director of Finance

    Telephone: 020 8430 2931 / ext. 22644

    Report Dated: 11th March 2002

Fog Index 10.7

    CIPFA - Treasury Management in Local Authorities - A Code of Practice and

     A Guide for Chief Financial Officers

    Sector Treasury Services Ltd. - U.K. Economic Forecasts

    FIS Volume 6 - Capital Expenditure and Finance

    London Borough of Newham - Treasury Management Strategy 2001/02

     Treasury Policy Statement

Annual Report 1999-2000 KM 05/04/10

Executive Summary

    This report sets out the Treasury Management Strategy for 2002/03 including statutory determinations, recommends some minor changes to the Council’s Treasury Policy Statement and provides a brief report on the activities undertaken during 2001/02 to date. The report is in line with legal requirements and borrowing codes of practice.

Outline of Proposals

    Report to agree Treasury Strategy Document and borrowing limits for 2002/03 for recommendation to Council.

Outcomes Sought

    The report is being made to keep cabinet members aware of treasury policies, an area of potentially high financial risk, being pursued in accordance with the CIPFA code of Practice and the Council’s Treasury Policy Statement.

Service Delivery / Performance Management Issues

    Treasury Management is an area where balancing risk against prospective returns is key to protecting the financial position of the Council without exposure to undue risk.

Link to Vision and Strategies

    The report has no direct impact on service delivery to the public. However, the ability to contain costs and make savings in this area will directly affect the level of resources available for the development of Council strategies and the achievement of the Vision.

Local Area Impact

    The report has no specific impact on the Local Area other than the achievement of financial savings that will help to maximise resources available for Council services.

Financial and Legal Implications

    Legal: None arising from this report.

Financial: The Council is expected to end 2001/02 with a loan debt of ?616m and investments of

    approximately ?85-95m. Clearly these need to be proactively managed to keep borrowing costs to a minimum and enhance returns on investment without incurring undue risk. Annual interest payments are in the order of ?50m with investment interest of around ?5.2m.

    The recommended strategy, including the overall, short-term and variable rate borrowing limits, will provide sufficient flexibility for the Director of Finance to manage the Council’s loan debt effectively in 2002/03.

    Due to interest rate fluctuations, there is a risk that future investment income will be lower than expected if short-term interest rates due not increase from current levels in the near future.

Key Considerations / Issues For Discussion

    This report outlines the Council’s strategy on borrowing and investment issues. These have a direct

    impact on the Council’s future medium term budget plan.


    The Council’s budget monitoring arrangements involve continuous dialogue and consultation between finance staff, external investment managers and external advisers.

Annual Report 1999-2000 KM 05/04/10


1.1 Treasury Management is delegated to the Director of Finance. In recognition of the risks

    associated with them, Treasury Management activities are governed by the Council’s Treasury

    Policy Statement, which sets out the type of activities that may be undertaken, by whom and

    specifies the reporting requirements. The Statement requires that a report be made prior to the

    start of the financial year mainly to agree a strategy for the forthcoming year. This report

    complies with that requirement.

1.2 The purpose of this report is to: -

    ? Recommend changes to the Council’s Treasury Policy Statement, including the

    implementation of the new CIPFA recommended Treasury Management Practices.

    ? Present the 2002/03 Treasury Management Strategy for approval including key parameters

    controlling the Council’s borrowing activities during the new financial year.

    ? Provide a brief update on the Treasury Management Activity undertaken so far during


    1.3 In 2002/03 the main risk to be managed is the volatility of the income received on the

    Council’s investments that could impact on the Medium Term Financial Strategy. The

    Council’s loan debt is currently made up almost entirely of fixed rate loans. Movements in

    interest rates will only have an impact on that part of the portfolio to be replaced,

    approximately 8.2% in 2002/03. So although it is important to get borrowing decisions right in

    the long term, interest costs are relatively easy to model and plan for within the Budget


    In contrast the return on the Council’s investments is potentially far more volatile being

    dependent on both the level of balances and interest rates. In 2002/03 it is investment income

    that poses the greatest risk to the Council’s financial position. The Budget for 2002/03 is



2.1 The council maintains a Treasury Policy Statement in accordance with the CIPFA Code of

    Practice on Treasury Management and best practice. A number of minor changes are

    suggested now. These are as follows:

    2.2 Use of Money Market Funds. This is an investment instrument that will be available to Local

    Authorities from April 2002. It will allow deposits to be placed in a AAA rated fund at a 7 day

    interest rate. If overnight interest rates are below the 7 day rate, then this facility may provide

    an attractive short-term option.

    2.3 Consideration is being given to new investment opportunities that have recently arisen. These

    include a AAA Sovereign rated Debt Management Account Deposit Facility administered by

    the Government Debt Management Office and a AAA rated Deposit Scheme administered by

    the Bank of Ireland. These types of account would come under the scope of Short Term

    Sterling Deposits in the Treasury Policy Statement.

    2.4 The maximum investment term for any ?2 million deposit placed with a AA rated Foreign bank

    have been extended from 6 months to 364 days. The limit for the remaining ?8 million is to

    remain at six months. This change is to allow new fund manager, Alliance Capital more scope

    to maximise investment returns with very little increase in investment risk. Specialist advice

    was taken from Sector in making this minor change.

Annual Report 1999-2000 KM 05/04/10

2.5 The Policy Statement already allows the use of Market loans. Consideration is being given to

    using Market Loans at stepped rates, know as Lender’s Option, Borrower’s Option loans

    (LOBO’s). This means that after an initial period of low fixed interest rates (two years), the

    stepped loan would run at a higher fixed rate until maturity (30 to 40 years in the future). If the

    lender asks for an interest rate change, the Council has the option of repaying the loan with no


2.6 CIPFA have recently published an updated set of recommended Treasury Management

    Practices. Most changes from the previous version relate to different ways of presenting the

    practices document, rather than any fundamental changes in treasury practice. The Council

    treasury System Document is being updated to take account of this updated version.

    3. ANNUAL STRATEGY 2002/03

3.1 The Annual Strategy document for 2002/03 is contained in Appendix A for approval. This sets

    out the strategies to be adopted in the management of the treasury function during 2002/03.

3.2 In addition the strategy document contains the limits the Council is required to set on its overall,

    short-term and variable rate borrowing under S.45 of the Local Government and Housing Act

    1989. These determinations must be made by the Council and may not be delegated to

    Committees or Officers. Therefore the determinations need to be referred to Council on 15th

    April 2002.


     th4.1 Cabinet Committee agreed a Treasury Management Strategy for 2001/02 at its meeting of 19

    March 2001. The purpose of this section of the report is to provide members with an update on

    that strategy detailing the activities undertaken so far this year.

    4.2 Borrowing Requirements

4.2.1 The latest estimate of net borrowing requirements in 2001/02 is as follows: -

     2001/02 Borrowing



     Maturing long-term debt 33,824

     Financing Capital Expenditure 28,249


    Less: Repayments from Revenue (15,718)

     Reserved Receipts (17,200)


     This is lower than originally predicted (?39.122m) due to an increase in anticipated Reserved


4.2.2 The Council’s Public Works Loan Board (PWLB) Quota for 2001/02 at ?77.45m, including

    some carryover from 2000/01 (?13.3 million), is more than sufficient to meet our borrowing


4.2.3 As investment rates have fallen rapidly in the last six months, a decision was made to reduce

    investment levels and overall borrowing levels. This also had an effect of maximising Housing

    subsidy for debt charges.

Annual Report 1999-2000 KM 05/04/10

    4.2.4 Debt totalling ?94.8million has been repaid in 2001/02; this includes ?61 million of loans that

    were repaid early, without penalty or where a discount was receivable. Long term borrowing

    of ?58 million was made at lower rates.

4.3 Interest Rates and Borrowing Strategy

4.3.1 The Borrowing Strategy being adopted in 2001/02 is closely related to the view of future

    movements in interest rates.

4.3.2 At the start of the year Sector, the Council’s treasury advisers, were predicting that short-term

    rates would fall in 2001 to around 5?% and remain stable during the rest of the year. Long

    term rates were also expected to remain broadly stable, rising a little during the year to just

    over 5%.

    4.3.3 Some commentators were expecting Base Rates to stay relatively stable for the rest of 2001,

    with a possible increase of ?%- ?% during late 2001 / early 2002, but since the events in New thYork on the 11 September, Base Rates have been cut by 1% to 4% in an attempt to avoid

    recession. Sector believe that these rates will rise by the end of 2002 to around 4?%, although

    some commentators believe the poorly performing American economy may cause Base Rates

    to stay at 4% or fall lower during the remainder of the year.

    4.3.4 Longer term rates have fluctuated slightly since March 2001 with 25 year PWLB loans

    between 4?% and 5 3/8%. Long term rates are expected to remain at around 5% during the

    rest of 2002 although an increase in future Government spending may cause them to rise in


    4.3.5 ?28 million of long term borrowing has been taken in September 2001 at 4 7/8% (the lowest

    rate available in 2001/02 at that point). A further ?30million was borrowed in December 2001

    at 4?%.

    4.3.6 Following cuts in investment rates to 4%, ?31 million of PWLB loans were prematurely repaid.

    These repayments generated ?494,000 of one-off discounts to the General Fund. This policy of

    redeeming loans early to generate discounts was outlined in the September 2001 Treasury

    report and forms part of the Council’s medium term budget strategy.

    4.3.7 Further loan redemption of ?10 million of PWLB has been delayed until 2002/03 in

    expectation that long-term rates may temporarily fluctuate higher, thus maximising discounts

    receivable. The Treasury report to Cabinet in September 2001 outlined the repayment of

    further ?10 million loans in 2002/03 and 2003/04.

    4.3.8 Long term fixed borrowing represents a stable option for funding capital expenditure and

    should always be considered within the Treasury Management Strategy. However,

    rescheduling opportunities will also be kept under review.

    4.3.9 Council officers, alongside treasury advisers, Sector will continue to monitor interest rates and

    forecasts so as to adapt the strategy if required.

    4.3.10 A borrowing target of taking PWLB monies at, or below 98% of the average PWLB rate for the

    year has been set. So far borrowing has been at an average rate of 4.81% against a benchmark

    of 4.92%.

Annual Report 1999-2000 KM 05/04/10


4.4.1 To date during 2001/02 the Council has had little need to borrow on a temporary basis to meet

    day-to-day cash flow requirements. Instead external investments have been made via the

    London Money Market of between ?30.8m and ?84.0m reflecting the authority’s day-to-day

    cash flow and the relative timing of long-term loans raised and repaid. Following falls in short

    term rates, investment balances have been reduced to between ?30 & ?50million.

4.4.2 In addition the Council’s external cash managers (Dresdner RCM, Scottish Widows and

    Tradition UK Ltd are managing ?49.7m of cash on the Council’s behalf. The quarterly returns

    achieved by the Fund managers are summarised in the table below:

    Cash Fund Manager Returns (Net of fees)

     ththst30 June 2001 30 Sept 2001 31 December 2001 Quarter to: % % %

    Dresdner RCM 0.94 1.87 1.09

    Scottish Widows 1.05 1.79 1.06

    Tradition UK Ltd(1) 1.40 1.25 1.10

    Newham top ?15m (1) 1.57 1.52 1.31

    Newham all (1) 1.38 1.35 1.15

    Average 7 Day LIBID 1.28 1.21 1.01

    Internal Benchmark 1.29 1.22 1.02

    (101% of 7 Day LIBID)

     1. Investing in sterling deposits only, no use of Gilts or CD’s.

4.4.3 Both Dresdner and Scottish Widows underperformed the benchmark in the first quarter and

    were both over the benchmark in the second quarter. Both were slightly above the benchmark

    in the third quarter. Tradition have been above the benchmark in every quarter, though the

    scope of their pure cash investments meant they did not have the potential to outperform by

    over 0.5% in the second quarter.

4.4.4 A review of the external cash managers was undertaken in 2001/02. Tradition, a cash manager

    was retained as a benchmark for the Treasury Section and to provide an alternate strategy

    option, thus reducing risk. Dresdner RCM have been retained, due to their superior long-term

    performance, though Scottish Widows have been replaced with Alliance Capital from February

    2002. Alliance Capital were chosen for their innovative approach to investing and have been

    appointed on a benchmark that will require them to have upper quartile performance over a

    three year period.

4.4.5 Following a reorganisation, Dresdner RCM have renamed their cash managing section PIMCO.

    The individual managers controlling the fund are unchanged, so the fund strategy will not be

    unduly affected.

4.4.6 The remainder of the cash balance is managed internally. Two targets have been set for the

    Council Treasury Section to compare performance against benchmarks. These targets are as


4.4.7 Top ?15million Tradition UK do not have to consider cash-flow effects when making

    investment decisions. This means they have more scope to take advantage of favourable

    interest rates when investing and do not have to take account of when Council payments are

    due. To allow comparison, the returns on the top ?15 million of Internal investments are

    compared to Tradition’s performance. The Benchmark for 2001/02 is to get within Tradition’s

    performance by 0.1%. The top ?15million of the internal funds have outperformed Tradition

    during this financial year.

    Annual Report 1999-2000 KM 05/04/10

4.4.8 Alternate investment opportunities are assessed to take advantage of schemes that offer higher

    returns without increasing risk. For example a new deposit account has been opened with

    Abbey National Plc. As the Abbey delay changing investment rates until the month following

    a Base Rate change, this account offers higher than market rates in times of falling interest

    rates. This has been very useful in the last six months, as Base Rates have fallen.

    4.4.9 Entire Internal Fund A benchmark of beating the 7 day LIBID rate by 1% in 2001/02 has

    been set. The Council’s Treasury Section have been able to achieve a return higher than

    101% of the 7 day rate over the first three quarters of the year.

    Annual Report 1999-2000 KM 05/04/10

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