015/2013 – Treasury Management – 05 March 2013
Executive Summary and recommendation:
Approval of the Treasury Policy Statement, Treasury Management Strategy Statement, Prudential and Treasury Indicators, Minimum Revenue Provision (MRP) Policy and Investment Strategy.
In line with legislation and CIPFA best practice formal approval is needed in relation to the above Treasury Management documents.
The strategies and information for consideration have been developed in line with best practice, and are consistent with the Medium Term Financial Plan (version 39).
Further information is provided in the main body of the report and accompanying appendices.
Police and Crime Commissioner decision: Approved
Signature: 
Title: Police and Crime Commissioner
Date: 05 March 2013
Part 1 – Unrestricted facts and advice to the PCC
1. Introduction and background
1.1. The proposed treasury management strategy statement for 2013/14 is attached at Appendix A. This continues to focus on economy and stability, to achieve the lowest net interest rate costs recognising the risk management implications, and protect the annual revenue budget from short term fluctuations on interest rates.
1.2. The proposed Treasury Management Policy Statement for 2013/14 is shown at Appendix B and covers the definition of treasury management activities and the key principles underpinning all treasury management activities. The definition includes the investment of surplus cash and the sourcing of external borrowing. The Commissioner’s average daily cash surplus, projected to be around £44.4m, is made up of the amounts held in balances, reserves and provisions, usable capital receipts, unapplied capital grants and temporary cash flow surpluses.
1.3. The Chartered Institute of Public Finance and Accountancy (CIPFA) Prudential Code for Capital Finance in Local Authorities introduced new requirements for the manner in which capital spending plans are to be considered and approved. The Code was revised in November 2011 and includes a slight change to one of the key principles along with a requirement to incorporate the Commissioner’s high level policies for borrowing and investments within the Treasury Management Policy Statement. Where relevant the amendments have been included for approval within this report.
1.4. Prudential Indicators in respect of capital expenditure, external debt and treasury management activity are included at Appendix C. This includes the Authorised Limit for external borrowing required under section 3(1) of the Local Government Act 2003.
1.5. Guidance from the Department of Communities and Local Government (DCLG) requires the Commissioner to set an annual investment strategy. The proposed strategy is set out at Appendix D and has as its primary principle the security of investments.
1.6. The criteria for choosing counter parties set out there provide a sound approach to investment in “normal” market circumstances. Whilst the Commissioner is asked to approve this base criteria, under the exceptional current market conditions the Commissioner’s Chief Finance Officer will temporarily restrict further investment activity to those counter parties considered of higher credit quality than the minimum criteria set out for approval. These restrictions will remain in place until the banking system returns to “normal” conditions. Similarly the time periods for investments will be restricted.
1.7. The DCLG has also issued statutory guidance setting out options for the way MRP may be calculated. Further background to the guidance and the policy is set out at Appendix E.
1.8. One of the corner-stones of effective treasury management is the preparation and implementation of suitable Treasury Management Practices (TMPs), which set out the manner in which the organisation will seek to achieve the treasury management policies and objectives and prescribe how it will manage and control those activities. A summary of the Treasury Management Practices relevant to the Commissioner is attached at Appendix F. Detailed schedules have been prepared which specify the systems and routines that are employed and the records that are maintained.
2. Matters for consideration
The Commissioner is requested:
i. To formally adopt the CIPFA guidance as up-dated in November 2011;
ii. To approve the Treasury Management Strategy set out in Appendix A;
iii. To approve the Treasury Management Policy Statement at Appendix B;
iv. To approve the Prudential and Treasury Indicators at Appendix C, including the Authorised Limit for external borrowing;
v. To approve the annual Investment Strategy at Appendix D
vi. To approve the Minimum Revenue Provision (MRP) policy at Appendix E;
vii. To approve the over arching Treasury Management Practices at Appendix F;
viii. To note the current approvals for counter parties and investment limits shown at Appendix G.
3. Other options considered, if any
None
4. Contribution to Police and Crime Plan outcomes
4.1 The requirement for production and monitoring of Prudential and Treasury Indicators ensures the Commissioner prudently manages alternative funding streams available to maintain an affordable and sustainable Business Development Plan (BDP). Although there is no direct impact on the Police and Crime Plan, effective Treasury Management ensures that the financial infrastructure is appropriate to underpin the resources available to deliver the service required.
5. Consultations carried out
Not Applicable
6. Financial Implications/Value for money
6.1 The Commissioner’s treasury portfolio position as at 31 December 2012 comprised:
| Principal £m | Average Rate % | |
| Fixed Rate Borrowing (North Yorkshire County Council) | 472.0 | 4.49 |
| Other long term liabilities | 0 | – |
| Total | 472.0 | 4.49 |
| Investments | 46.2 | 0.522 |
6.2 The fixed rate funding relates to a loan transferred from North Yorkshire County Council, which the Police Authority inherited when it separated out from the Local Authority. Although the interest rate of 9.15% is high in comparison to current market rates, the Authority did not seek to replace this at a lower rate, since it is part funded by annual grant covering 51% of the costs of the interest and debt management charge. The loan is due to be repaid in full on 31 March 2015.
6.3 Balanced Budget Requirement
It is a statutory requirement under Section 33 of the Local Government Finance Act 1992 to produce a balanced budget. In particular, Section 32 requires a local authority to calculate its budget requirement for each financial year to include the revenue costs that flow from capital financing decisions.
This means that capital expenditure must be limited to a level where increases in charges to revenue from additional external interest and running costs are affordable within the projected income levels for the foreseeable future.
6.4 Budget Assumptions
The budget assumptions contained within this section are based on predicted movements on several variables. The investment interest receivable budget for 2013/14 is £200,000.
7 Legal Implications
7.1 With effect from 1 December 2011 Chief Finance Officer Services have been undertaken by West Yorkshire Police Authority (now the Office of the Police and Crime Commissioner for West Yorkshire). This is the subject of a Section 23 (collaboration) agreement which was agreed by the Police Authority Management Board on 21 November 2011.
7.2 The Commissioner uses Sector Treasury Services as her external treasury management advisers. The company provides a range of services which include:
- Technical support on treasury matters, capital finance issues and the drafting of member reports;
- Economic and interest rate analysis;
- Debt services which includes advice on the timing of borrowing;
- Debt rescheduling advice surrounding the existing portfolio;
- Generic investment advice on interest rates, timing and investment instruments;
- Credit ratings/market information service comprising the three main credit rating agencies.
7.3 It must be recognised that responsibility for treasury management decisions remains with the organisation at all times and will ensure that undue reliance is not placed upon our external service providers. Whilst the advisers provide support to the internal treasury function under current market rules and the CIPFA Code of Practice the final decision on treasury matters remains with the Commissioner. The Commissioner will ensure that the terms of their appointment and the methods by which their value will be assessed are properly agreed and documented, and subjected to regular review.
8. Equality Implications
Not Applicable
9. Appendices:
Appendix A Treasury Management Strategy
1. The proposed strategy for 2013/14 is based upon treasury officers’ views on interest rates, supplemented by leading market forecasts provided by the Commissioner’s treasury advisor Sector. The strategy covers:
- Policy on use of external service providers
- Treasury limits in force which will limit treasury risk and activities
- Prudential and Treasury Indicators
- The current treasury position
- The borrowing requirement and MRP Policy
- Prospects for interest rates and the economic background
- Creditworthiness policy
- The borrowing strategy
- Policy on borrowing in advance of need
- The investment strategy
2. The Local Government Act 2003 (the Act) and supporting regulations require the Commissioner to ‘have regard to’ the CIPFA Prudential Code and the CIPFA Treasury Management Code of Practice. The objectives of the codes are to ensure, within a clear framework and that Treasury management decisions are taken in accordance with good professional practice.
3. The code requires the Commissioner to determine her strategy for borrowing, and to prepare an annual investment strategy in accordance with guidance issued by the Department for Communities and Local Government (CLG). The investment strategy sets out policies for managing investments, giving priority to security and liquidity over yield. The code also requires the setting of Prudential and Treasury Indicators for the next three years, to ensure that capital investment plans are affordable, prudent and sustainable.
4. The CLG has also issued statutory guidance setting out options for the way the minimum revenue provision (MRP) may be calculated. The method chosen requires the Commissioner’s approval and should be formalised in a Treasury management policy document.
5. CIPFA Requirements
CIPFA defines Treasury management as:
“The management of the Authority’s (Commissioner’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”.
The primary requirements of the Code are as follows:
- Creation and maintenance of a Treasury Management Policy Statement which sets out the policies and objectives of the Commissioner’s treasury management activities.
- Receipt and approval of three main reports each year; the annual Treasury Management Strategy Statement (this report), including the prudential and treasury indicators, the annual Investment Strategy and Minimum Revenue Provision Policy; a mid-year Review Report and an Annual Report (stewardship report) covering activities during the previous year.
- Delegation, by the Commissioner, of responsibilities for implementing and monitoring treasury management policies and practices and for the execution and administration of treasury management decisions. This is set out in the Commissioner’s Financial Regulations.
- Creation and maintenance of Treasury Management Practices which set out the manner in which the Commissioner will seek to achieve those policies and objectives. Detailed schedules have been prepared which specify the systems and routines that are employed and the records that are maintained.
6. Current Treasury Position
6.1 The Commissioner’s treasury portfolio position as at 31 December 2012 comprised:
| Principal£m | Average Rate% | |
| Fixed Rate Borrowing (North Yorkshire County Council) | 472.0 | 4.49 |
| Other long term liabilities | 0 | – |
| Total | 472.0 | 4.49 |
| Investments | 46.2 | 0.522 |
6.2 The fixed rate funding relates to a loan transferred from North Yorkshire County Council, which the Authority inherited when it separated out from the Local Authority. Although the interest rate of 9.15% is high in comparison to current market rates, the Authority has not sought to replace this at a lower rate, since it is part funded by annual grant covering 51% of the costs of the interest and debt management charge.
7. Balanced Budget Requirement
It is a statutory requirement under Section 33 of the Local Government Finance Act 1992 for the Commissioner to produce a balanced budget. In particular, Section 32 requires a local authority to calculate its budget requirement for each financial year to include the revenue costs that flow from capital financing decisions.
This means that capital expenditure must be limited to a level where increases in charges to revenue from additional external interest and running costs are affordable within the projected income of the Commissioner for the foreseeable future.
8. Budget Assumptions
8.1 The budget assumptions contained within this section are based on predicted movements on several variables. The investment interest receivable budget for 2013/14 is estimated at £200,000.
8.2 Interest rate outlook: The Bank Rate has been unchanged at 0.50% since March 2009. Budgets and cash flow forecasts have been based on the view of base rates supplied by Sector. The Sector view of base rate movements is provided at Appendix G.
8.3 The Commissioner will avoid locking into longer term deals while investment rates are at historically low levels. This is unless exceptionally attractive rates are available with counter parties of particularly high creditworthiness which make longer term deals worthwhile and within the risk parameters set by the Commissioner.
8.4 In terms of a temporary investments strategy, the Commissioner’s Chief Finance Officer continues to monitor the “interest rate market” to ensure that the net return/cost achieved does not diverge from the market norm (e.g. average 7-day rate), whilst maintaining the appropriate security of principal invested. A mixture of short term and longer period investments will be made in response to:-
- Day-to-day cash flow requirements;
- Medium to longer term cash flow requirements;
- Capital and Revenue Development Programme;
- Property & Facilities Strategy (Major 5 year investment programme);
- The relationship between short term and longer period rates in conjunction with market expectations and forecasts.
8.5 The day-to-day cash flow will continue to be carefully monitored throughout the year. Each working day any surplus funds will be invested on the short-term money market, whilst any shortfall will be borrowed from the same source.
8.6 The Medium Term Financial Plan (MTFP) includes a fully funded Capital and Revenue Development Programme covering the period 2012/13 to 2015/16 and indicates that no new borrowing is required to support the current capital expenditure plans until 2016/17 when £2.740m may be taken.
8.7 The Commissioner should be aware that the options for funding of future investment beyond those detailed in the MTFP will be restricted to:-
- re-allocation of resources from projects currently identified in the MTFP;
- increased contributions from revenue;
- borrowing.
8.8 The Funding and Financial strategies provide the governance environment in which financial business is undertaken. These strategies together will enable both the Commissioner and the Chief Constable to identify the alternative funding options and their impact on the revenue budget and associated asset base. In turn, this will aid in mitigating the risks that are faced in the medium term, whilst building a sustainable funding platform, through following a structured approach to evaluating funding options.
9 Treasury indicators which limit risk and activity – ‘Prudential Indicators’
9.1 It is a statutory duty under Section 3 of the Act and supporting regulations for the Commissioner to determine and keep under review how much the organisation can afford to borrow. The amount so determined is termed the “Affordable Borrowing Limit”. In England and Wales the Authorised Limit represents the legislative limit specified in the Act.
9.2 The Commissioner must have regard to the Prudential Code when setting the Authorised Limit, which essentially requires it to ensure that total capital investment remains within sustainable limits and, in particular, that the impact upon its future council tax levels is ‘acceptable’.
9.3 Whilst termed an “Affordable Borrowing Limit”, the capital plans to be considered for inclusion incorporate financing by both external borrowing and other forms of liability, such as credit arrangements. The Authorised Limit is to be set, on a rolling basis, for the forthcoming financial year and two successive financial years. Details of the Authorised Limit can be found in Appendix 3 of this report.
10 Prudential and Treasury Indicators 2012/13-2015/16
10.1 As well as being required by statute, the Prudential and Treasury indicators set out at Appendix 3 are relevant for the purposes of formulating an integrated treasury management strategy and ensuring appropriate measures are in place to support the Business Development Plan.
10.2 The required Prudential Indicators for the forthcoming and subsequent two financial years must be set by the Commissioner before the start of the financial year. They may, however, be revised at any time if circumstances change. They may take the form of upper/lower limits, estimates or actual figures, and may comprise a mixture of three year estimates/limits, actuals for the previous year and treasury management indicators relating to compliance and upper lending limits.
10.3 The Indicators must be consistent with proper accounting practice and, where applicable, reconcile ultimately with figures in the published statement of accounts (actual results), revenue budget and/or capital plan (budgets). They are designed to support local decision making and not to be comparative performance indicators. They should therefore be seen as defining an integrated and complete picture of prudential financial management in relation to capital expenditure and treasury management, not as a set of individual indicators to be assessed in isolation.
10.4 Factors to be taken into account in setting or revising the Prudential Indicators include affordability (e.g. precept setting implications), prudence and sustainability (e.g. the implications of external borrowing), value for money (e.g. option appraisal), stewardship of assets (e.g. asset management planning), service objectives (e.g. strategic planning) and practicality (e.g. achievability of the Capital Plan).
10.5 CIPFA’s Prudential Code for Capital Finance in Local Authorities has recently been amended to include a new indicator. The indicator shows the actual external debt (the treasury management operations), as a percentage of the underlying capital borrowing need (the Capital Financing Requirement – CFR), highlighting any over or under borrowing.
10.6 The CFO can report that the Authorised Limits for external debt is consistent with the Commissioner’s current commitments, the existing capital plan, the capital expenditure forecasts and associated revenue budget implications identified in the budget report for 2013/14 and the approved Treasury Management Policy Statement.
10.7 The Chief Finance Officer also confirms that the limits are based on the estimate of most likely, prudent, but not worst case scenario, with sufficient headroom over and above this to allow for operational management (e.g. unusual cash movement). To derive these limits, a risk analysis has been applied to the capital plan, estimates of the capital financing requirement and estimates of cashflow requirements for all purposes.
10.8 Having made her decision on the Revenue Budget, the Commissioner is now asked to note that the “Authorised Limit” determined for 2013/14, will be the statutory limit determined under section 3(1) of the Local Government Act 2003.
11 Economic Background
11.1 Prospects for Interest Rates and Economic Considerations
Sector Treasury Services act as the Commissioner’s treasury advisors and part of their service is to assist in formulating a view on interest rates. The table in Appendix H draws together a number of current City forecasts for short term (Bank Rate) and longer fixed interest rates. Sector’s central view as at each financial year end is as follows:
- 2012/13 – 0.5%
- 2013/14 – 0.5%
- 2014/15 – 0.75%
There is downside risk to these forecasts if recovery from the recession proves to be weaker and slower than currently expected.
11.2 The Global economy
The Eurozone debt crisis has depressed growth in most countries. This has impacted the UK economy which is unlikely to have grown significantly in 2012 and is creating a major headwind for recovery in 2013. Quarter 2 of 2012 was the third quarter of contraction in the economy; this recession is the worst and slowest recovery of any of the five recessions since 1930. Overall growth in 2012 will be close to zero and could then lead into negative growth in quarter 1 of 2013, which would then mean that the UK was in its first triple dip recession since records began in 1955.
Sentiment in financial markets has improved considerably since the ECB pledge to buy unlimited amounts of bonds of countries asking for a bailout (Spain and Greece). However, the foundations to this “solution” to the Eurozone debt crisis are still weak and do not address the huge obstacle of unemployment rates of over 25% in those countries. It is also possible that the situations in Portugal and Cyprus could deteriorate further in 2013 and, although they are minor economies, such developments could unnerve financial markets. There are also general elections coming up in Italy and Germany which could potentially produce some upsets on the political scene. It is, therefore, quite possible that sentiment in financial markets could turn during 2013 after the initial burst of optimism at the start of the year. While equity prices have enjoyed a strong start to 2013, the foundations for this stock market recovery are shallow given the economic fundamentals in western economies. In addition there is doubt in the central banks of the US and UK as to the effectiveness of any further QE in stimulating economic growth. An end to central purchases of bonds may lead to a fall in bond prices.
The US economy has only been able to manage weak growth in 2012 despite huge efforts by the Federal Reserve to stimulate the economy through Quantitative Easing (QE) and maintenance of ultra low interest rates into 2015. Unemployment levels have been slowly reducing but against a background of a fall in the numbers of those available for work. The fiscal cliff facing the President at the start of 2013 has been a major dampener discouraging business from spending on investment and increasing employment more significantly in case there is a sharp contraction in the economy in the pipeline. The housing market, though, does look as if it has, at long last, reached the bottom and house prices are now on the up.
Hopes for a broad based recovery have, therefore, focused on the emerging markets. Recent news from China appears to indicate that the economy has returned to a healthier rate of growth. However, there are still concerns around the unbalanced nature of the economy which is heavily dependent on new investment expenditure. The potential for the bubble in the property sector to burst, as it did in Japan in the 1990s, could have a material impact on the economy as a whole.
11.3 The UK economy
The Government’s austerity measures, aimed at getting the public sector deficit into order, have now had to be extended over a longer period than the original four years. Achieving this new extended timeframe will still be dependent on the UK economy returning to a reasonable pace of growth towards the end of this period.
Currently, the UK is enjoying a major financial benefit from some of the lowest sovereign borrowing costs in the world as the UK is seen as a safe haven from Eurozone debt. However, the subsiding of market concerns over the Eurozone has unwound some of the attractiveness of gilts as a safe haven and led to a significant rise in gilt yields. There is little evidence that UK consumer confidence levels are recovering, nor that the manufacturing sector is picking up. Availability of credit remains tight in the economy and the Funding for Lending scheme, which started in August 2012, has not yet had time to make a significant impact in respect of materially increasing overall borrowing in the economy. Finally, the housing market remains tepid and the outlook is for house prices to be little changed for a prolonged period.
11.4 Economic Growth
Economic growth has basically flat lined since the election of 2010 and economic forecasts for 2012 and beyond were revised substantially lower in the Bank of England Inflation quarterly report for August 2012 and were then further lowered in the November Report. Many forecasters are expecting the MPC to vote for a further round of QE in early 2013 to try to stimulate economic activity.
11.5 Unemployment
The Government’s austerity strategy has resulted in a substantial reduction in employment in the public sector. Despite this, total employment has increased to the highest level for four years as over one million jobs have been created in the private sector in the last two years.
11.6 Inflation and Bank Rate
Inflation has fallen sharply during 2012 from a peak of 5.2% in September 2011 to 2.2% in September 2012. However, inflation increased back to 2.7% by the end of the year, though it is expected to fall back to reach the 2% target level within the two year horizon.
11.7 AAA rating
On 24 February 2013 Moody’s cut their UK rating to Aa1. This means that the UK has lost its AAA status for the first time since 1978.
By way of explanation Moody’s statement said, “The main driver underpinning Moody’s decision to downgrade the UK’s government bond rating to Aa1 is the increasing clarity that, despite considerable structural economic strengths, the UK’s economic growth will remain sluggish over the next few years due to the anticipated slow growth of the global economy and the drag on the UK economy”. The outlook for the UK was deemed “Stable” which indicates that the agency sees little prospect of a further cut in the near term and they added that “the UK’s creditworthiness remains extremely high”.
Economists are however predicting that there will be little impact in reality if the UK is to follow the experiences of the US and France. When they lost their AAA ratings last year borrowing costs actually fell post-downgrade.
11.8 Sector’s forward view
Economic forecasting remains difficult and the economy remains relatively fragile, with many areas of uncertainty
The focus of so many consumers, corporates and banks on reducing their borrowings, rather than spending, will continue to act as a major headwind to a return to robust growth in western economies.
Given the weak outlook for economic growth, Sector sees the prospects for any changes in Bank Rate before 2015 as very limited. There is potential for the start of Bank Rate increases to be even further delayed if growth disappoints.
Sector believes that the longer run trend is for gilt yields and PWLB rates to rise due to the high volume of gilt issuance in the UK, and the high volume of debt issuance in other major western countries. The interest rate forecast in this report represents a balance of downside and upside risks. The downside risks have already been commented on. However, there are additional upside risks to PWLB rates and gilt yields, for example UK inflation being significantly higher than in the wider EU and US causing an increase in the inflation premium in gilt yields.
12 Borrowing Strategy
12.1 The Commissioner currently only has one loan with North Yorkshire County Authority, which is repayable in annual instalments and will be repaid in 2014/15. The interest rate is fixed at 9.15% and a grant of 51% is received towards the principal and interest costs. There is no intention to replace this loan while the grant contribution continues.
12.2 The Sector forecast for the PWLB new borrowing rate, including the 20 basis points certainty rate reduction, is as follows:
| NOW | Mar-13 | Jun-13 | Sept-13 | Dec-13 | Mar-14 | Mar-15 | |
| Bank Rate | 0.50% | 0.50% | 0.50% | 0.50% | 0.50% | 0.50% | 0.75% |
| 5yr PWLB rate | 1.83% | 1.50% | 1.50% | 1.60% | 1.60% | 1.70% | 2.20% |
| 10yr PWLB rate | 2.85% | 2.50% | 2.50% | 2.50% | 2.60% | 2.70% | 3.20% |
| 25yr PWLB rate | 4.03% | 3.80% | 3.80% | 3.80% | 3.80% | 3.90% | 4.30% |
| 50yr PWLB rate | 4.17% | 4.00% | 4.00% | 4.00% | 4.10% | 4.10% | 4.50% |
12.3 In view of the above forecast, should borrowing be required at any stage, the Commissioner’s borrowing strategy will be based upon the following:
- If rates are expected to increase during the year it would be advantageous to time new long term borrowing as soon as the requirement is known.
- PWLB rates on loans of less than ten years duration are expected to be lower than longer term PWLB rates offering a range of options for new borrowing which will spread debt maturities away from a concentration in long dated debt.
- Consideration will also be given to borrowing fixed rate market loans at 25 – 50 basis points below the PWLB target rate and to maintaining an appropriate balance between PWLB and market debt in the debt portfolio.
12.4 In normal circumstances the main sensitivities of the forecast are likely to be the two scenarios noted below. The treasury officers, in conjunction with the treasury advisers, will continually monitor both the prevailing interest rates and the market forecasts, adopting the following responses (as set out in the Treasury Management Policy) to a change of sentiment:
- if it were felt that there was 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 of deflation, then long term borrowings will be postponed, and potential rescheduling from fixed rate funding into short term borrowing will be considered;
- if it were felt that there was a significant risk of a much sharper RISE in long and short term rates than that currently forecast, perhaps arising from a greater than expected increase in world economic activity 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 were still relatively cheap.
12.5 An impact assessment will be incorporated as part of the decision making process for accessing borrowing facilities. This assessment will incorporate consideration of interest rates, maturity periods and loan types available to secure value for money for the Commissioner. Borrowing will only be considered as a matter of need. It will not be in anticipation of that need.
12.6 It is not anticipated that there will be a need to re-schedule existing outstanding debt, but should there be a future need this would be in accordance with the policy on maturity profiles and only where overall savings can be achieved.
13. Contribution to Police and Crime Plan outcomes
13.1 The requirement for production and monitoring of Prudential and Treasury Indicators ensures the Commissioner prudently manages the alternative funding streams available to it to maintain an affordable and sustainable Business Development Plan (BDP). Although there is no direct impact on the Police and Crime Plan, effective Treasury Management ensures that the financial infrastructure is appropriate to underpin the resources available to deliver the service required.
13.2 The Medium Term Financial Plan (MTFP), version 39, presented to the Commissioner as part of the budget report, indicates that no new borrowing is required to support the current capital expenditure plans until 2016/17 when £2.740m may be taken to support the capital programme.
14.0 Creditworthiness Policy
14.1 The Commissioner uses the creditworthiness service provided by Sector. This service has been progressively enhanced over the last year and now uses a sophisticated modelling approach with credit ratings from all three rating agencies, Fitch, Moodys and Standard and Poors, forming the core element. However, it does not rely solely on the current credit ratings of counter parties but also uses the following as overlays: –
- credit watches and credit outlooks from credit rating agencies;
- specific economic indices to give early warning of likely changes in credit ratings;
- sovereign ratings to select counter parties from only the most creditworthy countries.
14.2 This modelling approach combines credit ratings, credit watches and credit outlooks in a weighted scoring system which is then combined with an overlay of specific economic indices for which the end product is a series of colour code bands which indicate the relative creditworthiness of counter parties. These colour codes are also used to determine the duration for investments and are therefore referred to as durational bands. The Commissioner’s Chief Finance Officer is satisfied that this service now gives a much improved level of security for its investments. It is also a service which the office of the Police and Crime Commissioner would not currently be able to replicate using in house resources.
14.3 The selection of counter parties with a high level of creditworthiness will be achieved by selection of institutions down to a minimum durational band within Sector’s weekly credit list of worldwide potential counter parties. The Commissioner will therefore use counter parties within the following durational bands: –
- Purple 2 years
- Blue 1 year (only applies to nationalised or semi nationalised UK Banks)
- Orange 1 year
- Red 6 months
- Green 3 months
14.4 The Commissioner will not use the approach suggested by CIPFA of using the lowest rating from all three rating agencies to determine creditworthy counter parties as Moodys tend to be more aggressive in giving low ratings than the other two agencies. This would be unworkable and leave the very few parties on the approved lending list. The Sector creditworthiness service does use ratings from all three agencies, but by using a risk weighted scoring system does not overly rely on one agency’s ratings.
14.5 All credit ratings are monitored via daily bulletins received from Sector. The Commissioner is alerted to changes to ratings of all three agencies through its use of the Sector creditworthiness service.
14.6 If a downgrade results in the counterparty/investment scheme no longer meeting the Commissioner’s minimum criteria, its further use as a new investment will be withdrawn immediately.
14.7 In addition to the use of Credit Ratings the Commissioner is advised of information in movements in benchmarks and other market data on a weekly basis. Extreme market movements may result in downgrade of an institution or removal from the Commissioner’s lending list.
14.8 Sole reliance will not be placed on the use of this external service. In addition the Commissioner will also use market data and market information, information on government support for banks and the credit ratings of that government support.
Appendix B Treasury Management Policy Statement
The proposed Treasury Policy Statement, based upon CIPFA guidance, is as follows:
1. Treasury management activities are defined as:
The management of the Commissioner’s investments and cash flows, banking, money market and capital market transactions; the effective control of the risks associated with those activities. The key principles underpinning treasury management activities are as follows:
- The Commissioner regards the successful identification, monitoring and control of work as the main criteria by which the effectiveness of treasury management activities is measured. Accordingly the analysis and reporting of the treasury management activities will focus on their risk implications for the organisation, and any financial instruments entered into, to manage these risks.
- The Commissioner acknowledges that effective treasury management will provide support towards the achievement of business and service objectives. The Commissioner is committed to the principles of achieving value for money in treasury management, and to employing suitable comprehensive performance measurement techniques, within the context of effective risk management.
2. The Commissioner’s high level policies for borrowing and investments are:
Borrowing
If it were felt that there was 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 of deflation, then long term borrowings will be postponed, and potential rescheduling from fixed rate funding into short term borrowing will be considered.
If it were felt that there was a significant risk of a much sharper RISE in long and short term rates than that currently forecast, perhaps arising from a greater than expected increase in world economic activity 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 were still relatively cheap.
Investments
The Commissioner’s investment strategy has as its primary objective safeguarding the repayment of the principal and interest of its investments on time first, with ensuring adequate liquidity second and investment return third. In the current economic climate the overriding risk consideration relates to counterparty security. The Commissioner will continue to favour quality counter parties when placing funds, even if this involves a yield sacrifice.
Appendix C Prudential and Treasury
| Prudential Indicators | 2012/13 | 2013/14 | 2014/15 | 2015/16 | 2016/17 | |
| £’000 | £’000 | £’000 | £’000 | £’000 | ||
| Estimate | Estimate | Estimate | Estimate | Estimate | ||
| Capital Expenditure | 8,939.0 | 7,087.7 | 6,452.3 | 6,399.5 | 23,735.0 | |
| Ratio of Financing Costs to Net Revenue Stream | 0.07% | 0.06% | 0.04% | (0.15%) | (0.10%) | |
| Capital Financing Requirement as at 31 March | 820.6 | 585.2 | 349.8 | 349.8 | 3,032.8 | |
| Annual Change in Capital Financing Requirement | (235.4) | (235.4) | (235.4) | 0.0 | 2,740.0 | |
| Net Borrowing / (Investment) | (37,498.1) | (34,336.0) | (34,473.9) | (31,489.0) | (14,168.4) | |
| Gross Debt as a percentage of the CFR (new indicator) | 0.1 | 0.0 | 0.0 | 0.0 | 0.1 | |
| Incremental Impact of Capital Investment Decisions – since last calculation | ||||||
| Increase (decrease) in precept (Band D) per annum | 0.00 | 0.02 | 0.02 | 0.02 | 0.23 | |
| Treasury Management Indicators | 2012/13 | 2013/14 | 2014/15 | 2015/16 | 2016/17 | |
| £’000 | £’000 | £’000 | £’000 | £’000 | ||
| Estimate | Estimate | Estimate | Estimate | Estimate | ||
| Authorised Limit for External Debt – | ||||||
| Borrowing | 5,964.1 | 13,055.1 | 17,375.5 | 24,264.9 | 53,616.3 | |
| Other Long Term Liabilities | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | |
| Total | 5,964.1 | 13,055.1 | 17,375.5 | 24,264.9 | 53,616.3 | |
| Operational Boundary for External Debt – | ||||||
| Borrowing | 4,587.8 | 10,042.4 | 13,365.8 | 18,665.3 | 41,243.3 | |
| Other Long Term Liabilities | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | |
| Total | 4,587.8 | 10,042.4 | 13,365.8 | 18,665.3 | 41,243.3 | |
| Upper Limit for Fixed Interest Rate Exposure | ||||||
| Net principal re fixed rate borrowing/ investments | -100% | -100% | -100% | -100% | -100% | |
| Upper Limit for Variable Interest Rate Exposure | ||||||
| Net principal re variable rate borrowing/ investments | -50% | -50% | -50% | -50% | -50% | |
| Upper Limit for Total Principal Sums Invested for Over 365 days (up to a maximum of 564 days) | Indicator is not applicable as the Authority has no plans to invest for over 364 days | |||||
| Maturity structure of fixed rate borrowing 2013/14 | Lower limit % | Upper limit % | ||||
| Under 12 months | 0% | 50% | ||||
| 12 months and within 24 months | 0% | 25% | ||||
| 24 months and within 5 years | 5% | 75% | ||||
| 5 years and within 10 years | 10% | 75% | ||||
| 10 years and above | 0% | 100% | ||||
Appendix D Annual Investment Strategy
1. The Commissioner will have regard to the CLG’s Guidance on Local Government Investments (“the Guidance”) and the 2011 revised CIPFA Treasury Management in Public Services Code of Practice and Cross Sectoral Guidance Notes (“the CIPFA TM Code”). The Commissioner’s investment priorities are:
- the security of capital; and
- the liquidity of its investments.
2. The Commissioner will also aim to achieve the optimum return on investments commensurate with proper levels of security and liquidity. The Commissioner’s risk appetite is low in order to give priority to security of investments.
3. The borrowing of monies purely to invest or on‑lend and make a return is unlawful and the Commissioner will not engage in such activity.
4. Investment instruments are identified as either ‘Specified’ or ‘Non-Specified’ Investments. The Commissioner’s available instruments are listed in the paragraph below. Counterparty limits will be as set through the Treasury Management Practices.
5. It is proposed that the Annual Investment Strategy for 2013/14 is based solely upon the use of “specified” investments listed below, with all such investments being sterling denominated, with maturities up to a maximum of 364 days (<12 months) meeting the minimum “high” credit rating where applicable:
- Debt Management Agency Deposit Facility
- Term Deposits – UK Government
- Term Deposits – other local authorities
- Term Deposits – banks and building societies
- Money market funds
6. It should be noted that the move to allow placing of investments up to a period of 546 days was agreed by the Police Authority in 2006/07. However, this facility was not required during the current financial year, with all investments intended to be placed for periods of up to 364 days, and with UK financial institutions only. A summary of the current investment periods are outlined below with the main emphasis being on increasing the liquidity of funds by reducing the length of time any one investment should be held with a counterparty:
| Sector Colour Code | Current Investment period |
| Green | 3 months |
| Red | 6 months |
| Orange | 12 months |
| Blue | 12 months (Government Backed) |
| Purple | 24 months |
| Yellow | Up to 60 months |
7. The Treasury Management Function takes cognisance of latest market information produced by the treasury advisors (Sector) to support decisions regarding maturity periods and counterparty limits.
8. Since the credit crunch crisis there have been a number of developments which require separate consideration and approval for use:
Part – Nationalised banks in the UK have credit ratings which do not conform to the credit criteria usually used by local authorities to identify banks which are of high credit worthiness. In particular, as they no longer are separate institutions in their own right, it is impossible for Fitch to assign them an individual rating for their stand alone financial strength. Accordingly, Fitch have assigned an “F” individual rating [1] which means that at a historical point of time, this bank failed and is now at least part owned by the Government. However, these institutions are now recipients of an “F1+” short term rating [2] as they effectively take on the creditworthiness of the Government itself i.e. deposits made with them are effectively being made to the Government. They also have a support rating of 1; in other words, on both counts, they have the highest ratings possible.
9. Due the current economic climate presenting significant difficulties for the treasury management function to find available counterparty’s changes were made to the approved list of coucounter parties their investment limits at a Police Authority meeting in June 2012. Current limits are shown in Appendix H below.
([1] Individual rating is the rating applied to individual institutions)
([2] Short Term rating is the rating applied to the duration of placements for the respective institutions)
Appendix E The Minimum Revenue Provision (MRP) policy
1.Current forecasts show that there is sufficient capital funding to cover the capital expenditure in the capital plan without the need for any new external borrowing.
2. Authority members originally approved the implementation of an MRP policy in 2008/09 at the NYPA meeting on 29 September 2008. The implementation was in line with the main recommendations contained within the guidance issued by the Secretary of State under section 21(1A) of the Local Government Act 2003.
3. The broad aim of a prudent MRP provision is to ensure that debt is repaid over a period that is reasonably commensurate with the period over which the capital expenditure (financed by the debt) provides benefits.
4. For 2013/14 the Commissioner is requested to approve the continuation of the use of the Asset Life Method (equal instalments) for any borrowing made/expenditure incurred after 1 April 2008, whilst existing debt prior to that date will continue to be based upon the Regulatory Method.
Appendix F Treasury Management Practices
TMP1: Treasury risk management:
Credit and counterparty risk
The risk of failure of a third party to meet their contractual obligations under an investment, borrowing, capital, project or partnership financing, particularly as a result of the third party’s diminished creditworthiness.
Liquidity risk
The risk that cash will not be available when needed.
Interest rate risk
Fluctuations in the levels of interest rates create an unexpected or an unbudgeted burden on an organisation’s finances against which it has failed to protect itself adequately.
Exchange rate risk
The risk that fluctuations in foreign exchange rates create an unexpected or unbudgeted burden on an organisation’s finances.
Refinancing risk
The risk that maturing borrowings, capital, project or partnership financing cannot be refinanced on terms that reflect the provisions made by the organisation for those refinancing, both capital and revenue.
Legal and regulatory risk
The risk that the organisation fails to act in accordance with its powers or regulatory requirements.
Fraud, error, corruption and contingency management
The failure to employ suitable systems and procedures and to maintain effective contingency management arrangements to these ends.
Market risk
The risk that through adverse market fluctuations in the value of the principal sums an organisation invests, it’s stated policies and objectives are compromised.
TMP2: Performance measurement
The process designed to calculate the effectiveness of the portfolio’s or manager’s investment returns or borrowing costs and the application of the resulting data for the purposes of comparison with the performance of other portfolios or managers, or with recognised industry standards or market indices.
TMP3: Decision-making and analysis
Consideration of key aspects such as risk, legality, creditworthiness and competitiveness.
TMP4: Approved instruments, methods, and techniques
Consideration of the types of investment instruments the organisation is legally able to deal in and also the level of competences available within the organisation to allow effective decisions to be taken.
TMP5: Organisation, clarity and segregation of responsibilities and dealing arrangements.
Clear organisational and decision making lines, clearly laid down division of responsibilities, proper internal control procedures in place.
TMP6: Reporting requirements and management information requirements.
Covering reporting lines and frequencies.
TMP7: Budgeting, accounting, and audit arrangements
Covering manpower costs, debt and financing costs, bank and overdraft charges, brokerage commissions, external advisor’s and consultants’ costs.
TMP8: Cash and cash flow management
The preparation of cash flow management forecasts and ‘actuals’ to determine acceptable levels of cash balances, the adequacy of overdraft facilities and the optimum arrangements for investing and managing surplus cash.
TMP9: Money laundering
Making Treasury staff aware of the provisions of the Money Laundering Regulations 2007 and associated legislation such as the Terrorism Act 2000 and the Proceeds of Crime Act 2002, and ensuring (as far as possible) that adequate procedures are in place to ensure effective compliance with them.
TMP10: Staff training and qualifications
Ensuring the staff training and development regime is in place and that staff are competent to operate within a treasury environment.
TMP11: Use of external service providers
Ensuring that correct appointment and renewal procedures are followed.
TMP12: Corporate governance
The code requires a commitment to the principles of corporate governance, which will embrace the TPS itself, treasury policies, procedural guidelines and defined responsibilities, dealings with counter parties and external bodies.
Appendix G Interest Rate Forecasts
The data below shows a variety of interest rate forecasts published by a number of institutions, including those of UBS and Capital Economics (an independent forecasting consultancy). The PWLB rates and forecasts shown have taken into account the 20 basis points certainty rate reduction effective as of 1 November 2012.
The forecast within this strategy statement has been drawn from these diverse sources and officers’ own views.
Sector:
| NOW | Mar-13 | Jun-13 | Sept-13 | Dec-13 | Mar-14 | Jun-14 | Sep-14 | Dec-14 | Mar-15 | Mar-16 | |
| Bank Rate | 0.50% | 0.50% | 0.50% | 0.50% | 0.50% | 0.50% | 0.50% | 0.50% | 0.50% | 0.75% | 1.75% |
| 5yr PWLB rate | 1.83% | 1.50% | 1.50% | 1.60% | 1.60% | 1.70% | 1.70% | 1.80% | 2.00% | 2.20% | 2.90% |
| 10yr PWLB rate | 2.85% | 2.50% | 2.50% | 2.60% | 2.60% | 2.70% | 2.70% | 2.80% | 3.00% | 3.20% | 3.90% |
| 25yr PWLB rate | 4.03% | 3.80% | 3.80% | 3.80% | 3.80% | 3.90% | 3.90% | 4.00% | 4.10% | 4.30% | 5.00% |
| 50yr PWLB rate | 4.17% | 4.00% | 4.00% | 4.00% | 4.00% | 4.10% | 4.10% | 4.20% | 4.30% | 4.50% | 5.20% |
Captial Economics:
| NOW | Mar-13 | Jun-13 | Sept-13 | Dec-13 | Mar-14 | Jun-14 | |
| Bank Rate | 0.50% | 0.50% | 0.50% | 0.50% | 0.50% | 0.50% | 0.50% |
| 5yr PWLB rate | 1.83% | 1.55% | 1.30% | 1.30% | 1.30% | 1.30% | 1.30% |
| 10yr PWLB rate | 2.85% | 2.55% | 2.30% | 2.30% | 2.30% | 2.30% | 2.30% |
| 25yr PWLB rate | 4.03% | 3.70% | 3.50% | 3.50% | 3.50% | 3.50% | 3.50% |
| 50yr PWLB rate | 4.17% | 4.00% | 3.80% | 3.80% | 3.80% | 3.80% | 3.80% |
UBS (for quarter ends):
| NOW | Mar-12 | Jun-13 | Sept-13 | Dec-13 | |
| Bank Rate | 0.50% | 0.50% | 0.50% | 0.50% | 0.50% |
| 10yr PWLB rate | 2.85% | 3.00% | 3.10% | 3.20% | 3.40% |
| 25yr PWLB rate | 4.03% | 4.20% | 4.30% | 4.40% | 4.50% |
| 50yr PWLB rate | 4.17% | 4.30% | 4.40% | 4.50% | 4.60% |
Appendix H Current approvals for coucounter partiesd investment limits:
| Institution | Sector Rating | Limit |
| Lloyds TSB Bank Plc | B – 12 months | 8,750,000 |
| Bank of Scotland Plc | B – 12 months | |
| The Royal Bank of Scotland Plc | B – 12 months | 8,750,000 |
| National Westminster Bank Plc | B – 12 months | |
| HSBC Bank plc | G – 3 months | 8,750,000 |
| Barclays Bank plc | G – 3 months | 8,750,000 |
| Nationwide BS | G – 3 months | 8,750,000 |
| Debt Management Office | Y – 60 months | 10,000,000 |
Public Access to information
The Police and Crime Commissioner wishes to be as open and transparent as possible about the decisions he/she takes or are taken in his/her name. All decisions taken by the Commissioner will be subject to the Freedom of Information Act 2000 (FOIA).
As a general principle, the Commissioner expects to be able to publish all decisions taken and all matters taken into account and all advice received when reaching the decision. Part 1 of this Notice will detail all information which the Commissioner will disclose into the public domain. The decision and information in Part 1 will be made available on the NYPCC web site within 2 working days of approval.
Only where material is properly classified as restricted under the GPMS or if that material falls within the description at 2(2) of The Elected Local Policing Bodies (Specified Information) Order 2011 will the Commissioner not disclose decisions and/or information provided to enable that decision to be made. In these instances, Part 2 of the Form will be used to detail those matters considered to be restricted. Information in Part 2 will not be published.
Is there a Part 2 to this Notice – No
| Tick to confirm statement (√) | |
| Director/Chief OfficerJudith Heeley has reviewed the request and is satisfied that it is correct and consistent with the NYPCC’s plans and priorities. | Yes |
| Legal AdviceLegal advice has been sought on this proposal and is considered not to expose the PCC to risk of legal challenge or such risk is outlined in Part 1 or Part 2 of this Notice. | Yes |
| Financial AdviceThe CC CFO has been consulted on this proposal. | Yes |
| Equalities AdviceAn assessment has been made of the equality impact of this proposal. Either there is considered to be minimal impact or the impact is outlined in Part 1 of this Notice. | Yes |
I confirm that all the above advice has been sought and received and I am satisfied that this is an appropriate request to be submitted for a decisionSignature  Date 11 February 2013 |
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