Appendix 10

Treasury Management Strategy 2009/10

1 Summary

1.1 The Hampshire Fire & Rescue Authority adopts the key recommendations of CIPFA's Treasury Management in the Public Services: Code of Practice (the Treasury Management Code), which includes an annual report on the treasury management strategy and plan before the start of the year. It places a number of responsibilities on the Authority, including the following:

· Approving an annual borrowing strategy at its annual budget meeting, to cover the raising of capital finance and the management of the Authority's long-term debt portfolio, focusing on the minimisation of risk.

· Considering at the same time the Authority's Annual Investment Strategy.

1.2 This strategy recommends that:

· long-term fixed-rate borrowing of up to £1.8m during 2009/10 should be taken out from the Public Works Loan Board (PWLB), whilst maintaining the target variable/fixed rate ratio of 50% / 50%. If circumstances are appropriate to do so then this limit can be exceeded.

· the Annual Investment Strategy described in section 4 be approved.

2 Capital finance and debt

2.1 Total capital expenditure for 2009/10 is estimated to be £5.166m, of which £1.316m is to be financed from the proceeds of asset sales during the year, £0.318m from capital grants, and £0.73m from revenue contributions. The balance of £2.802m will be financed from borrowing.

2.2 Since the Fire & Rescue Authority was established in April 1997, a number of long-term fixed-rate loans totalling £5.95m have been taken from the Public Works Loan Board (PWLB) in line with the strategy previously agreed.

Date	Amount	Rate	Year of maturity
	£	%
March 1998	350,000	5.875	2023/24
October 2000	350,000	5.0	2020/21
August 2001	750,000	4.875	2022/23
November 2001	650,000	4.875	2020/21
November 2001	450,000	4.5	2021/22
July 2002	350,000	5.0	2024/25
August 2002	100,000	4.875	2019/20
August 2002	100,000	4.75	2026/27
September 2002	150,000	4.625	2020/21
July 2004	500,000	4.95	2031/32
August 2004	500,000	4.85	2032/33
September 2004	500,000	4.75	2033/34
November 2004	350,000	4.65	2033/34
December 2006	350,000	4.2	2036/37
July 2007	500,000	5.0	2037/38

2.3 Given that PWLB rates are currently at relatively low levels (around 4.0% for 30-year money), the opportunity could be taken to take new long-term fixed-rate loans in line with the 2009/10 identified borrowing requirement. This would finance the planned capital assets at historically low rates against the risk of future long-term fixed interest rate rises.

2.4 However, a balance needs to be drawn in the debt portfolio between long-term debt at fixed interest rates from the PWLB and other sources and debt where interest is payable at variable rates. Fixed-rate long-term debt means that interest costs are more stable and less vulnerable to changes in interest rates. Short-term debt is sensitive to changes in interest rates and enables savings to be made when interest rates fall but means higher costs when they rise.

2.5 If no further fixed-rate long-term borrowing takes place between now and the end of March 2009, £5.95m or 43% of HFRA's estimated capital financing requirement as at 31 March 2009 of £13.74m will be held at fixed interest rates.

2.6 An estimated capital financing requirement as at 31 March 2010 of £15.497m would allow the taking up of a further £1.8m new fixed-rate long-term borrowing to March 2010 in order to adhere to the target variable/fixed rate ratio of 50%/50%. This limit can be exceeded if circumstances are appropriate.

3 Interest rates and borrowing strategy

3.1 After having reached a peak of 5.75% in July 2007, a succession of cuts meant that by December 2008 the Base Rate of 2.0% had fallen to its lowest level since the Bank of England was formed in 1694. Further cuts are widely expected and Gordon Brown has not ruled out the possibility of interest rates dropping to zero.

3.2 Inflationary concerns have all but dissipated and whilst Consumer Price Index (CPI) inflation in November 2008 stood at a higher than expected 4.1%, it would seem that the current downturn will inevitably lead to this figure falling sharply over coming months.

3.3 Based on 25-year term fixed-rate maturity PWLB loans, long-term borrowing rates initially rose from 4.5% in early January 2008 and peaked at just above 5.0% in June 2008 before falling back to their current low rate of 4.0% in early January 2009.

3.4 It is envisaged that longer-term interest rates will remain on a stable path over the next year at around 4.0%, although the most recent downward trend could indicate the possibility of marginally lower rates becoming available during 2009.

3.5 Therefore, the strategy will be to take out long-term fixed-rate borrowing from the PWLB of up to £1.8m in the period to March 2010 at a rate of 4.0% or less.

3.6 If fixed-rate long-term borrowing rates were to either fall still further or clear signs of a rising trend in rates was to occur, consideration would also be given to taking out further advances to cover the Authority's future years' capital financing requirements to March 2012.

4 Investment of surplus funds - Annual Investment Strategy

4.1 This proposed Annual Investment Strategy has been prepared in accordance with guidance issued under section 15(1)(a) of the Local Government Act 2003.

4.2 When investing its surplus funds, the Authority's investment priority is to continue to maintain the security of capital and maintain policy flexibility through liquidity of its investments. The Authority will aim to achieve the optimum return on its investments commensurate with the proper levels of security and liquidity.

4.3 Accordingly, only `specified investments' will be used in 2009/10. These categories of investment are defined in the Government's guidance as offering both high security and liquidity.

4.4 During the year, cashflow requirements will mean that there is no scope for any direct long-term investment on the money markets. Therefore, the Authority will invest all its surplus funds with the County Council, earning interest based on the local authority seven-day notice rate.

4.5 Whilst the Authority is not expected to hold any surplus funds during 2009/10, in the unlikely event that the Authority has surplus funds available these will either be invested in:

· Fixed-term deposits for periods of up to three months with local authorities, the Government's Debt Management Office, or banks and building societies rated at least A2 by Moody's (a Government-recognised credit rating agency) that are included on Hampshire County Council's lending list;

· Call deposits in three managed AAA-rated money market funds included on the Authority's lending list, which are given as follows:

- Standard Life Sterling Fund

- Fidelity Institutional Sterling Cash Fund; and

- RBS Global Treasury Sterling Fund;

- Call deposits with the County Council.

4.6 Such `call deposits' could be recalled by the Hampshire Fire & Rescue Authority at any time.

4.7 The banks and building societies included on the Authority's current lending list are given as follows:

· Lloyds TSB

· Royal Bank of Scotland (NatWest)

· Barclays

· HSBC

· Abbey

· Nationwide Building Society

· Britannia Building Society

· Yorkshire Building Society

· Coventry Building Society

· Chelsea Building Society

· Skipton Building Society

· Leeds Building Society

4.8 The lending list is closely monitored and reviewed using Moody's ratings. Institutions will be removed immediately from the list if any doubt is cast on their creditworthiness.

4.9 Limits are placed on levels of total deposits made with individual institutions, and will run for a maximum term of up to one year. The lending term will be shorter in respect of those institutions with lower credit ratings.

4.10 Changes to the lending list and the limits on investments will be subject to the approval of the Treasurer.

4.11 Other, or `non-specified', investments will not be used.

4.12 The Treasurer's treasury management staff operate within detailed parameters set out in an internal code of practice, which takes account of CIPFA's Treasury Management in the Public Services: Code of Practice and other guidance issued by the Chartered Institute of Public Finance and Accountancy.