Archived decisions

Appendix 9

Treasury Management Strategy 2010/11

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, and an annual report after its close.

1.2 The Authority's prudential and other treasury indicators are set out in section 5 of this report.

1.3 The recently revised 2009 Treasury Management Code also introduces a new requirement for a mid-year review, and a need to ensure that Members tasked with treasury management responsibilities, including those responsible for scrutiny, have access to training relevant to their needs and those responsibilities.

1.4 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.

1.5 This strategy recommends that:

· long-term fixed-rate borrowing of up to £1.5m during 2010/11 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 2010/11 is estimated to be £6.186m, of which £0.171m is to be financed from the proceeds of asset sales during the year, £1.735m from capital grants, and £0.73m from revenue contributions. The balance of £3.55m 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 totaling £7.15m have been taken from the Public Works Loan Board (PWLB) in line with the strategy previously agreed.

2.3 Whilst PWLB rates have risen over recent months, long-term fixed rates continue to remain at relatively low and stable levels in the context of historical rates (around 4.5% for 30-year money). The strategy of taking new long-term fixed-rate loans in line with the 2010/11 identified borrowing requirement will be applied. This would finance the planned capital assets at 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 2010, £7.15m or 50% of HFRA's estimated capital financing requirement as at 31 March 2010 of £14.3m will be held at fixed interest rates.

2.6 An estimated capital financing requirement as at 31 March 2011 of £17.3m would allow the taking up of a further £1.5m new fixed-rate long-term borrowing to March 2011 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 The Base Rate had remained unchanged at 0.5% since it was last reduced in March 2009, its lowest level since the Bank of England was formed in 1694.

3.2 Whilst inflation as measured by the Consumer Price Index (CPI) is expected to approach 3.0% over the next few months after the temporary cut in VAT ends, a number of market forecasters are anticipating inflation to return to around the 2.0% level for much of 2010 as high unemployment both in the UK and overseas keeps wages suppressed.

3.3 Based on 25-year term fixed-rate maturity PWLB loans, long-term borrowing rates have fluctuated considerably over the past year although have averaged around 4.5%. Initially rising from 4.0% in early January 2009, they peaked at around 4.8% in June 2009 before falling back to 4.1% in October 2009, before rising again to their current rate of around 4.5%.

3.4 It is envisaged that longer-term interest rates will remain on a stable path over the next year at around 4.5%, although recent concern over the UK Government's indebtedness threatening its AAA sovereign rating status may lead to an increase in such long-term borrowing costs over time.

3.5 The strategy will be to take out long-term fixed-rate borrowing from the PWLB of up to £1.5m in the period to March 2011 at a rate of 4.5% or less.

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 2010/11. Specified investments are defined in the Government's guidance as offering both high security and liquidity. All such investments should be in sterling and with a maturity of no more than a year. Such short-term investments made with the UK Government or a local authority will automatically count as specified investments. In addition, short-term sterling investments with banks and building societies with high credit ratings will count as specified investments.

4.4 During the year, cash flow 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 2010/11, 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 364 days 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 four managed AAA-rated money market funds included on the Authority's lending list, which are given as follows:

- Standard Life Sterling Fund

- RBS Global Treasury Sterling Fund

- JP Morgan Sterling Fund; and

- Prime Rate 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:

Moody's long-term Maximum

rating lending

term

· Lloyds Aa3 364 days

· NatWest Aa3 364 days

· Barclays Aa3 364 days

· HSBC Aa2 364 days

· Nationwide Building Society Aa3 364 days

· Northern Rock A2 6 months

· Leeds Building Society A2 3 months

· Abbey Aa3 Overnight

4.8 The Authority obtains credit rating information from Moody's, which is one of only three Government-recognised credit rating agencies. Credit ratings are reviewed on at least a monthly basis to identify any changes.

4.9 The lending list is closely monitored and reviewed by the Treasurer, taking into account each institution's credit ratings, asset base, market capitalization, press reports, etc. Institutions will be removed immediately from the list if any doubt is cast on their creditworthiness. The credit rating agencies have been largely discredited by Iceland and their role in the credit crisis. Credit ratings are just one of the various tools used in making a considered assessment of credit risk.

4.10 Limits are placed on levels of total deposits made with individual institutions, based on their relative strength as a counterparty. Whilst the Annual Investment Strategy sets a maximum lending term of 364 days, this will be shortened in respect of those institutions with a relatively lower credit rating.

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

4.12 Other, or `non-specified', investments will not be used, given the greater potential risk.

4.13 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.

4.14 In-house expertise is considered sufficient not to warrant the use of external treasury management advisors.

5 Prudential and other treasury indicators

5.1 The interest budget to finance the Council's capital financing requirement for 2010/11 to 2012/13 is summarized as follows:

2010/11 2011/12 2012/13

Estimate Estimate Estimate

£'000 £'000 £'000

Interest on:

Public Works Loan Board loans 445 537 581

Temporary loans from 30 30 30

Hampshire County Council

Total 475 567 611

5.2 A summary of the prudential indicators is attached as Appendix 10.