Annual Treasury Outturn Report - Reading Borough Council · eased slowly as reductions in transport...

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Annual Treasury Report 2011/12 Appendix G

w Background

Treasury Management in Local Government is governed by the CIPFA Code of Practice on Treasury Management in the Public Services and in this context is the “the management of the Council’s investments and cash flows, its banking and its capital market transactions; the effective control of the risks associated with those activities and the pursuit of optimum performance consistent with those risks”. This Council has adopted the Code and complies with its requirements.

Council approves the treasury strategy and it receives a strategy report at the beginning of each financial year (as part of the budget report) identifying how it is proposed to finance capital expenditure, borrow and invest in the light of capital spending requirements, interest rate forecasts and economic conditions. Monitoring of the implementation of the treasury strategy is carried out and reported alongside budget monitoring with the final year end activity report being this annual treasury outturn report. At least one more in depth review report is presented to Audit & Governance Committee during the year (in 2011/12 in September). Overall responsibility for treasury management remains with the Council.

These reporting arrangements enable those officers tasked with implementing policies and undertaking transactions to demonstrate they have properly fulfilled their responsibilities, and enable those Councillors with ultimate responsibility/governance of the treasury management function to scrutinise and assess its effectiveness and compliance with policies and objectives. Given the technical nature of the subject, by way of introduction the annual report is intended to explain how, during 2011/12

- the Council tried to minimise net borrowing costs over the medium term - we ensured we had enough money available to meet our commitments - we ensured reasonable security of money we have lent and invested - we maintained an element of flexibility to respond to changes in interest

rates - we managed treasury risk overall

It must be recognised that no treasury management activity is without risk, and the successful identification, monitoring and control of risk is an important and integral element of all treasury management activities. The main risks to the Council’s treasury activities are:

• Market or Interest Rate Risk (Fluctuations in interest rate levels)

• Inflation Risk (Exposure to inflation)

• Credit and Counterparty Risk (Security of Investments)

• Liquidity Risk (Inadequate cash resources to meet commitments)

• Refinancing Risk (Impact of debt maturing in future years)

• Legal & Regulatory Risk

2. Economic Background

At the time of setting the 2011/12 strategy in, there were some tentative signs that the UK was emerging from recession with the worst of the financial crisis behind it. Recovery in growth was expected to be slow and uneven as the austerity measures announced in the 2010 Spending Review were implemented in order to bring down the budget deficit and government borrowing and rebalance the economy and public sector finances. Inflation measured by the Consumer Price Index (CPI) had remained stubbornly above 3%, unemployment was at a 16-year high at 2.5 million and was expected to rise further as the public and private sector contracted. There was also high degree of uncertainty surrounding Eurozone sovereign debt sustainability.

Inflation : During 2011-12 inflation remained high with CPI (the official measure) and RPI rising in September to 5.2% and 5.6% respectively primarily due to escalating utility prices and the January 2011 increase in VAT to 20%. Inflation eased slowly as reductions in transport costs, food prices, intensifying competition amongst retailers and supermarkets and the VAT effect falling out in 2012, pushed February 2012’s CPI down to 3.4% and RPI to 3.7%. This, however, was not enough to offset low wage growth and, as a result, Britons suffered the biggest drop in disposable income in more than three decades.

Growth, Employment, House Prices : Sustained Growth, on the other hand, remained elusive. The Bank’s Quarterly Inflation Reports painted a bleak picture as the outlook was downgraded to around 1% in 2011 and 2012 alongside. The unresolved problems in the Eurozone weighed negatively on global economic prospects. UK GDP was positive in only the first and third calendar quarters of 2011; annual GDP to December 2011 registered just 0.5%. Unemployment rose to 2.68 million and, worryingly, youth unemployment broke through the 1 million barrier. House prices struggled to show sustained growth and consumer confidence remained fragile.

Monetary Policy : The Bank of England’s Monetary Policy Committee has maintained the status quo on the Bank Rate which has now been held at 0.5% since March 2009, but increased asset purchases by £75bn in October 2011 and another £50bn in February 2012 taking the Quantitative Easing (QE) total to £325bn.

The policy measures announced in the March 2012 Budget statement were judged to be neutral to the economy. The government stuck broadly to its austerity plans as the economy was rebalancing slowly. The opinion of independent Office for Budget Responsibility (OBR) was that the government was on track to meet its fiscal targets; the OBR identified oil price shocks and a further deterioration in Europe as the main risks to the outlook for growth and in meeting the fiscal target.

US : The US economy continued to show tentative, positive signs of growth alongside a gradual decline in the unemployment rate. The US Federal Reserve

(the Fed) committed to keeping policy rates low until 2014, although a modest shift in the Fed’s language in March, alongside an improvement in economic activity, cast doubts about the permanence of the Fed’s policy commitment.

Europe : In Europe, sovereign debt problems for some peripheral countries became critical. Several policy initiatives were largely ineffective; two bailout packages were required for Greece and one for Portugal, and the contagion spread to Spain and Italy whose sovereign bonds came under increased stress in November. Standard & Poor’s downgraded nine European sovereigns and the EFSF bailout fund. The successful Greek sovereign bond swap in March 2012 shortly after its second bailout package allowed it to avoid bankruptcy later that month, but it was not a long-term solution. The ECB’s ¤1.3 trillion Long-Term refinancing Operations (LTROs) flooded the financial markets with ultra-cheap 3-year liquidity and relieved much of the immediate funding pressure facing European banks in 2012, but markets ultimately took the view the LTROs simply served to delay a resolution of, rather than addressed, the fundamental issues underpinning Euroland’s problems.

Markets sentiment oscillated between ‘risk on’/’risk off’ modes, this swing becoming the norm for much of 2011/12 as investors shifted between riskier assets and the relative safety of higher quality government bonds. Gilts, however, were a principal beneficiary of the ‘risk-off’ theme which helped push yields lower. There was little market reaction to or impact on gilts by the decision by Fitch and Moody’s to change the outlook on the UK’s triple-A rating from stable to negative.

Credit : Europe’s banking sector was inextricably linked with the sovereign sector. Sharp moves in sovereign credit default swaps and bond yields were fairly correlated with the countries’ banking sector performance. The deterioration in the prospects for real growth had implications for earnings and profit growth and banks’ creditworthiness. The European Banking Authority’s banking stress tests of 70 EU banks undertaken in October 2011 identified a collective ¤106 billion shortfall to banks’ Core Tier 1 ratio of 9%. The slowdown in debt and equity capital market activity also had implications for banks’ funding and liquidity. These principal factors, as well as a reassessment by the rating agencies of future sovereign support for banks, resulted in downgrades to the long-term ratings of several UK and non-UK financial institutions in autumn 2011.

3. Impact of Economic Background

Over the 12-month period from April 2011 to March 2012, 5-year gilt yields more than halved from 2.40% to 1.06%; 10-year gilt yields fell from 3.67% to 2.25%; 20-year yields fell from 4.30% to 3.20% and 50-year yields from 4.20% to 3.35%. PWLB borrowing rates fell commensurately (see table 2 in appendix 2). The continuing economic weakness resulting in base rate remaining at 0.5%, thus impacting shorter term interest rates, in combination with the Eurozone crisis leading to a shortening of investment periods meant that but the cost of carry associated with borrowing longer-term loans whilst investing the monies

temporarily until required for capital financing remained high, in excess of 4.1 % for 20-year PWLB Maturity borrowing. These market movements reflect a changing market sentiment to foresee a sustained period of low growth. Therefore, although 2011/12 saw some of the PWLB lowest interest rates seen in the last decade, no response by way of borrowing was required on this occasion.

4. Reform of Council Housing Finance

The abolition of the Housing Revenue Account subsidy system provided the most significant event from a treasury point of view during the year. Council housing finance has moved to a “self-financed” system whereby authorities support borrowing in connection with their own housing stock from their own rent income. This reform required legislation, in the form of part of the Localism Act to implement and required a readjustment of each authority’s housing-related debt based on a valuation of its council housing stock. In Reading’s case we were assessed as being able to afford a debt of just over £200m, so were required to take on additional debt of £147.8m on Wednesday 28th March 2012 in readiness for the formal start of self financing in 2012/13.

The treasury management implications of HRA reform and an appropriate strategy to manage the transaction were discussed with the Council’s treasury advisors. The Council will continue to work with its treasury advisors and has committed to review its HRA Business Plan during 2012/13.

A preferential set of PWLB rates at 0.13% above the equivalent gilt yield, (rather than the normal 1% above gilts) was available for this transaction on 26th March only, for the settlement on 28th March. Given the one-off nature of the PWLB funding window and the advantages offered in terms of rate, loan structure and administration, the Council took the decision to fund the full £147.8m through new PWLB borrowing. Whilst overall in the very short term this left us with the cost of carry mentioned above, it was assessed that over the 30 year business plan period, probably starting within a short number of years (no more than 5) the Council would be likely to be better off by fully funding rather than the alternative approach (that might have eliminated most short term lending but left the Council needing to refinance at non preferential PWLB rates maturing borrowing and new capital financed by borrowing at higher rates). The average cost of the debt the council took on was 3.25%. Adopting a one-pool approach is therefore likely to result in only a small change in the average rate overall, (from about 3.79% to 3.53%), so initially it is intended to adopt this approach to the allocation of interest costs between the General Fund and HRA.

Loan structures and maturities were discussed and the final proposals analysed with the Council’s treasury advisors to fit in with the Council’s likely longer term requirements taking account of our existing treasury management position and risk profile. Details of the loans borrowed are in section 5, below. Whilst the Council has initially adopted a one-pool approach there are alternative two & three-pool approaches, and whilst the last only really makes sense as an option

on self financing (and has not as far as we are aware actually been adopted by any authority), the 2 pool approach may offer some merit depending upon how circumstances develop.

5. The Borrowing Requirement and Debt Management

Balance on 1/04/2011

£m

Debt Maturing

£m

New Borrowing

£m

Balance on 31/03/2012

£m

Ave Rate % / Ave Life (yrs)

CFR

Short Term Borrowing1 28.2 45.2 24.8 7.8 1.4%/<1year

Long Term Borrowing -PWLB 160.1 15.5 165.3 309.9 3.53%/31.2yrs

Long Term Borrowing-Market 40.7 10.7 4.0 34.0 3.89%/21yrs

TOTAL BORROWING 229.0 71.4 194.1 351.7 3.52%/28 yrs

Other Long Term Liabilities (PFI & Finance Leases)

35.8 0.9 0.0 34.9

TOTAL EXTERNAL DEBT 264.8 72.3 194.1 386.6

The Council’s underlying need to borrow as measured by the Capital Financing Requirement (CFR) as at 31/3/2012 was estimated at £414.9m . The Council’s borrowing requirement during the year was £379.9m, so effectively £28.2m of this was internally financed at the year end.

In practice, the Council’s need to borrow during the year varies; the graph shows gross and net (after investments) borrowing throughout the year. Whilst the gross borrowing was stable, close to £225m throughout the year, the position net of investments fluctuated more significantly each month.

2011-12 Gross & Net Borrowing

150

175

200

225

250

275

300

325

350

375

01

/04

/11

01

/05

/11

01

/06

/11

01

/07

/11

01

/08

/11

01

/09

/11

01

/10

/11

01

/11

/11

01

/12

/11

01

/01

/12

01

/02

/12

01

/03

/12

£m

Gross Net

Excluding the HRA self financing transaction, the Council funded £7.9m of its capital expenditure through borrowing. The PWLB remained the Council’s preferred source of borrowing given the transparency and control that its

Loans with maturities less than 1 year.

1

facilities continue to provide. In total £17.5m of new loans were raised which included the replacement of £26m maturing debt. The table shows all new PWLB loans in 2011/12

Date Amount

£ Fixed /

Variable Rate % Final Maturity Terms *

14-Jul-2011 7,500,000 F 3.59 25-Mar-2026 EIP

15-Sep-2011 10,000,000 F 3.35 25-Mar-2031 EIP

28-Mar-2012 12,000,000 F 3.53 25-Mar-2051 Maturity

28-Mar-2012 12,000,000 F 2.97 25-Sep-2026 Maturity




28-Mar-2012 4,821,000 Variable 0.62 28-Mar-2022 Variable - 6M





28-Mar-2012 29,000,000 F 2.99 25-Mar-2041 EIP

Given the large differential between short and longer term interest rates, which is likely to remain a feature for some time in the future, as well as the pressure on Council finances, the debt management strategy sought to lower debt costs within an acceptable level of volatility (interest rate risk). Loans that offered the best value in the prevailing interest rate environment were PWLB variable interest rates loans, PWLB medium-term Equal Instalments of Principal (EIP) loans and temporary borrowing from the market.

6. Internal Borrowing

Given the significant reductions to local government funding putting pressure on Council finances, the strategy followed was broadly to seek to minimise debt interest payments over the medium term without compromising the longer-term stability of the portfolio. The differential between the cost of new longer-term

debt and the return generated on the Council’s temporary investment returns was significant (2%-4%). Some use of internal resources in lieu of borrowing was judged to be the most cost effective means of financing the council’s cash flow needs. This should lower overall treasury risk by reducing both external debt and temporary investments. Whilst this position is expected to continue in 2012/13, it will not be sustainable over the medium term. The Council had less than £30m investments at the end of 2011/12 and has more than £30m of maturing debt within 5 years, so we can expects some continuing need for new borrowing.

7. Lender’s Option Borrower’s Option Loans (LOBOs)

No options to change the terms on £30m of the Council’s LOBOs were exercised by the lenders during the year. Of this portfolio, £20m is subject to option every 6 months and two other £5m loans are fixed until 2014 & 2015.

The 2011 revision to the CIPFA Treasury Management Code now requires the prudential indicator relating to Maturity of Fixed Rate Borrowing to reference the maturity of LOBO loans to the earliest date on which the lender can require payment, i.e. the next call date. This change is reflected in Annex 1, paragraph (c). However, given the interest rate outlook it would be surprising if these options were exercised during 2012/13.

8. Debt Rescheduling & Debt Portfolio

Given changes to both new PWLB borrowing rates, and discount rates for restructuring, there were no realistic debt rescheduling opportunities during the year. For the foreseeable future debt restructuring is not likely to be viable within the present PWLB rate structure until a situation is reached that long term interest rates are markedly lower than shorter term rates. The accounts include some residual entries relating to historic re-scheduling, and in this respect comply with the accounting requirements of the Local Authority Accounting Code of Practice.

Changes in the debt portfolio have achieved: ° the average interest rate being paid on loans throughout the year being

3.56%, very marginally lower than that paid in 2010/11 (3.61%) ° a reduction in the average overall debt cost of the 31 March portfolio from

3.77% (31/3/11) to 3.59% (31/3/12) but the average life has increased from 24.2 years to 28.2 years. Lengthening the average life helped give us greater certainty over this cost into the future.

The graph shows how by debt management since 2008 its cost has been reduced from an average rate over 4.2% to below 3.6% at 31 March 2012. Each spot on the graph represents the year end position. We expect the average rate charged in 2012/13 to be between 3.5% and 3.6%

Av

era

ge

In

tere

st

Average PWLB & Long Term Maturity & Interest over time 4.40

4.20

4.00

3.80

3.60

3.40

20.0 22.0 24.0 26.0 28.0 30.0 32.0

31/3/2008

31/3/2009

31/3/2011

31/3/2010 31/3/2012 & latest

34.0 36.0 Years

9. Investment Activity

The CLG’s Investment Guidance requires local authorities to focus on security and liquidity, rather than yield.

Balance on Investments Maturities/ Balance on Typical/ Investments 01/04/2011 Made Investments 31/03/2012 Average Rate

£m £m Sold £m £m %

Short Term Investments 35.0 15.0 45.0 5.0 2.10

Call Accounts 4.7 Changes daily 14.3 0.95

Long Term Investments 0.0 5.0 0.0 5.0 2.65

Long Term (tradable) Corporate Bonds

10.0 0.0 5.0 5.9 3.39

Money Market Funds 0.0 21.6 21.6 0.0 0.70

TOTAL INVESTMENTS 49.7 30.2

Security of capital was maintained by following the Council’s counterparty policy as set out in its Treasury Management Strategy Statement for 2011/12. Investments during the year included:

° Investments in AAA-rated Stable Net Asset Value Money Market Funds ° Call accounts and deposits with Banks and Building Societies systemically

important to the UK’s banking system (i.e. Barclays, Lloyds TSB, Santander UK, RBS & the Council’s own ban, the Co-Operative)

° Bonds issued by (European) AAA rated Multilateral Development Banks

Credit Risk (Security) : Counterparty credit quality was assessed and monitored by Arlingclose on our behalf with reference to credit ratings; credit default swaps; GDP of the country in which the institution operates; the country’s net debt as a percentage of GDP; any potential support mechanisms and share price.

The minimum long-term counterparty credit rating determined for the 2011/12 treasury strategy was A+/A1 across rating agencies Fitch, S&P and Moody’s.

With various downgrades to credit ratings during 2011/12 of many institutions considered to be systemically important to the financial system, it was made clear in monitoring reports that subject to Arlingclose advice we would continue to invest in the very short term in various “high street” banks. The downgrades were driven principally by the agencies’ view the extent of future government support (flowing from the recommendations to the government from the Independent Commission on Banking) rather than deterioration in the institutions’ creditworthiness.

Counterparty credit quality has progressively strengthened/been maintained as demonstrated by the Credit Score Analysis summarised below. The Table 7 in Annex 2 explains the credit score.

Date Value Weighted

Average Credit Risk Score

Value Weighted

Average Credit Rating

Time Weighted

Average Credit Risk

Score

Time Weighted

Average Credit Rating

Average Life (days)

31/03/2011 3.78 AA- 2.43 AA+ 277 30/06/2011 3.56 AA- 2.65 AA 306 30/09/2011 3.75 AA- 2.37 AA+ 162 31/12/2011 4.28 AA- 2.44 AA+ 136 31/03/2012 5.03 A+ 1.58 AA+ 191

Liquidity : In keeping with the CLG’s Guidance on Investments, the Council maintained a sufficient level of liquidity through the use of Money Market Funds / overnight deposits/ the use of call accounts.

Yield : The Council sought to optimise returns commensurate with its objectives of security and liquidity but considered an appropriate risk management response to uncertain and deteriorating credit conditions in Europe was to shorten maturities for new investments The UK Bank Rate was maintained at 0.5% through the year. Short term money market rates also remained at very low levels (see Table 1 in Annex 2) which impacted investment income.

Income earned on £10m of longer-dated investments made in earlier years at an average rate of 3.55% provided some cushion against the low interest rate environment. Although periodically considered, no new longer-term investments were made. The Council’s budgeted investment income for the year was £0.3cm. Average invested cash balances were around £57.6m, and during the period and interest earned on these sums, together with a treasury gain associated with adjusting the timing of the Council’s pension contributions was £1.3m.

10. Compliance with Prudential Indicators

The Council substantially complied with its Prudential Indicators for 2011/12, which were approved in the 2011/12 budget motion as part of the Council’s Treasury Management Strategy Statement. Details can be found in Annex 1.

In compliance with the requirements of the CIPFA Code of Practice this report provides councillors with a summary report of the treasury management activity during 2011/12. None of the Prudential Indicators have been breached and a prudent approach has been taking in relation to investment activity with priority being given to security and liquidity over yield.

11. Other Items

Potential for reduced PWLB borrowing rates : A brief paragraph in the 2012 Budget Report (March 2012) contained HM Treasury’s intention to offer a 0.2% discount on loans from the PWLB “for those principal local authorities providing improved information and transparency on their locally-determined long-term borrowing and associated capital spending plans” and a the potential of an independent body to facilitate the provision of “a further reduced rate for authorities demonstrating best quality and value for money”. More detail is awaited and, given that discussion with relevant bodies will be required, it is expected to be some months before these measures are implemented.

The Budget report also contained the following announcement : “The Government is also implementing reform of the Housing Revenue Account subsidy system to give local authorities responsibility for managing their own council housing business. The OBR currently forecasts that this reform will increase public borrowing more than originally estimated. These estimates are very uncertain but if they do not change then the Government will take action to address the increase in public debt”.

This announcement in the Budget needs to be taken in the context of the Coalition Government’s primary objective to reduce the structural deficit. A deterioration in the economic outlook and/or public finances would require a policy response and the above statement suggests that the reform of housing finance is one of a range of potential measures that could be considered. However, were the government to make changes in this area, they would be in direct breach of assurances given when the Localism Bill was presented to parliament, and various queries raised by local government have not led to any satisfactory explanations to the rationale for including this statement in the budget report. The Council is not planning significant changes to either its HRA debt or cash borrowings to support that finance requirement.

Annex 1

Capital Financing Requirement (CFR) Estimates of the Council’s cumulative maximum external borrowing requirement for 2011/12 to 2013/14 are shown in the table below:

31/3/2012 Estimate

£m

31/3/2012 Actual £000s

31/3/2013 Estimate

£000s

31/3/2014 Estimate

£000s

Gross CFR 424.8 414.9 422.6 419.5

Less: PFI Liabilities 35.7 35.0 35.6 35.5

Borrowing CFR 389.1 379.9 387.0 384.0

Less: Current Forecast

Existing Profile of Borrowing 387.0 386.6 366.3 354.5

Cumulative Maximum External Borrowing Requirement 2.1 -7.7 21.3 29.5

Usable Reserves Estimates of the Council’s level of Provisions and Reserves from the Gold Report for 2011/12 to 2013/14 are as follows:

31/3/2012 Estimate

£m

31/3/2012 Actual £000s

31/3/2013 Estimate

£000s

31/3/2014 Estimate

£000s

Usable Reserves 20.8 24.5 19.8 20.4

Prudential Indicator Compliance

(a) Authorised Limit and Operational Boundary for External Debt

° The Local Government Act 2003 requires the Council to set an Affordable Borrowing Limit, irrespective of their indebted status. This is a statutory limit which should not be breached.

° The Council’s Affordable Borrowing Limit was set at £250m for 2011/12. It was increased to £400m in the autumn of 2011 in preparation for HRA self financing.

° The Operational Boundary is based on the same estimates as the Authorised Limit but reflects the most likely, prudent but not worst case scenario without the additional headroom included within the Authorised Limit, and for 2011/12 was set at £240m. It was also increased in the autumn to £390m

° These limits have not been breached. Excluding self financing the average borrowing, was just under £227.5m, with a peak of £238m. Self financing took the peak up to £334m at the year end.

(b) Upper Limits for Fixed Interest Rate Exposure and Variable Interest Rate Exposure

° These indicators allow the Council to manage the extent to which it is exposed to changes in interest rates.

° The upper limit for variable rate exposure allows for the use of variable rate debt to offset exposure to changes in short-term rates on our portfolio of investments.

Limits for 2011/12 %

Maximum during 2011/12 %

Upper Limit for Fixed Rate Exposure 140 1422

Compliance with Limits: Yes Yes

Upper Limit for Variable Rate Exposure 50 -1.7%

Compliance with Limits: Yes Yes

(c) Maturity Structure of Fixed Rate Borrowing

° This indicator is to limit large concentrations of fixed rate debt needing to be replaced at times of uncertainty over interest rates.

Maturity Structure of Fixed Rate & Longer Term Borrowing

Lower Limit

%

Upper Limit

%

Fixed Rate Borrowing as at 31/03/12

(£m)

% Fixed Rate Borrowing as at 31/03/12

Compliance with Set Limits?

under 12 months 0 25 32.5 9.45% Yes

12 months and within 24 months 0 25 11.5 3.34% Yes

24 months and within 5 years 0 25 32.5 9.45% Yes

5 years and within 10 years 0 40 25.2 7.33% Yes

10 years and within 20 years

40

100 41.2 11.98% Yes

20 years and within 30 years 100 39.0 11.34% Yes



50 years and above 100 0.0 0.00% Yes

The 2011 revision to the CIPFA Treasury Management Code now requires the prudential indicator relating to Maturity of Fixed Rate Borrowing to reference the maturity of LOBO loans to the earliest date on which the lender can require payment, i.e. the next call date3

(d) Actual External Debt

2 Contrary to what is suggested elsewhere in the report, technically the upper limit was marginally breached

for 5 days in September 2011. Throughout the year the average fixed rate exposure was 124%, but the

exposure had fallen to 104% at the year end. 3

Page 15 of the Guidance Notes to the 2011 CIPFA Treasury Management Code

° This indicator is obtained directly from the Authority’s balance sheet. It is the closing balance for actual gross borrowing (short and long-term) plus other deferred liabilities.

° The indicator is measured in a manner consistent for comparison with the Operational Boundary and Authorised Limit.

Actual External Debt as at 31/03/2012 Forecast £m

Actual £m

Borrowing 352 351.7

Other Long-term (mainly PFI) Liabilities 35 35.0

Total 387 386.7

(e) Total principal sums invested for periods longer than 364 days

°

° °

This indicator allows the Council to manage the risk inherent in investments longer than 364 days. The limit for 2011/12 was set at £40m. In practice, the Council’s investment approach for 2011/12 was generally to keep investment maturities to a maximum of 12 months. Only one investment was were made for a period greater than 364 days during this period (with Lloyds TSB, maturing in July 2012).

(f) Capital Expenditure

° This indicator is set to ensure that the level of proposed capital expenditure remains within sustainable limits, and, in particular, to consider the impact on Council tax and in the case of the HRA, housing rent levels.

Capital

Expenditure

2011/12

Probable

£m

2011/12

Actual

£m

2012/13

Estimate

£m

2013/14

Estimate

£m

Non-HRA 46.4 36.7 38.3 21.1

HRA* 5.6 5.6 6.1 5.3

Total 52.0 42.3 44.4 26.4

*if applicable

Capital expenditure has been financed or funded as follows:

Capital Financing 2011/12 Probable

£m

2011/12 Actual

£m

2012/13 Estimate

£m

2013/14 Estimate

£m

Capital & S106 Receipts 11.4 10.7 11.0 9.2

Government Grants 24.9 18.1 17.5 9.9

Major Repairs Allowance 4.6 4.6 5.5 5.5

Revenue contributions/Other 0.0 1.0 0.0 0.0

Total Financing 40.9 34.4 34.0 24.4

Borrowing 11.1 7.9 10.4 2.0

Total Funding 52.0 42.3 44.4 26.4

The estimates for 2012/13 and beyond do not at this stage include the impact of the Council’s decision since February to relocate from the Civic Offices. The table shows that the capital expenditure plans of the Authority are likely to need to be funded in part by borrowing.

(g) Ratio of Financing Costs to Net Revenue Stream

This is an indicator of affordability and highlights the revenue implications of existing and proposed capital expenditure by identifying the proportion of the revenue budget required to meet financing costs. The ratio is based on costs net of investment income.

Ratio of Financing Costs to Net Revenue Stream

2011/12 Estimate

%

2011/12 Actual

%

2012/13 Estimate

%

2013/14 Estimate

%

Non-HRA 10.1 9.6 10.3 10.5

HRA* 6.3 6.3 29.8 29.8

(h) Incremental Impact of Capital Investment Decisions

This is an indicator of affordability that shows the impact of capital investment decisions on Council Tax and Housing Rent levels. The incremental impact is calculated by comparing the total revenue budget requirement of the current approved capital programme with an equivalent calculation of the revenue budget requirement arising from the proposed capital programme.

Incremental Impact of Capital Investment Decisions

2011/12 Approved

£

2011/12 Actual

£

2012/13 Approved

£

2013/14 Approved

£

Increase in Band D Council Tax (In Year)

5.32 2.42 2.70 2.19

Increase in Band D Council Tax (On-going)

21.74 10.27 11.14 9.04

Increase in Average Weekly Housing Rents

0.11 0.07 0.00 0.0

(i) Gross and Net Debt The purpose of this treasury indicator is to highlight a situation where the Authority is planning to borrow in advance of need.

Upper Limit on Net Debt

compared to Gross Debt

2011/12

Probable

£m

2011/12

Actual

£m

2012/13

Approved

£m

2013/14

Approved

£m

Outstanding Borrowing (at

nominal value)

352.0 351.6 350 350

Other Long-term Liabilities

(at nominal value)

35.0 35.0 36 36

Gross Debt 387.0 386.6 386 386

Less: Investments 14.0 30.2 0 0

Net Debt 373.0 356.4 386 386

N.B. CIPFA has acknowledged that the upper limit does not work as was intended and is working on a

revised indicator. This indicator will be amended once revised guidance has been received from CIPFA.

(j) Upper Limit for Total Principal Sums Invested Over 364 Days

The purpose of this limit is to contain exposure to the possibility of loss that may arise as a result of the Authority having to seek early repayment of the sums invested.

(k) H R A

L

Upper Limit for total

principal sums

invested over 364

days

2011/12

Approved

£m

2011/12

Actual

£m

2012/13

Approved

£m

2013/14

Approved

£m

2014/15

Approved

£m

i 40 5 40 40 40

mit on Indebtedness

HRA CFR 2011/12 ]Limit

£m

2011/12 Actual

£m

HRA Debt Cap (as

prescribed by CLG)

208.5 203.1

Difference 5.4

Annex 2

The average, low and high rates correspond to the rates during the financial year and rather than those in the tables below

Table 1: Bank Rate, Money Market Rates

Date Bank Rate

O/N LIBID

7-day LIBID

1-month LIBID

3-month LIBID

6-month LIBID

12-month LIBID

2-yr SWAP Bid

3-yr SWAP Bid

5-yr SWAP Bid

01/04/2011 0.50 0.40 0.54 0.54 0.69 1.12 1.59 1.89 2.36 3.00

30/04/2011 0.50 0.50 0.40 0.49 0.69 1.05 1.52 1.62 2.07 2.74

31/05/2011 0.50 0.40 0.40 0.52 0.69 1.08 1.56 1.53 1.89 2.54

30/06/2011 0.50 0.50 0.40 0.50 0.77 1.06 1.54 1.44 1.82 1.50

31/07/2011 0.50 0.40 0.40 0.50 0.78 1.07 1.55 1.29 1.53 2.09

31/08/2011 0.50 0.40 0.40 0.56 0.86 1.15 1.63 1.27 1.43 1.92

30/09/2011 0.50 0.60 0.60 0.54 0.92 1.21 1.69 1.25 1.38 1.75

31/10/2011 0.50 0.63 0.55 0.56 0.96 1.25 1.74 1.30 1.42 1.81

30/11/2011 0.50 0.65 0.58 0.64 1.01 1.31 1.80 1.41 1.49 1.76

31/12/2011 0.50 0.50 0.65 0.67 1.05 1.35 1.84 1.31 1.34 1.54

31/01/2012 0.50 0.50 0.70 0.68 1.06 1.38 1.87 1.20 1.23 1.46

29/02/2012 0.50 0.50 0.75 0.67 1.05 1.37 1.87 1.22 1.29 1.54

31/03/2012 0.50 0.55 0.55 0.61 1.00 1.33 1.84 1.22 1.30 1.59

Minimum 0.50 0.10 0.35 0.49 0.68 1.01 1.40 1.08 1.23 1.46

Average 0.50 0.47 0.52 0.58 0.89 1.21 1.69 1.36 1.55 1.98

Maximum 0.50 0.65 0.95 0.68 1.06 1.38 1.87 1.95 2.42 3.07

Spread -- 0.55 0.60 0.19 0.38 0.37 0.47 0.87 1.19 1.60

Table 2 : PWLB Borrowing Rates – Fixed Rate, Maturity Loans

Change Date Notice No 1 year 4²-5 yrs 9²-10 yrs 19²-20 yrs 29²-30 yrs 39²-40 yrs 49²-50 yrs

01/04/2011 128/11 1.93 3.66 4.81 5.33 5.35 5.31 5.28

30/04/2011 162/11 1.73 3.45 4.61 5.18 5.21 5.17 5.14

28/05/2011 202/11 1.64 3.21 4.43 5.08 5.12 5.09 5.07

30/06/2011 246/11 1.61 3.09 4.42 5.17 5.21 5.20 5.18

30/07/2011 288/11 1.52 2.75 4.06 4.97 5.07 5.06 5.04

31/08/2011 332/11 1.48 2.50 3.71 4.66 4.84 4.87 4.85

30/09/2011 376/11 1.51 2.41 3.47 4.35 4.61 4.69 4.69

29/10/2011 418/11 1.45 2.42 3.56 4.29 4.46 4.47 4.44

30/11/2011 462/11 1.32 2.14 3.21 3.84 4.02 4.03 3.98

31/12/2011 501/11 1.21 1.99 3.04 3.86 4.09 4.12 4.08

31/01/2012 042/12 1.29 1.99 3.08 3.89 4.11 4.15 4.12

29/02/2012 084/12 1.31 1.96 3.11 4.04 4.25 4.26 4.21

30/03/2012 128/12 1.28 2.05 3.21 4.17 4.38 4.41 4.36

Low 1.19 1.93 2.98 3.77 3.98 4.02 3.98

Average 1.47 2.53 3.70 4.50 4.65 4.67 4.64

High 1.97 3.73 4.89 5.41 5.42 5.39 5.35

Table 3: PWLB Repayment Rates - Fixed Rate, Maturity Loans

Change Date Notice No

1 year 4²-5 yrs 9²-10 yrs 19²-20 yrs 29²-30 yrs 39²-40 yrs 49²-50 yrs

01/04/2011 128/11 0.82 2.37 3.62 4.21 4.24 4.16 4.10

30/04/2011 162/11 0.62 2.16 3.42 4.06 4.10 4.02 3.96

28/05/2011 202/11 0.53 1.93 3.23 3.97 4.01 3.94 3.90

30/06/2011 246/11 0.50 1.80 3.22 4.05 4.10 4.05 4.01

30/07/2011 288/11 0.41 1.48 2.86 3.84 3.96 3.91 3.87

31/08/2011 332/11 0.37 1.25 2.50 3.53 3.73 3.72 3.68

30/09/2011 376/11 0.38 1.20 2.33 3.26 3.53 3.57 3.55

29/10/2011 418/11 0.34 1.16 2.37 3.16 3.35 3.32 3.26

30/11/2011 462/11 0.21 0.90 2.03 2.71 2.91 2.88 2.81

31/12/2011 501/11 0.10 0.75 1.85 2.72 2.97 2.97 2.90

31/01/2012 042/12 0.18 0.76 1.88 2.76 3.00 3.00 2.95

29/02/2012 084/12 0.20 0.74 1.91 2.91 3.13 3.11 3.03

30/03/2012 128/12 0.17 0.81 2.01 3.04 3.27 3.26 3.19

Low 0.08 0.70 1.79 2.64 2.87 2.87 2.81

Average 0.36 1.28 2.51 3.37 3.54 3.51 3.46

High 0.86 2.44 3.71 4.29 4.31 4.23 4.18

Table 4: PWLB Borrowing Rates – Fixed Rate, EIP Loans

Change Date Notice No 1 year 4²-5 yrs 9²-10 yrs 19²-20 yrs 29²-30 yrs 39²-40 yrs 49²-50 yrs

01/04/2011 128/11 - 2.76 3.73 4.83 5.21 5.33 5.36

30/04/2011 162/11 - 2.55 3.53 4.64 5.05 5.18 5.22

28/05/2011 202/11 - 2.37 3.30 4.46 4.93 5.09 5.12

30/06/2011 246/11 - 2.25 3.17 4.46 4.99 5.17 5.22

30/07/2011 288/11 - 2.01 2.83 4.11 4.73 4.97 5.06

31/08/2011 332/11 - 1.88 2.57 3.75 4.38 4.67 4.80

30/09/2011 376/11 - 1.85 2.48 3.51 4.06 4.36 4.53

29/10/2011 418/11 - 1.80 2.49 3.59 4.07 4.30 4.42

30/11/2011 462/11 - 1.59 2.21 3.24 3.65 3.85 3.97

31/12/2011 501/11 - 1.47 2.05 3.08 3.59 3.87 4.02

31/01/2012 042/12 - 1.50 2.05 3.12 3.64 3.9 4.05

29/02/2012 084/12 - 1.50 2.03 3.15 3.76 4.05 4.19

30/03/2012 128/12 - 1.54 2.11 3.26 3.87 4.18 4.33

Low - 1.45 1.99 3.02 3.53 3.78 3.92

Average - 1.89 2.60 3.74 4.27 4.51 4.61

High - 2.82 3.82 4.92 5.30 5.41 5.44

Table 5: PWLB Repayment Rates - Fixed Rate, EIP Loans

Change Date Notice No

1 year 4²-5 yrs 9²-10 yrs 19²-20 yrs 29²-30 yrs 39²-40 yrs 49²-50 yrs

01/04/2011 128/11 - 1.54 2.55 3.70 4.10 4.22 4.25

30/04/2011 162/11 - 1.33 2.34 3.50 3.93 4.07 4.11

28/05/2011 202/11 - 1.16 2.10 3.32 3.81 3.97 4.01

30/06/2011 246/11 - 1.04 1.98 3.31 3.87 4.06 4.11

30/07/2011 288/11 - 0.82 1.64 2.95 3.60 3.86 3.94

31/08/2011 332/11 - 0.70 1.39 2.60 3.25 3.55 3.68

30/09/2011 376/11 - 0.68 1.30 2.36 2.93 3.24 3.41

29/10/2011 418/11 - 0.70 1.42 2.57 3.05 3.27 3.39

30/11/2011 462/11 - 0.43 1.03 2.10 2.53 2.73 2.85

31/12/2011 501/11 - 0.31 0.88 1.93 2.46 2.75 2.90

31/01/2012 042/12 - 0.35 0.88 1.97 2.51 2.78 2.93

29/02/2012 084/12 - 0.35 0.85 2.00 2.63 2.93 3.08

30/03/2012 128/12 - 0.38 0.94 2.10 2.74 3.06 3.21

Low 0.29 0.82 1.87 2.40 2.66 2.80

Average 0.71 1.42 2.59 3.14 3.39 3.50

High 1.59 2.62 3.78 4.18 4.30 4.33

Table 6: PWLB Variable Rates

1-M Rate 3-M Rate 6-M Rate 1-M Rate 3-M Rate 6-M Rate

Pre-CSR Post-CSR

01/04/2011 0.67 0.77 0.89 1.57 1.67 1.79

30/06/2011 0.67 0.71 0.79 1.57 1.61 1.69

30/09/2011 0.65 0.65 0.66 1.55 1.55 1.56

31/12/2011 0.58 0.59 0.61 1.48 1.49 1.51

30/03/2012 0.59 0.60 0.62 1.49 1.50 1.52

Low 0.58 0.59 0.60 1.48 1.49 1.50

Average 0.63 0.65 0.68 1.53 1.55 1.58

High 0.69 0.79 0.91 1.59 1.69 1.81

Table 7: Credit Score Analysis

Scoring: Long-Term

Credit Rating Score

AAA 1

AA+ 2

AA 3

AA- 4

A+ 5

A 6

A- 7

BBB+ 8

BBB 9

BBB- 10

Not rated 11

BB 12

CCC 13

C 14

D 15

The value weighted average reflects the credit quality of investments according to the size of the deposit. The time weighted average reflects the credit quality of investments according to the maturity of the deposit

The Council would expect to achieve a score of 7 or lower, to reflect the Council’s overriding priority of security of monies invested and the minimum credit rating of threshold of A- for investment counterparties.

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