Agenda pack
North Lanarkshire Council · 30 March 2023
Back to Council — 30 March 2023 and its agenda
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Our Ref: Your Ref: Contact: Tel: Fax: E-Mail: Date: Mark Hamill 07811294702 hamillm@northlan.gov.uk 21 Mar 2023 Members of the Council Chief Executive’s Office Archie Aitken Chief Officer (Legal and Democratic) Civic Centre, Windmillhill Street Motherwell ML1 1AB DX 571701, Motherwell 2 www.northlanarkshire.gov.uk Notice is given that a Meeting of the COUNCIL is to be held within the Council Chamber, Civic Centre, Motherwell on Thursday, 30 March 2023 at 4:00 pm which you are requested to attend. The agenda of business is attached. Chief Executive Members : Councillors: D Ashraf, A Ballinger, C Barclay, B Baudo, A Beveridge, M Boyd, H Brannan-McVey, G Brennan, B Burgess, A Bustard, J Cairns, A Campbell, T Carragher, C Costello, M Coyle, S Coyle, D Crichton, G Currie, P Di Mascio, K Docherty, K Duffy, A Duffy-Lawson, H Dunbar, T Fisher, F Fotheringham, W Goldie, M Hughes, J Hume, L Jarvie, D Johnston, T Johnston, J Jones, P Kelly, J Keltie, A Khan, K Larson, J Leckie, G Lennon, J Logue, H Loughran, F MacGregor, A Magowan, A Masterton, M McBride, B McCluskey, B McCulloch, M McCulloch, P McDade, F McKay, R McKendrick, J McLaren, C McManus, F McNally, M McPake, J McPhilemy, A McVey, L Mitchell, L Nolan, P Patton, J Reddin, L Roarty, D Robb, G Robinson, N Shevlin, W Shields, A Smith, K Stevenson, A Stubbs, L Stubbs, R Sullivan, A Thomas, J Toner, S Watson, C Williams, N Wilson and G Woods. Page 1 of 54
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AGENDA (1) Declarations of Interest in terms of the Ethical Standards in Public Life Etc. (Scotland) Act 2000 (2) Minutes of Meetings of Committees, Sub-Committees and Panels - Cycle 1 Submit volume of minutes of meetings of committees, sub-committees and panels for cycle 1 for approval in terms of standing order number 21(copy to follow) (3) Remit from the Education, Children and Families Committee held on 28 February 2023 - Appointment of Representative of the Church of Scotland (page 5 - 8) Submit report by the Chief Officer (Legal and Democratic) seeking approval to appoint a representative of the Church of Scotland on the Education, Children and Families Committee. (copy herewith) (4) Remit from the Finance and Resources Committee held on 1 March 2023 - Treasury Management Strategy 2023/2024 Treasury Management and Prudential Indicators 2023/2024 to 2025/2026 (page 9 - 54) Submit report by the Chief Officer (Finance) (1) outlining the Treasury Management Strategy for 2023/2024 in accordance with the CIPFA Code of Practice on Treasury Management, and (2) reporting on the treasury and prudential indicators as required by the above code and the CIPFA Prudential Code for Capital Finance in Local Authorities (copy herewith) (5) Membership of Committees, Sub-Committees, Panels and Outside Bodies Submit proposed amendments to Membership of Committees, Sub-Committees, Panels and Outside Bodies (copy to follow) NOTICE OF MOTIONS (6) Notice of Motion submitted by Councillor Watson and Councillor Logue "North Lanarkshire Council agrees to Grant the Freedom of North Lanarkshire to the Royal Regiment of Scotland, at a date to be agreed in 2023" (7) Notice of Motion submitted by Councillor A Stubbs and Councillor Brennan “This Council agrees that Councillors’ surgeries should be advertised through the Council’s social media pages and a once monthly advert covering local Councillors’ surgery details in relevant local newspapers. The cost of advertising in newspapers in 2023/24, estimated at between £20,000 to £50,000 annually, should be met from the projected underspend in the 2022/23 Strategic Communication budget, with the decision on whether or not to continue newspaper adverts beyond March 2024, and any subsequent funding required for future years, to be reviewed as part of the normal budgetary process” QUESTIONS (8) Questions Received in Terms of Standing Order 51 - None Received Page 3 of 54
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North Lanarkshire Council Report Education, Children and Families Committee Does this report require to be approved? ☐ Yes ☒ No Ref Date 28/02/23 Appointment of Representative of the Church of Scotland From A Aitken, Chief Officer of Legal and Democratic E-mail rosean@northlan.gov.uk Telephone 07951 409714 1. Background 1.1 At its meeting held on 22 November 2022, the Committee received verbal notification from the Democratic Services Manager that notification had been received by the Council that Mr. D Hannan, the representative of the Church of Scotland, had tendered his resignation. At that time, no nomination had been received for a new representative. 1.2 In accordance with the Local Government (Scotland) Act 1973, where the Council constitutes a Committee to deal with education issues, there is a statutory requirement to appoint, as Members of the Committee (a) one representative of the Church of Scotland, nominated in such a manner as may be determined by the General Assembly of the Church; (b) one representative of the Roman Catholic Church, nominated in such Executive Summary The purpose of this report is to notify the Committee of the nomination made by the Church of Scotland for Ms. Margaret Clarkson to be appointed as its statutory representative to the Committee. Recommendations The Committee is recommended to:- (1) Acknowledge the nomination by the Church of Scotland for Ms. M. Clarkson to be its representative on the Committee, and (2) Remit this report to the Council with a recommendation that Ms. M. Clarkson be appointed as the representative of the Church of Scotland on the Education, Children and Families Committee. The Plan for North Lanarkshire Priority Enhance participation, capacity, and empowerment across our communities Ambition statement (20) Improve the involvement of communities in the decisions, and development of services and supports, that affect them AGENDA ITEM 3 Page 5 of 54
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a manner as may be determined by the Scottish Hierarchy of the Church, and (c) one person in the selection of whom the Council shall have regard, taking account of the representation of the Church of Scotland and Roman Catholic Church, to the comparative strength within the Council’s area of the churches and denominational bodies having appointed places of worship. The statutory provision accordingly applies to the Education, Children and Families Committee. 2. Report 2.1 Following the completion of its internal processes for identifying an appropriate person, notification was received from the Church of Scotland by the Council on 2 February 2023 that Ms. M. Clarkson was that Church’s nominated person. 2.2 Ms. Clarkson brings 37 years’ experience as a classroom teacher, both within mainstream secondary and the additional support needs sector, and still has an interest for young people and education. 2.3 The Council is bound to accept the nomination from the Church of Scotland and the Committee is recommended to remit this report to the Council seeking its formal approval for Ms. Clarkson to be appointed to the Committee. Until formal approval is provided by the Council, Ms. Clarkson is unable to take up her position on the Committee. Accordingly, if the Council approves the appointment, the first meeting of the Committee that Ms. Clarkson will be entitled to attend is on 23 May 2023. 3. Measures of success 3.1 Compliance with the statutory obligations set out in the Local Government (Scotland) Act 1973 4. Supporting documentation None Archie Aitken Chief Officer of Legal and Democratic Page 6 of 54
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5. Impacts 5.1 Public Sector Equality Duty and Fairer Scotland Duty Does the report contain information that has an impact as a result of the Public Sector Equality Duty and/or Fairer Scotland Duty? Yes ☐ No ☒ If Yes, please provide a brief summary of the impact? If Yes, has an assessment been carried out and published on the council’s website? https://www.northlanarkshire.gov.uk/your-community/equalities/equality- and-fairer-scotland-duty-impact-assessments Yes ☐ No ☐ 5.2 Financial impact Does the report contain any financial impacts? Yes ☐ No ☒ If Yes, have all relevant financial impacts have been discussed and agreed with Finance? Yes ☐ No ☐ If Yes, please provide a brief summary of the impact? 5.3 HR policy impact Does the report contain any HR policy or procedure impacts? Yes ☐ No ☒ If Yes, have all relevant HR impacts have been discussed and agreed with People Resources? Yes ☐ No ☐ If Yes, please provide a brief summary of the impact? 5.4 Legal impact Does the report contain any legal impacts (such as general legal matters, statutory considerations (including employment law considerations), or new legislation)? Yes ☒ No ☐ If Yes, have all relevant legal impacts have been discussed and agreed with Legal and Democratic? Yes ☒ No ☐ If Yes, please provide a brief summary of the impact? This appointment is undertaken in accordance with the Local Government (Scotland) Act 1973. 5.5 Data protection impact Does the report / project / practice contain or involve the processing of personal data? Yes ☐ No ☒ If Yes, is the processing of this personal data likely to result in a high risk to the data subject? Yes ☐ No ☐ If Yes, has a Data Protection Impact Assessment (DPIA) been carried out and e- mailed to dataprotection@northlan.gov.uk Yes ☐ No ☐ 5.6 Technology / Digital impact Does the report contain information that has an impact on either technology, digital transformation, service redesign / business change processes, data management, or connectivity / broadband / Wi-Fi? Page 7 of 54
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Yes ☐ No ☒ If Yes, please provide a brief summary of the impact? Where the impact identifies a requirement for significant technology change, has an assessment been carried out (or is scheduled to be carried out) by the Enterprise Architecture Governance Group (EAGG)? Yes ☐ No ☐ 5.7 Environmental / Carbon impact Does the report / project / practice contain information that has an impact on any environmental or carbon matters? Yes ☐ No ☒ If Yes, please provide a brief summary of the impact? 5.8 Communications impact Does the report contain any information that has an impact on the council’s communications activities? Yes ☐ No ☒ If Yes, please provide a brief summary of the impact? 5.9 Risk impact Is there a risk impact? Yes ☐ No ☒ If Yes, please provide a brief summary of the key risks and potential impacts, highlighting where the risk(s) are assessed and recorded (e.g. Corporate or Service or Project Risk Registers), and how they are managed? 5.10 Armed Forces Covenant Duty Does the report require to take due regard of the Armed Forces Covenant Duty (i.e. does it relate to healthcare, housing, or education services for in-Service or ex- Service personnel, or their families, or widow(er)s)? Yes ☐ No ☒ If Yes, please provide a brief summary of the provision which has been made to ensure there has been appropriate consideration of the particular needs of the Armed Forces community to make sure that they do not face disadvantage compared to other citizens in the provision of public services. Page 8 of 54
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North Lanarkshire Council Report Finance & Resources Committee Does this report require to be approved? ☒ Yes ☐ No Ref; EK/KS/RM Date 01/03/23 Treasury Management Strategy 2023/2024 Treasury Management and Prudential Indicators 2023/2024 to 2025/2026 From Elaine Kemp, Chief Officer for Finance E-mail KempE@northlan.gov.uk Telephone 07939 280 601 1. Background 1.1 Each year, in line with the Code of Practice, the Council approves a Treasury Management Strategy. This report updates the strategy for year 2023/2024. Executive Summary This report fulfils the key requirements of the Local Government Act 2003 to: • Outline the Treasury Management Strategy for 2023/2024 in accordance with the CIPFA Code of Practice on Treasury Management. • Report on the treasury and prudential indicators as required by the above code and the CIPFA Prudential Code for Capital Finance in Local Authorities. Recommendations It is recommended that Committee: 1) Approves the Treasury Management Strategy 2023/2024 and adopts the Treasury Management and Prudential Indicators for 2023/2024 to 2025/2026, set out within Appendix 1 to this report. 2) Acknowledges the proposed use of specific fiscal flexibilities as advised by Scottish Government, in 2022/2023 and 2023/2024, with the implementation of such managed in line with the principles detailed within the Treasury Management Strategy 2023/2024. 3) Remits the Treasury Management Strategy 2023/2024 to the Council for approval. The Plan for North Lanarkshire Priority Improve North Lanarkshire's resource base Ambition statement (25) Ensure intelligent use of data and information to support fully evidence based decision making and future planning AGENDA ITEM 4 Page 9 of 54
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1.2 In addition, the Treasury Management Strategy outlines the Prudential and Treasury Indicators, which are monitored on a regular basis to demonstrate that the Council’s investment plans are managed within a sound financial environment. 1.3 This strategy continues to emphasise, under the revised Code of Practice, an enhanced role for members in terms of accountability and awareness. The Finance & Resources Committee is responsible for the development of the strategy, its implementation and monitoring, while the Audit and Scrutiny Panel has a specified role in the effective scrutiny, as part of its work on reviewing the internal financial controls of the Council. 1.4 The report also reflects The Local Government Investments (Scotland) Regulations 2010 which were enacted from 1 April 2010 containing a requirement for the annual investment strategy and annual investment report to be approved by the full Council and not delegated to a committee or sub-committee. As a result, this strategy, if endorsed by committee, should be remitted to the Council for approval. 2. Report 2.1 The strategy fully detailed within Appendix 1 covers the: • debt and investment projections • outlook in interest rates • borrowing and investment strategies • treasury management performance measures • policy on repayment of loans funds advances • treasury management/prudential indicators. 2.2 The requirements of the Local Government Investments (Scotland) Regulations 2010 have been incorporated within the 2023/2024 Strategy. 2.3 The introduction of the Prudential Code for Capital Finance in Local Authorities in April 2004 brought about a change to capital spending controls, giving councils the freedom to invest in capital projects without the limitation of legislative controls, provided their programmes can be shown to be prudent, affordable, and sustainable. 2.4 This report builds on this framework outlining the Council’s prudential and treasury management indicators for 2023/2024 to 2025/2026. The key mandatory indicators required by both the Treasury Management Code and the Prudential Code are illustrated for these years and, along with local indicators, with a view to more fully informing the decision-making process. 2.5 As outlined in 2022, the Scottish Government introduced fiscal flexibilities for Local Government to help manage the cost of COVID, subject to statutory guidance. Discussions have taken place between the CIPFA Directors of Finance, Scottish Government and COSLA, to determine the application and impact of these with statutory guidance circulars issued for implementation. As a result, these flexibilities options have been reviewed and considered and Council seeks approval to use specific fiscal flexibilities in 2022/2023 and 2023/2024, with the implementation of the fiscal flexibilities managed in line with the principles detailed within the Treasury Management Strategy 2023/2024. Further information can be found in Appendix 1. 2.6 Members should note that the forecasts contained within this report are indicative, pending the outcome of the consideration of approval around the fiscal flexibilities, and already incorporate the 5-year Capital Programme 2021/2022 to 2025/2026. The financial implications of implementing this plan are accounted for in the Council’s Medium Page 10 of 54
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Term Financial Planning assumptions. 2.7 Material changes to the estimates/forecasts provided within this strategy and prudential indicators will be reported during the quarterly Treasury Management monitoring process. 3. Measures of success 3.1 The Treasury Management Strategy and the Prudential/Treasury Management indicators illustrated in Appendix 1, provide members with assurance that the key objectives of the Prudential Framework (i.e. prudence and affordability) will be satisfied, and the inherent risks of Treasury Management risks will be controlled effectively and efficiently, providing value for money. When taken together, the indicators illustrate that the proposed capital investment plans for 2023/2024 onwards are prudent and affordable. Healthy prudential margins from 2023/2024 onwards justify the investment levels, the cost or affordability of which is contained within the existing financial management strategies. 4. Supporting documentation 4.1 Appendix 1: Treasury Management Strategy 2023/2024 and the Treasury Management and Prudential Indicators for 2023/2024 to 2025/2026 (see attached). Elaine Kemp Chief Officer for Finance Page 11 of 54
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5. Impacts 5.1 Public Sector Equality Duty and Fairer Scotland Duty Does the report contain information that has an impact as a result of the Public Sector Equality Duty and/or Fairer Scotland Duty? Yes ☐ No ☒ If Yes, please provide a brief summary of the impact? If Yes, has an assessment been carried out and published on the council’s website? https://www.northlanarkshire.gov.uk/your-community/equalities/equality- and-fairer-scotland-duty-impact-assessments Yes ☐ No ☐ 5.2 Financial impact Does the report contain any financial impacts? Yes ☒ No ☐ If Yes, have all relevant financial impacts have been discussed and agreed with Finance? Yes ☒ No ☐ If Yes, please provide a brief summary of the impact? All financial impacts are contained within the body of the report 5.3 HR policy impact Does the report contain any HR policy or procedure impacts? Yes ☐ No ☒ If Yes, have all relevant HR impacts have been discussed and agreed with People Resources? Yes ☐ No ☐ If Yes, please provide a brief summary of the impact? 5.4 Legal impact Does the report contain any legal impacts (such as general legal matters, statutory considerations (including employment law considerations), or new legislation)? Yes ☐ No ☒ If Yes, have all relevant legal impacts have been discussed and agreed with Legal and Democratic? Yes ☐ No ☐ If Yes, please provide a brief summary of the impact? 5.5 Data protection impact Does the report / project / practice contain or involve the processing of personal data? Yes ☐ No ☒ If Yes, is the processing of this personal data likely to result in a high risk to the data subject? Yes ☐ No ☐ If Yes, has a Data Protection Impact Assessment (DPIA) been carried out and e- mailed to dataprotection@northlan.gov.uk Yes ☐ No ☐ 5.6 Technology / Digital impact Does the report contain information that has an impact on either technology, digital transformation, service redesign / business change processes, data management, or connectivity / broadband / Wi-Fi? Yes ☐ No ☒ Page 12 of 54
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If Yes, please provide a brief summary of the impact? Where the impact identifies a requirement for significant technology change, has an assessment been carried out (or scheduled) by the Enterprise Architecture Governance Group (EAGG)? Yes ☐ No ☐ 5.7 Environmental / Carbon impact Does the report / project / practice contain information that has an impact on any environmental or carbon matters? Yes ☐ No ☒ If Yes, please provide a brief summary of the impact? 5.8 Communications impact Does the report contain any information that has an impact on the council’s communications activities? Yes ☐ No ☒ If Yes, please provide a brief summary of the impact? 5.9 Risk impact Is there a risk impact? Yes ☒ No ☐ If Yes, please provide a brief summary of the key risks and potential impacts, highlighting where the risk(s) are assessed and recorded (e.g. Corporate or Service or Project Risk Registers), and how they are managed? Treasury Management activity by its very nature has a number of inherent risks including interest rate, liquidity and refinancing risks. To minimise risk for its treasury management activities the Council adopts and operates in accordance with the guidelines for best practice prescribed within the CIPFA “Treasury Management in the Public Services” Code of Practice and the CIPFA Prudential Code for Capital Finance in Local Authorities. 5.10 Armed Forces Covenant Duty Does the report require to take due regard of the Armed Forces Covenant Duty (i.e. does it relate to healthcare, housing, or education services for in-Service or ex- Service personnel, or their families, or widow(er)s)? Yes ☐ No ☒ If Yes, please provide a brief summary of the provision which has been made to ensure there has been appropriate consideration of the particular needs of the Armed Forces community to make sure that they do not face disadvantage compared to other citizens in the provision of public services. Page 13 of 54
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Appendix 1 Treasury Management Strategy 2023/2024 & Treasury Management Indicators & Prudential Indicators 2023/2024 to 2025/2026 Page 14 of 54
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Appendix 1 Index 1. Introduction 2. Annual Borrowing Requirement 2023/2024 3. Outlook for Interest Rates 4. Annual Borrowing Strategy 2023/2024 5. Annual Investment Strategy 2023/2024 6. Performance Measurement Indicators and Benchmarking 7. Treasury Management Indicators 2023/2024 to 2025/2026 8. Prudential Indicators 2023/2024 to 2025/2026 9. Policy on Repayment of Loans Fund Advances 2023/2024 10. Fiscal Flexibilities Annex A: Treasury Management Policy Statement and Clauses adopted Annex B: Explanation of Long-term Rating Definitions Annex C: Permitted Investments, Associated Controls Credit Rating, Money and Time Limits Annex D: Interest Rate Forecast March 2023 until December 2025 Annex E: Sensitivity Analysis of Prudential Indicators: Affordability 2023/24, 2024/25 and 2025/26 Annex F: Loans Fund Repayment Schedule Page 15 of 54
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Appendix 1 Treasury Management Strategy 2023/2024, Treasury Management Indicators and Prudential Indicators 2023/2024 to 2025/2026 1. Introduction 1.1 Treasury Management (TM) deals with the borrowing and investment activity of the Council and is an integral part of the financial management strategy of the Council. It seeks to ensure that both capital borrowing requirements and day to day revenue cash transactions are fully funded. Its importance has increased as a result of the additional freedoms provided by the Prudential Code, with specific treasury management and prudential indicators included in this Strategy that require approval. 1.2 The treasury management and prudential indicators outlined within section 7 and 8 below consider the affordability and impact of capital expenditure decisions, whilst the treasury management service considers the effective funding of these decisions. Together these form part of a process to ensure the Council meets its balanced budget requirement. 1.3 The Council’s treasury management activities are strictly regulated by statutory requirements and a professional code of practice. In accordance with the Council’s financial regulations the Council adopts the CIPFA “Treasury Management in the Public Services” Code of Practice (the Code) issued in December 2021 including the Treasury Management Policy statement, and the adoption of the key clauses outlined within Annex A. The Council also complies with the CIPFA Prudential Code issued in December 2021 and the setting of three-year prudential indicators. As previously advised the Council will adopt the revised reporting requirements for the first time during financial 2023/24. 1.4 The Council has a Capital Strategy which is approved and reviewed annually by the Policy and Strategy Committee, in conjunction with the Strategic Capital Investment Programme to demonstrate that the Council takes capital expenditure and investment decisions in line with the Councils service objectives and properly takes account of stewardship, value for money, prudence, affordability and sustainability. 1.5 The Prudential Code requires the Council’s Capital Strategy to be aligned to the Treasury Management Strategy. To ensure this integrated approach between the capital expenditure plans and Treasury Management Strategy, the Council will continue to incorporate the Prudential Indicators with regard to capital expenditure within this document. 1.6 The Treasury Management Strategy outlines the Council’s debt position, including the anticipated level of debt and the authorised borrowing limit. The capital expenditure plans determine the borrowing need of the Council. The Treasury Management team essentially monitor the long-term cash flow planning, to ensure the Council can meet its capital spending obligations. 1.7 The Code re-affirms the Audit and Scrutiny Panel’s role in providing effective scrutiny of the Treasury Management Strategy and policies, whilst the Finance and Resources Committee remains responsible for the development of the strategy, its implementation and monitoring. 1.8 The revised Prudential and Treasury Codes emphasises members responsibility in this area, requiring increased member awareness, to enable greater member scrutiny of treasury management activity. This also enables local authorities to demonstrate that members have the necessary skills and knowledge in this complex and technical area, to make informed decisions. The Treasury Management team provide in house awareness sessions, with members also provided with the opportunity to review the Councils Treasury Management Practices manual. A new Treasury Management Toolkit has been developed by CIPFA Scotland Treasury Management Forum and CIPFA, which provides an online training resource to elected members and financial staff, to further develop knowledge and understanding of elements of treasury management. 1.9 In accordance with the CIPFA Treasury Management Code recommendations, the Council has a Treasury Management advisory contract in place. The current providers are Arlingclose Ltd, who provide specific advice on investment, debt and capital finance issues. 1.10 Per the CIPFA Treasury Management Code, the Council adopts a high-level approach to setting policies for borrowing and investment activity. An appropriate scheme of delegation is in place to ensure all staff employed in treasury management have the suitable skills and resources, to carry out delegated treasury management activities effectively, efficiently and achieving value Page 16 of 54
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Appendix 1 Treasury Management Strategy 2023/2024, Treasury Management Indicators and Prudential Indicators 2023/2024 to 2025/2026 for money. 1.11 The treasury management staff regularly attend training courses, seminars and workshops provided by the Council’s advisors, the CIPFA Scotland Treasury Management Forum and other ad hoc providers, including brokers and financial institutions. Staff also receive regular treasury related updates, information and newsletters on a daily/weekly basis via email from banks and other financial institutions. Staff also have access to treasury related websites to maintain awareness of treasury management issues. 1.12 The requirements of the Code have been incorporated within the 2023/2024 Treasury Management Strategy and in the preparation of the Treasury Management Indicators & Prudential Indicators for 2023/2024 to 2025/2026. 1.13 The Code of Practice requires the Council to produce reports on its Treasury Management policies, practices, and activities on a regular and ongoing basis. This encompasses the preparation and approval of an Annual Strategic Plan, which defines the arrangements for managing the Treasury Management function in the incoming year. This report details the proposed Strategy for 2023/2024. 1.14 This Strategy covers: The debt and investment projections Outlook in interest rates The borrowing and investment strategies Treasury Management performance indicators Specific limits on treasury management activities 1.15 The requirements of the Local Government Investments (Scotland) Regulations 2010 have been incorporated within the 2023/2024 Strategy, including the preparation of an investment strategy which must be approved by the full Council. 1.16 As outlined previously, the Scottish Government introduced fiscal flexibilities for Local Government to help manage the cost of COVID, subject to statutory guidance. Further detail is provided within Section 10. Discussions have taken place between the CIPFA Directors of Finance, Scottish Government and COSLA, to determine the application and impact of these with statutory guidance circulars issued for implementation. As a result, these flexibilities options have been reviewed and considered and Council seeks approval to use specific fiscal flexibilities in 2022/2023 and 2023/2024, with the implementation of the fiscal flexibilities managed in line with the principles detailed within the Treasury Management Strategy 2023/2024. 1.17 Members should note that the forecasts contained within this report are indicative, assuming the outcome of the consideration of approval around the fiscal flexibilities, and already incorporate the 5-year Capital Programme 2021/2022 to 2025/2026. Material changes to the estimates/forecasts provided within this Treasury Management strategy and Prudential indicators will be reported during the quarterly Treasury Management Monitoring Process. 2. Annual Borrowing Requirement 2023/2024 2.1 At the beginning of 2023/2024, it is anticipated that the Council’s total debt outstanding including long term liabilities will amount to £982.6m. The Capital Programme for the period 2022/2023 to 2025/2026 was approved by the Policy and Strategy Committee on 17 March 2022 and is reviewed on a continual basis by the Strategic Capital Delivery Group (SCDG) including re- profiling adjustments within the programme. It should be noted therefore that the estimates presented within this report are based on the current forecasts of the progression of the programme and projected resources available. On this basis, it is currently anticipated that during 2023/2024 there will be a total capital investment of £298.4m which comprises the General Fund Community Investment programme (£167.4m) and the Housing Revenue Account programme (£131.0m). 2.2 The forecast capital expenditure will be resourced by capital grants, external contributions and capital funded from current revenue (CFCR), with the balance of £196.5m representing capital investment funded by borrowing. This represents an in year borrowing need, which will contribute towards the net increase in the Capital Financing Requirement (CFR). Table 7 within Section 8 below sets out the forecast Capital Expenditure plans for the period 2023/2024 to Page 17 of 54
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Appendix 1 Treasury Management Strategy 2023/2024, Treasury Management Indicators and Prudential Indicators 2023/2024 to 2025/2026 2025/2026. 2.3 During 2022/2023 the Council has primarily used internal cash balances, short term borrowing, plus credits due to the scheduled principal repayments to the loans fund from service departments (annuity based), to meet its borrowing requirement. This strategy is adopted in light of interest rate expectations, management of carrying costs, and the availability of short-term borrowing up to 364 days at attractive rates. A similar borrowing strategy is anticipated during 2023/2024 with the current sources adopted in lieu of future long-term borrowing in line with the borrowing strategy outlined below. However, this will be kept under review. 2.4 To meet the capital programme financing requirement, the replacement of maturing long-term debt and the maintenance of cash balances necessary to meet on going daily liquidity requirements, it is estimated that the Council will source long-term borrowing of £172.6m in 2023/2024, £205.0m in 2024/2025 and £135.0m in 2025/2026. 2.5 These borrowing projections exclude temporary borrowing undertaken, with average levels held expected to be approximately £242.0m over the three-year period. This level of short-term borrowing proves attractive to the Council, due to the lower rates currently available, however it is currently anticipated that these rates may rise in the short term as a result of recently announced increases in the Bank of England Base Rate, due to economic and inflationary pressures, but are anticipated to stabilise over time. 2.6 The Council’s borrowing requirement is set firmly within the framework of wider Council activity and will be driven by ‘the Plan’ for North Lanarkshire, the Capital Strategy and the Medium Term Financial Plan. 3. Interest Rates Outlook and Other Economic Updates 3.1 The ongoing impact on the UK from the war in Ukraine, higher inflation, higher interest rates, uncertain government policy, and a deteriorating economic outlook, are some of the issues that will present major challenges for the Council’s Treasury Management Strategy for 2023/24. 3.2 The Bank of England (BoE) base Bank Rate was increased by 0.50% to 3.50% in December 2022, with an additional rise of 0.5% to 4.0% announced in February 2022. These increases followed a 0.75% rise in November 2022, which was the largest single rate rise since 1989, and the ninth successive rise since December 2021. 3.3 The Bank of England forecasts a prolonged but shallow recession in the UK, with CPI inflation at 10.5% in December, which is forecast to remain elevated at around 8%, in the coming year. While the projected peak of inflation is lower than previous forecasts, due in part to the government’s support package for household energy costs, inflation is expected to remain higher for longer over the forecast horizon and the economic outlook remains weak, with unemployment projected to start rising. 3.4 Wholesale gas prices have recently fallen, and global supply chain disruption appears to have subsided as global demand has slowed. Domestic inflationary pressures in the United Kingdom have become firmer than expected. Both regular pay growth in the private sector and CPI inflation in the services sector have been significantly higher than forecast by the BoE in November. Given the lags in monetary policy transmission, Bank Rate increases since December 2021 are expected to have a greater impact on the economy in the coming quarters. 3.5 The Council’s treasury management advisors Arlingclose, forecast that the Bank Rate will continue to rise in 2023 as the Bank of England attempts to subdue inflation, which is significantly above its 2% target. Arlingclose expects the Bank Rate to rise to 4.25% by June 2023 with forecast rate cuts during 2024, with the risks in the near and medium-term should inflation not evolve as the Bank forecasts and remains persistently higher. 3.6 Gilt yields are expected to remain broadly at current levels over the medium-term, with 5, 10 and 20-year gilt yields expected to average around 3.5%, 3.5%, and 3.85% respectively over the period to December 2025. The risks for short, medium and longer-term yields are judged to be broadly balanced over the forecast horizon. As ever, there will undoubtedly be short-term volatility due to economic and political uncertainty and events. 3.7 Movements in supply and demand for UK gilts heavily influence the gilt prices and yields, with Page 18 of 54
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Appendix 1 Treasury Management Strategy 2023/2024, Treasury Management Indicators and Prudential Indicators 2023/2024 to 2025/2026 corresponding movements up or down in the PWLB interest rates reflecting the perception of improved stability or increased uncertainty in both the UK and other non UK financial markets respectively. 3.8 Annex D provides details of the forecast official Bank rate, 3-month money market rate and PWLB rates over the next three years which are underpinned by the economic risks and uncertainties outlined in the preceding paragraphs above. 3.9 The Council’s main source of borrowing is the Public Works Loan Board (PWLB), with PWLB lending generally available at 100bps (1.00%) above UK gilt prices with any forecast movements in PWLB interest rates closely correlated to gilt movements. 3.10 Table 1 below includes forecast average PWLB rates anticipated for a range of maturity periods over the next 3 years based on the forecast per Annex D. The interest rates shown take account of the 0.20% reduction in the standard rates which will apply if the Council, as expected, meets the qualifying criteria for the certainty rate in 2023/2024. Annual Average Bank Rate 3 months Money Market Rate PWLB Rates 5 year 10 year 20 year 50 year 2023 4.19% 4.39% 4.55% 4.30% 4.65% 4.40% 2024 3.88% 4.08% 4.35% 4.30% 4.65% 4.40% 2025 3.25% 3.43% 4.10% 4.30% 4.65% 4.40% Table 1 – Medium Term Interest Rate Estimates (averages) 3.11 These projections underpin the borrowing and investment strategies outlined in the following paragraphs. 4.0 Annual Borrowing Strategy 2023/2024 4.1 The Council uses a combination of internally accumulated cash funds i.e. its revenue reserves/balances plus working capital, temporary borrowing (up to 364 days) and external borrowing from both the markets and PWLB, to fund its capital financing requirement (CFR). This minimises the amount of investment balances held, managing credit and counterparty risk and the impact of low investment returns, resulting in the Council currently being in an under borrowed position, which is in line with the strategic approach adopted. 4.2 The borrowing strategy to meet the current year (2022/2023) capital programme financing requirement of £148.1m (excluding credit arrangements), has been to use a combination of internal cash balances, and short-term borrowing where available at attractive rates, in lieu of future long-term borrowing plus credits due to the scheduled principal repayments. This strategy is supported by efficient cashflow management, interest rate outlook, forecast balance sheet analysis of reserves and provisions, and effective treasury risk management. It is proposed that a similar borrowing strategy be adopted where possible to meet the financing requirement of £196.5m in 2023/2024. 4.3 The successor to IAS17 Leases, IFRS16 Accounting for Leases is applicable for Local Authorities from 1 April 2022. An optional two-year delay has been announced and each authority has the choice of when to implement this new standard by no later than 1st April 2024. Implementation will, dependent upon the nature of the financing and business model, require costs previously presented as revenue costs, restated and shown as capital expenditure under a credit arrangement. This will primarily impact upon the current treatment for vehicles and plant and equipment, acquired under operating lease arrangements when implemented, with a forecast increase in the Council’s 2024/2025 Capital Financing Requirement of approximately £3.5m. This is reflected in Table 7 within Section 8.0 below. 4.4 For 2023/2024, it is anticipated that the Capital Financing Requirement will increase by £220.9m, which comprises the capital investment funded by borrowing and movement in balances held under credit arrangements due to implementation of a change in accounting for existing service concession agreements following the publication of new statutory guidance published in September 2022; Local government finance circular 10/2022 – accounting for service concession arrangements, leases and similar arrangements. Page 19 of 54
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Appendix 1 Treasury Management Strategy 2023/2024, Treasury Management Indicators and Prudential Indicators 2023/2024 to 2025/2026 4.5 It is estimated that the Council will source long-term borrowing of £172.6m in 2023/2024, £205.0m in 2024/2025 and £135.0m in 2025/2026 to meet the on-going capital financing requirements, the replacement of maturing long-term debt and the maintenance of cash balances necessary to meet on going daily liquidity requirements. 4.6 These borrowing projections exclude monies borrowed and repayable over a shorter period, with average levels held expected to be approximately £242.0m over the three-year period. This level of short-term borrowing is attractive to the Council due to lower rates generally available. 4.7 The Council’s capital expenditure planning processes and investment/borrowing analysis enables it to time its borrowing to take advantage of opportunities that may arise to achieve beneficial borrowing rates, minimising interest rate risk. 4.8 The timing of new borrowing will also take into account the level of cash balances and investments held so that there may be an option of postponing borrowing and continuing to use these balances in the short term. 4.9 The Councils borrowing strategy will be underpinned not only by the absolute borrowing rates but also the relationship between short and long-term interest rates. This difference creating a ‘cost of carry’ for any new longer term borrowing where the proceeds of borrowing are temporarily held as investments because of the difference between what is paid on the borrowing and what is earned on the investment. The cost of carry is likely to be an issue for the foreseeable future. 4.10 The Council will closely monitor movements in long and short-term interest rates to manage its interest rate risk. 4.11 The repayment terms of new borrowing will take account of the debt maturity profile to ensure that an acceptable amount matures in any one year, managing the refinancing risk, whilst being undertaken at the most advantageous rate. 4.12 The forecast debt maturity profile at the 31 March 2023 per the graph below highlights that there are a number of points in the maturity spectrum at which the Council has little or no debt due for repayment. In general, the current maturity profile provides the Council with flexibility in determining the maturity period for new borrowing, whilst ensuring the strategy adopted minimizes the debt interest costs. 4.13 It should be noted that the debt maturity profile per the graph is based on the maturity date of LOBO (Lender’s Option Borrower’s Option) loans, whilst noting the Code requires the Council to classify LOBO type loans as having a potential maturity in the year where options or calls exist. A LOBO option is called, when the lender exercises its right to amend the interest rate, at which point the Council can accept the revised terms or reject them and repay the loan. 5 10 15 20 25 30 MILLIONS FINANCIAL YEAR Forecast Long Term Debt Maturity Profile 31 March 2023 PWLB MARKET LOANS Page 20 of 54
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Appendix 1 Treasury Management Strategy 2023/2024, Treasury Management Indicators and Prudential Indicators 2023/2024 to 2025/2026 4.14 The Council currently has a £3.0m exposure to LOBO loans which can be called within 2023/2024, which represents less than 0.67% of the projected long-term debt held at the 31 March 2023 of £447.211m. The interest rates on the LOBO loans held range from 10.625% to 10.937%, averaging 10.781%. 4.15 A comparison of the LOBO loan option 2023/2024 call dates to the maturity date is provided within Table 2 below: Loan Value 2021/2022 Call Dates Year of Maturity Current Interest Rate £2,000,000 1 June & 1 December 2025/2026 10.625% £1,000,000 3 April & 3 October 2026/2027 10.937% Table 2 –Lobo Loans Summary 4.16 Based on the current and the forecast interest rates, the likelihood of these loans being called has been assessed as minimal. In the event that the call option is exercised, the default position will be the repayment of the LOBO without penalty, with the associated treasury management risks (refinancing/interest rate/liquidity) managed in line with the borrowing strategy for other maturing debt. 4.17 The Council’s Treasury Management advisors provide forecasts of interest rates for different maturity dates in future years. Using these forecasts, it is projected over the years 2023/2024, 2024/2025 and 2026/2026 respectively, the PWLB borrowing rates may average between 4.10% and 4.55% (up to 5 years) and between 4.36% and 4.48% (up to 50 years). 4.18 Uncertainty over future interest rate movements increases the risks associated with treasury management borrowing activity, therefore it should be noted, that the period over which any new borrowing is taken will be guided by movements and fluctuations in the interest rate yield curve and capital financing requirement. 4.19 No more than 25% of the total debt outstanding shall be taken from any one lender at any one time, except for borrowing from Public Works Loan Board (or its successor body), unless expressly approved by the Chief Officer for Finance in line with current policy. 4.20 The Council must apply annually to be eligible for a certainty rate discount. The Council was successful in its application to the PWLB in October 2022, meeting the criteria and obtaining eligibility for the certainty rate discount on PWLB loans, accessible from 1 November 2022. Note within Table 1 above the medium-term interest rate average forecasts for the PWLB interest rates include the 20 basis point (bps) discount. 4.21 The Council, also made a successful application in 2019/2020 to the PWLB to access the infrastructure rate and will receive a further discount of 0.20% on future borrowing of up to £8.3m, this reduced rate continues to be available for financial year 2023/2024 of £1.3m. 4.22 The Council will consider a number of borrowing structures in 2023/2024 which will include; • Internally accumulated cash funds. The Council may temporarily use its cash backed revenue reserves/balances plus working capital to support its capital programme generally known as internal borrowing, in lieu of future short and long-term borrowing. This approach may be adopted to manage the level of investment balances held, managing credit and counterparty risk and the impact of low investment returns and cost of carry. • Short-term Borrowing The Council may borrow on a temporary basis (up to 364 days) which would significantly reduce the carrying costs whilst managing the refinancing and interest rate risk. For example for loans up to 364 days, other local authorities are currently offering better terms than those of the PWLB for a 1 year loan, with this option therefore being more attractive. This may also be used to meet cashflow demands to cater for temporary fluctuations in cash balances held on a daily basis. • PWLB Variable Rate Loans These loans are available for periods of up to 10 years with the interest payable generally Page 21 of 54
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Appendix 1 Treasury Management Strategy 2023/2024, Treasury Management Indicators and Prudential Indicators 2023/2024 to 2025/2026 linked to movements in short term rates, with increases in interest rates expected to be limited over the next three years and costs expected to remain cheaper than long term rates. Liquidity within the short-term borrowing market may supercede the potential benefits of this type of borrowing. • PWLB Fixed Rate Maturity Loans (< 20 years) New loans for periods up to 20 years, which fit in with the existing debt maturity profile, are attractive, providing relatively low refinancing risk as short-term rates are expected to remain lower than their longer dated counterparts in the foreseeable future. These could offer greater flexibility to repay/reschedule on beneficial terms in the future, depending on the volatility of interest rates. • PWLB Equal Instalment Payment and Annuity Loans (< 30years) These loans are different from fixed rate maturity loans as the repayments are made up of both interest and principal with the principal outstanding reducing at 6 monthly intervals throughout the life of the loan, with corresponding reduction in interest payments on the balance outstanding. The interest rates payable are lower than the fixed rate maturity loans for short and medium dated maturities with an additional benefit being a smoother debt maturity profile on the debt e.g. £2.5m every year for 10 years as opposed to £25m payable in 10 years. This also spreads the refinancing risk and may also present beneficial opportunities dependent upon the interest yield curve at the time repayments are due. • Medium/Long Term Fixed PWLB Loans (> 20 years) These loans will be considered in conjunction with managing the current debt maturity profile, the higher interest rate profile and the additional cost of carry. These loans currently offer less flexibility in terms of debt restructuring as a result of PWLB Circular 147, which left the premature repayment rates unaltered. As a result, these are the least attractive option at present but circumstances will be monitored to identify beneficial opportunities to source PWLB loans within this maturity spectrum. • Market Loans At present availability is limited, but in the future these loans may become more attractive given the 0.80% margin on PWLB loan rates, as these loans could be cheaper than similar long term PWLB loans despite this being partially offset by the certainty rate. In addition to the possibility of advantageous interest rates, there is also the ability to fix the rate for receipt at a date in the future, avoiding the cost of carry for example to cover future maturities in 2024/2025 and 2025/2026. • Local Authority Bonds Local authority bonds can be issued by a public stock exchange listing, a private placement or a retail bond but would only become a viable option if the size of funds to be borrowed reached a minimum of £150m. Prior to undertaking a bond issuance, the Council would carry out a due financial diligence process. Factors to be considered would be the type of bond issue e.g. index linked, the set-up costs, the timing of the issue, the potential cost of carry, the credit rating process, the projected long term capital financing requirement position and the nature of the projects being funded e.g. income streams index linked. • Leasing On occasions, leasing will be used if an option appraisal review identifies this as being advantageous to the Council. 4.23 As part of its borrowing strategy, the Council will seek to identify and evaluate opportunities for debt rescheduling to accrue potential benefits including: • achievement of cash interest savings, without exposing the Council to additional risk; • ensuring a better balanced maturity profile and volatility ratio; and • achieving the desired borrowing strategy. 4.24 The Council will continue to monitor its debt portfolio and movements in interest rates across PWLB interest rate structures, to identify opportunities to generate interest savings, whilst strategically managing any premiums or discounts incurred as a result of the rescheduling/ restructuring. Page 22 of 54
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Appendix 1 Treasury Management Strategy 2023/2024, Treasury Management Indicators and Prudential Indicators 2023/2024 to 2025/2026 4.25 The Local Authority (Capital Finance and Accounting) (Scotland) Regulations 2016 legislation enacted on 1 April 2016 and associated Local Government Circular 7/16 Statutory Guidance on Loans Fund Accounting provide the legislative background governing the Council's borrowing activity. 5.0 Annual Investment Strategy 2023/2024 5.1 Investment Regulations 5.1.1 The Investment Regulations became statutory instruments by force of the Scottish Parliament on the 1 April 2010 in conjunction with the associated Code on the Investment of Money by Local Authorities. This requires the Council to approve all the types of investments to be used and set appropriate time and money limits for the amount that can be held in each investment type. These types of investments are termed permitted investments and any investments used which have not been approved as a permitted investment will be considered as ultra vires. 5.1.2 Following a Markets in Financial Instruments (MiFID III) directive, from the 3 January 2018, local authorities were to be treated as retail clients, with the option to opt up to professional status provided certain criteria was met. The Council continues to meet the conditions to opt up to professional status and therefore continues to have access to products including money market funds, pooled funds, treasury bills, bonds shares and to financial advice. 5.2 Risk Management 5.2.1 In accordance with the revised code, the Council recognises the importance of risk management and the effective management of all the associated treasury management risks encountered in working with the approved permitted list of investments. The treasury management risks and tools put in place to manage these risks include: • Credit and counterparty risk: this is the risk of failure by a counterparty to meet its contractual obligations to the Council, particularly as a result of the counterparty’s diminished creditworthiness and the resulting detrimental effect on the Council’s capital or revenue resources. There are no counterparties where the risk is zero although AAA rated organisations have a very high level of creditworthiness. The Council has in place minimum credit criteria to determine which counterparties and countries are of high creditworthiness to enable investments to be made safely. • Liquidity risk: this is the risk that cash will not be available when it is needed. While it could be said that all counterparties are subject to at least a very small level of liquidity risk, the Council measures this risk on the basis as to whether or not instant access to cash can be obtained from each form of investment. The Council has developed a detailed cashflow model to record known and forecast income and payment events arising in the short, medium to long term. • Interest Rate Risk: This is the risk that fluctuations in the levels of interest rates create an unexpected or unbudgeted burden on the Council’s finances against which the Council has failed to protect itself adequately. To manage this risk, the Council takes a view of the future course of interest rates and formulates a Treasury Management Strategy accordingly, aiming to maximise investment earnings and minimise borrowing costs, whilst giving full regard to other treasury management risk factors including security and liquidity. • Price Risk Management: This risk primarily relates to financial instruments that are regularly traded in the various financial market exchanges. This is the risk that the Council is required to redeem this type of investment prematurely at prices above and below the price on which the financial instrument was originally purchased (par value) and thus be subjected to the market conditions prevailing at that time. If the investment is held to maturity the principal sum is guaranteed with it being redeemed at par value. The Council will only use those which appear on its permitted investment list, if their redemption price is not expected to vary much during its short life or for example in the case of treasury bills they offer a higher rate of return than depositing in the Debt Management Account Deposit Facility for a similar level of security. • Legal and Regulatory Risk: This is the risk that the Council itself or an organisation with which it is dealing in its treasury management activities fails to act in accordance with its legal powers or regulatory requirements and the Council suffers losses accordingly. In the event of Page 23 of 54
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Appendix 1 Treasury Management Strategy 2023/2024, Treasury Management Indicators and Prudential Indicators 2023/2024 to 2025/2026 any doubt as to the legal and regulatory issues the Council has recourse to its own in-house legal services team and also the Council’s appointed treasury advisors Arlingclose Ltd. The Council also currently has in place a highly experienced and qualified Treasury Management team. 5.3 Permitted Investments 5.3.1 The permitted investments which may be used in the forthcoming year are: a. Deposits with the Debt Management Account Facility (UK Government); b. Deposits with other local authorities or public bodies; c. Instant Access Accounts; d. Call Accounts; e. Term Deposits; f. Money Market Funds; g Instant Access Funds held with Council’s own bankers; h. UK Government Gilts and Treasury Bills; i. Supranational Bonds (e.g. World Bank); j. Certificates of deposits with financial institutions (banks and building societies); k. Covered Bonds; l. Reverse repurchase agreements and other collateralised arrangements; m. Investment properties; n. Loans to third parties, including soft loans; o. Loans to a local authority company; p. Shareholdings in a local authority company; q. Non-local authority shareholdings; r. Subordinated debt in projects delivered via ‘Hubco / DBFM’ model 5.3.2 In respect of Money Market funds (MMF) listed per f) above, these funds invest in high-quality short-term fixed income instruments and adhere to very strict credit quality, diversification and maturity guidelines with preservation of capital constituting the primary objective. Prior to January 2019, the Council used Constant Net Asset Value (CNAV) Funds meaning for every £1 of principal invested the fund will return £1 of principal on withdrawal by the investor, plus interest with preservation of capital the prime objective. 5.3.3 However on the 21 January 2019, as a result of MMF Industry reform, the CNAV funds are no longer available and on this date two types of funds became available to the Council: • a Public Debt CNAV (assets invested in government debt); and • a ‘Low Volatility NAV’ (LVNAV) that is a hybrid between CNAV and VNAV 5.3.4 After scrutiny of the new products available, the Council continues to use money market funds, primarily using the LVNAV type as an investment instrument. It is worth noting that one of the main differences between the LVNAV and CNAV fund is the Council is no longer guaranteed preservation of capital i.e. for every £1 of principal invested the fund will no longer guarantee a return £1 of principal on withdrawal. 5.3.5 However the day to day operation of LVNAV funds is very similar and has many of the attractive features of the CNAV fund and the probability of the price changing and loss of capital, within the boundaries set for price changes i.e. “the collar”, is widely regarded as de minimis. Therefore the use of these investments continue to remain within the risk appetite adopted by the Council per its investment approach. 5.3.6 Bail-in legislation which ensures that large investors including local authorities will rescue failing banks instead of taxpayers in the future, is now fully implemented in the UK. Under the UK Financial Services Compensation Scheme and similar European Schemes most private sector investors are now partially or fully exempt from contributing to a bail-in. The credit risk associated with making unsecured bank deposits has therefore increased relative to the risk of other investment options. 5.3.7 To manage the bail-in risk, covered bonds, reverse repurchase arrangements and other collateral arrangements with financial institutions are included within the permitted investment list. These investments are secured on the assets of the borrower, which limits the potential Page 24 of 54
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Appendix 1 Treasury Management Strategy 2023/2024, Treasury Management Indicators and Prudential Indicators 2023/2024 to 2025/2026 losses in the unlikely event of insolvency and would be exempt from bail-in. 5.3.8 Whilst there is no investment specific credit rating for these types of arrangements, the collateral upon which the investment is secured has a credit rating, with the highest of the collateral credit rating and the counterparty credit rating being used to determine cash and time limits. Note the combined secure and unsecured investments in any one bank should not exceed the cash limit for that counterparty. 5.3.9 Investments in subordinated debt in projects delivered via the ‘Hubco/DBFM’ model included within the permitted investments list will only be undertaken, following a full risk/benefit analysis, subject to a maximum investment amount of £1.5m per project and for a maximum term of 30 years. 5.3.10 For cash investments, there is a risk of capital loss arising from selling ahead of maturity if combined with an adverse movement in interest rates and for term deposits and loans if they are redeemed early. Therefore, the Council will undertake these investments in conjunction with its cashflow/liquidity projections and medium-term financial plans to manage this risk. 5.3.11 Within the Treasury Management code, it suggests the use of financial derivatives but given that the legal power to use derivative instruments remains unclear, the Council does not intend to use derivatives. Should the legal position change, the Council may seek to develop a detailed and robust risk management framework, governing the use of derivatives, but prior to adoption, full Council approval will be sought. 5.4 Investment Security 5.4.1 Although the yield on investment is a key consideration, the primary principle governing the Council’s investment criteria is the security of its investments. 5.4.2 After this main principle the Council will ensure: • It has sufficient liquidity in its investments, carefully selecting the maximum periods for which funds may prudently be committed also applying the Council’s prudential and treasury management indicators covering the maximum principal sums invested. • It maintains a policy covering the categories of investment types it will invest in, the criteria for choosing investment counterparties with adequate security, and to continually monitor security. 5.4.3 The Council minimises risk by identifying those financial institutions that it may invest in to maximise security and liquidity of investment including the specification of maximum time and money limits for each type of permitted investment offered by financial institutions. The counterparty must meet the relevant credit rating requirement with the focus being on the minimum acceptable quality adding a further security overlay to the investment activity of the Council. 5.4.4 The Council utilises the research of the world’s foremost providers of independent credit ratings. The ratings defining the likelihood of an investor such as the Council receiving their money back on the terms in which it was invested. (Long term Rating types and definitions are shown in Annex B). 5.4.5 The Council defines ‘high credit quality’ organisations and securities as those having a credit rating of A- or higher that are domiciled in the UK or a foreign country with a sovereign rating of AA+ or higher. For money market funds and other pooled funds the Council defines a high credit rating as those having a credit of A- or higher. Investments with organisations with long term ratings in the BBB long term category will therefore be restricted by cash and maturity limits. 5.4.6 The Council also supplements its credit rating information by accessing and applying additional operational market information before making any specific investment decision from the agreed pool of counterparties. 5.4.7 This additional market information will be applied to compare the relative security of differing investment counterparties and will include: • Credit Default swap prices; • Quality financial press; Page 25 of 54
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Appendix 1 Treasury Management Strategy 2023/2024, Treasury Management Indicators and Prudential Indicators 2023/2024 to 2025/2026 • Share prices; • Government support status / Bank Resolution and Recovery Directive; • Annual Reports; • Statements to the market; and • Financial Regulations; 5.4.8 Should this additional market information raise concerns regarding the security of a financial institution, then subject to further investigation this may also result in removal from the list. 5.4.9 The creditworthiness of counterparties will be monitored regularly. The Council receives credit rating information from Arlingclose Ltd (the Council’s advisors) as and when ratings change and counterparties are checked promptly. If a ratings change results in the counterparty failing to meet the Council’s strict criteria, they are removed immediately from the list. Similarly, if a counterparty rating is updated and they meet the Council’s strict criteria, they will be added to the list. 5.4.10 Full details of the Council’s investment approach including the type of investments, treasury management risks, associated controls, credit rating, money and time limits are shown in Annex C. The credit rating criteria indicated within the Annex stipulates a long-term rating requirement as this is considered the ultimate driver of credit worthiness of financial institutions. This represents a rating agency view of an institutions capacity to honour its financial obligations and its vulnerability to foreseeable events. The Council in conjunction with its advisors will continue to monitor other information provided from credit rating agencies in terms of short term, individual rating, support rating and outlook. 5.4.11 The Council will give due care when considering the country, group and sector exposure of the Council’s investments and will endeavour to have no more than 25% placed with any non-UK country at any time. A group of banks under the same ownership will be treated as a single organisation for limit purposes with industry /sector activity monitored regularly for appropriateness. 5.4.12 Environmental, social and governance (ESG) considerations are increasingly a factor in global investors’ decision making. Therefore, the Council requires to develop a formal ESG Policy, which may include ESG scoring or other real-time ESG criteria at an individual investment level. However, the framework for evaluating investment opportunities is still developing. In the meantime, when investing in banks and funds, the Council will prioritise banks that are signatories to the UN Principles for Responsible Banking and funds operated by managers that are signatories to the UN Principles for Responsible Investment, the Net Zero Asset Managers Alliance and/or the UK Stewardship Code. 5.5 Investment Strategy 5.5.1 The Council, by efficient cashflow management and balance sheet analysis, will identify its liquidity requirements and the core funds within its cash balances that could be locked in over a longer period up to the maximum limits as defined within Annex C. This will achieve the optimum performance, spreading investment periods and security of return, subject to over-riding credit counterparty security. 5.5.2 The 2023/2024 Treasury Management Strategy has been developed assuming that the annual borrowing requirement and debt repayments, net of credits due to the scheduled principal repayments to the loans fund, will be fully funded by undertaking external borrowing. Therefore, it is anticipated that the Council cash balances available for short term investment will average approximately £30.0m throughout the period 2023/2024 to 2025/2026. 5.5.3 This projected balance being subject to variation dependent upon actual level and timing of external borrowing undertaken, which will reflect positive and negative movements in working capital and level of revenue reserves/balances held during the 3 year period. 5.5.4 All investment activity will be governed by the principles laid out within sections 5.1 to 5.5 above and 5.7 below. 5.6 Borrowing and the Investment of Money 5.6.1 The Council will not borrow more than or earlier than required with the prime intention to profit from the investment return of the extra sums borrowed. Page 26 of 54
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Appendix 1 Treasury Management Strategy 2023/2024, Treasury Management Indicators and Prudential Indicators 2023/2024 to 2025/2026 5.6.2 Borrowing in advance will only be taken for risk management reasons subject to sound justification. When considering borrowing in advance the Council will balance investment risks, such as the credit and interest risks resulting from the temporary investment of the proceeds of borrowing, against the risk of adverse interest rate movements if borrowing is deferred. Consideration will also be given to the existing debt maturity profile over the medium term. 5.6.3 The Council will appraise all risk associated with advance borrowing activity with subsequent reporting either within the mid-year or annual reporting mechanism. This report will comply with the minimum data and analytical requirements outlined within The Local Government Investments (Scotland) Regulations 2010. 5.7 Non Treasury Management Investment Activity 5.7.1 The CIPFA Treasury Management Code includes a section on Non Treasury Management investment activity, which would normally be for those investments made for policy reasons outside of normal Treasury Management Activity, and may include: • service investments held clearly and explicitly in the course of the provision and for purposes of operational services • commercial investments which are taken mainly for financial reasons and to achieve a financial return 5.7.2 Normal treasury management activity would cover those investments which arise from the organisation's cashflows and debt management activity and ultimately represent balances which need to be invested until cash is required for use in the course of the Council's normal business. 5.7.3 For investments that fall outwith normal treasury management activity the Council will ensure that proper due diligence is carried out to ensure that there is a proper understanding as to: • the powers under which the investment is made to ensure the activity is legal • the service rationale behind the decision to undertake this type of investment • the extent to which capital invested is placed at risk • impact of any potential losses on the financial sustainability of the Council • the specialist professional advice required to assist in the decision making process 5.7.4 The Council will carry out more careful risk assessment, as it recognises there may be instances where such investments do not give priority for security and liquidity over yield whether due the nature of the transaction itself e.g. commercial investments or for valid service reasons 5.7.5 Effective scrutiny will be carried out and the justification behind the decision should be explicit, clearly outlining that it is within the Councils legal powers, the level of risk to both capital and returns, the requirement to seek specialist advice if sought and the potential impact on future sustainability if risks come to pass. 5.7.6 This would also include any external underwriting of those risks e.g. guarantees. Given the increase in Councils creating ALEO’s and increasing partnership working, the Council may be asked to provide a financial guarantee to enable other parties to access funds which may not otherwise be available due to their size/ lack of credit history. This may also result in external funds being accessed at more favourable terms than they are likely to receive, which will accrue both an operational and financial benefit to the Council. 5.7.7 In general, a financial guarantee is a promise to take responsibility for another company's financial obligation if that company cannot meet its obligation. Prior to agreeing to the provision of a financial guarantee, due financial diligence of the terms of the financial guarantee must be carried out, including an assessment as to the likelihood of the guarantee being called and potential financial liability to the Council. 5.7.8 The responsibility for proper scrutiny and final approval is the Council’s Chief Officer of Finance. Information in respect of non-Treasury Management investments must be clearly laid out and available within the Council’s statutory accounts. 5.7.9 Following the PWLB consultation in the first half of 2020, the PWLB announced revised terms of engagement for borrowing in particular around non Treasury Management activity. Of greater relevance in England and Wales, given recent activity, Councils are required to confirm there is Page 27 of 54
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Appendix 1 Treasury Management Strategy 2023/2024, Treasury Management Indicators and Prudential Indicators 2023/2024 to 2025/2026 no intention to borrow for the purposes of acquiring investment assets primarily for yield e.g. retail outlets, hotels in the current or next two financial years otherwise the facility may be suspended or withdrawn fully. The revised Prudential Code also makes it a requirement that local authorities must not borrow to invest primarily for financial return. 6.0 Performance Measurement Indicators & Benchmarking 6.1 The Code of Practice on Treasury Management requires the Council to use performance indicators to assess the adequacy of the treasury management function over the year and incorporate benchmarking to assess performance which is reported within the Annual Treasury Management Activity report. These are distinct historic indicators, which are additional to the predominantly forward-looking prudential indicators outlined in later sections of this report. 6.2 In respect of liquidity which is defined as the Council “having adequate, though not excessive cash resources, borrowing arrangements, overdrafts or standby facilities to enable it at all times to have the level of funds available to it which are necessary for the achievement of its business/service objectives” (CIPFA Treasury Management Code of Practice) the Council will seek to maintain: Liquid short term deposits of at least £3m available on an overnight basis. 6.3 This Council generally uses the following historic indicators to monitor its loan portfolio performance and benchmarking: ❖ Borrowing: Average rate of borrowing for the year compared to average in previous year. ❖ Investments: Local measures of yield benchmarks are the Council’s average return on short term investment activity in comparison to: - 3 month money market rate - Council’s own bank: Instant Access Account; - Council’s Advisors benchmarking club 6.4 In the context of benchmarking security, this is a much more subjective area to assess. The Council currently evidences this by the application of minimum quality criteria to investment counterparties, through the use of credit ratings, supplied by the three main credit rating agencies, together with additional market information available as described earlier within this report and outlined within Annex C. 7.0 Treasury Management Local and Mandatory Indicators 2023/2024 to 2025/2026 7.1 Treasury Management Local Indicator: Interest Rate Exposure 7.1.1 Per the revised CIPFA TM code, the Council is no longer required to set a mandatory indicator for limits with regard to fixed and variable interest rate exposure. The Council will monitor its interest rate exposure by the local indicator shown in Table 3 below. The proportion of fixed interest rate costs to variable interest costs will be monitored on a quarterly basis to identify if there are any potential risks if interest rates were to move significantly upwards. The Council will also monitor debt maturity profile, the spend profile of the capital programme and also continue to adopt a prudent approach to use of internal balances in lieu of future long-term borrowing i.e. monitor under borrowing position. The economic outlook and interest rate forecast will supplement this on-going review of interest rate exposure. Content of loan portfolio 2023/24 2024/25 2025/26 £m % £m % £m % External Interest Council is due to pay: Fixed rate loan debt 37.8 99.2% 45.1 99.3% 52.9 99.5% Variable rate loan debt 0.3 0.8% 0.3 0.7% 0.3 0.5% 38.1 100.0% 45.4 100.0% 53.1 100.0% External Interest Council is due to receive: Investments – variable terms 1.3 100.0% 1.1 100.0% 1.1 100.0% Net Loan Interest Payments 36.8 44.3 52.0 Table 3 – Local Indicators Interest Rate Exposures 2023/24 to 2025/26 Page 28 of 54
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Appendix 1 Treasury Management Strategy 2023/2024, Treasury Management Indicators and Prudential Indicators 2023/2024 to 2025/2026 7.1.2 Table 3 above relates only to external interest payments, excluding interest on revenue balances, and includes a number of assumptions regarding the timing and nature of the new borrowing anticipated. As mentioned previously the capital planning process and investment/borrowing analysis enables the Council to take advantage of opportunities that may arise, to achieve beneficial borrowing rates over the same period. 7.1.3 Table 3 highlights that the Council anticipates net loan external interest payments of approximately £36.8 million for 2023/2024. Of this total, £37.8million relates to interest payable on fixed rate debt, for which interest payments are guaranteed until the loans mature, £0.3million for interest payable on variable rate debt, and (£1.3) million relates to interest receivable on funds invested. Variable rate loans and funds deposited are subject to changes in interest rates and will be monitored as part of the Council’s Treasury Management Strategy on an ongoing basis. 7.1.4 The table below highlights the estimated impact of a one basis point increase or decrease (e.g. 4.0% variable rate rising to 5.0% or falling to 3.0%) in interest rates to treasury management costs/income for next year. Fixed interest rate debt will not be affected by interest rate changes. Financial Year : 2023/24 Estimate £m +1% £m -1% £m Net impact on Council -1.0 -0.4 +0.4 Table 4 –Sensitivity to Interest Rate Movements 2023/24 7.2 Treasury Management Mandatory Indicator: Maturity Structure of Borrowing 7.2.1 The Treasury Management Code requires the Council to specify upper and lower limits regarding the maturity structure of its long-term borrowing in order to minimise the risk associated with the Council having to replace large sums of long-term debt at a time when there may be uncertainty over interest rate exposure. 7.2.2 Table 3 illustrates that the Council has high levels of fixed rate debt however the current maturity profile of this debt is unlikely to be a major risk factor for the Council. The limits of fixed and variable rate maturity are set out within Table 5 below; Table 5– Maturity Structure of Fixed Rate Borrowing 7.2.3 The upper limit for long-term rate debt, maturing in less than 12 months, is set at 15.0% to accommodate the requirement within CIPFA TM Code to recognise the possibility of the Council loans classified as LOBO type loans having their option or call exercised within the next 12 months, under the terms of the loans as described within paragraph 4.14 above. 7.3 Treasury Management Indicator: Credit Risk 7.3.1 The Council will manage its credit risk by implementing the investment strategy per Section 5 and remaining within the guidelines outlined within Annex C. 7.3.2 The Council has also adopted a voluntary measure of its exposure to credit risk by monitoring the value weighted average credit rating of its investment portfolio. This is calculated by applying a score to each investment and taking the arithmetic average weighted by the size of each investment. Target Portfolio Average Credit Rating A- Table 6 – Credit Risk Indicator 2023/24 Maturity Structure of borrowing < 12m 12m to 2yrs 2 to 5yrs 5 to 10yrs 10 to 20yrs 20 to 40yrs 40yrs+ Upper limit – long term debt 15.0% 15.0% 25.0% 30.0% 35.0% 45.0% 30.0% Lower limit – long term debt 0.0% 0.0% 5.0% 5.0% 5.0% 10.0% 10.0% Page 29 of 54
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Appendix 1 Treasury Management Strategy 2023/2024, Treasury Management Indicators and Prudential Indicators 2023/2024 to 2025/2026 8.0 Prudential Indicators 2023/2024 to 2025/2026 8.1 Prudential Indicator: The Capital Expenditure Plans 8.1.1 The Prudential Code requires the Council to outline its capital expenditure plans taking into account the sources of funding available and also the cost to the council in supporting any additional borrowing burden which will require to be paid for from the Council’s own resources. The Government has power to control the level of prudential borrowing although no control has yet been implemented. Some of the estimates for other sources of funding may also be subject to change over this timescale. 8.1.2 Table 7 sets out the revised Capital Expenditure plans for 2022/2023 (Revised) and forecast for the period 2023/2024 to 2025/2026 as per the 5 year Capital Programme for the period 2021/2022 to 2025/2026 approved by the Policy and Strategy Committee on 17 March 2022, and is reviewed on a continual basis by the Strategic Capital Delivery Group (SCDG) including re-profiling adjustments within the 5 year programme. It should be noted therefore that the estimates presented within this report are based on the current forecasts of the progression of the programme and projected resources available. Capital Expenditure 2022/23 Revised £m 2023/24 Forecast £m 2024/25 Forecast £m 2025/26 Forecast £m Capital Expenditure : General Services 153.7 167.4 165.8 79.5 Capital Expenditure : HRA 106.7 131.0 146.8 153.8 Total Capital by Expenditure 260.3 298.4 312.6 233.2 Cumbernauld School/Theatre DBFM - - - - IFRS16: Vehicles & Buildings - - 3.5 - Service Concessions: PPP Schools - 49.3 9.5 9.0 Total Capital by Credit Arrangements - 49.3 13.0 9.0 Total Capital Investment 260.3 347.7 325.6 242.2 Financed by: Capital Grants 79.5 73.7 71.5 56.4 Capital from Current Revenue 31.8 27.1 27.1 27.1 Capital Receipts 1.0 1.0 1.0 1.0 CFR : Borrowing : General Services 89.6 114.6 115.9 45.1 CFR : Borrowing : HRA 58.5 81.9 97.1 103.6 Credit Arrangements - 49.3 13.0 9.0 Total Capital Funding Resources 260.3 347.7 325.6 242.2 Table 7 – Capital Expenditure Plans 2022/23 to 2025/26 8.1.3 General Services within Table 7 above encompasses the Capital Financing Requirement, reflecting the borrowing needs, for the General Fund Community Investment Programme which includes Town and Community Hubs, Schools Modernisation, Digital Infrastructure and Innovation, Children & Young People, Asset Management Plan Priorities, and the City Deal whilst HRA includes the New Build, Buy Back Scheme and the Ambition programmes. 8.1.4 For 2024/2025, an estimate of £3.5m has been included to reflect the potential implications of IFRS16 Accounting for Leases in respect of the reclassification for buildings, vehicle and plant, currently accounted for as operational leases within revenue currently managed outwith the prudential framework until changes are adopted by the Council on 1 April 2024. Page 30 of 54
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Appendix 1 Treasury Management Strategy 2023/2024, Treasury Management Indicators and Prudential Indicators 2023/2024 to 2025/2026 This is a change in accounting for leases and does not represent cash expenditure. 8.1.5 For 2023/2024 to 2025/2026, estimates have been included to reflect the potential impacts due to implementation of a change in accounting for existing service concession agreements following the publication of new statutory guidance published in September 2022; Local government finance circular 10/2022 – accounting for service concession arrangements, leases and similar arrangements. It should be noted this change does not represent cash expenditure, nor does it impact the cash payments to the contractors for such arrangements. 8.2 Prudential Indicator: Capital Financing Requirement (CFR) 8.2.1 The CFR is essentially a measure of Council’s underlying borrowing need i.e. capital expenditure which is not resourced by capital grants, receipts or CFCR - and any new borrowing will increase the CFR. The CFR includes long term liabilities representing outstanding obligations under the education PPP, finance leasing arrangements and the projects in relation to Cumbernauld Academy/Theatre, the Clyde Valley Waste Facility plus IFRS16 implications from 2024/2025. 8.2.2 However the Council pays off an element of the accumulated capital spend each year through a revenue charge, comprising scheduled debt repayments from service departments (annuity based) which reduces the CFR. Committee is asked to approve the CFR projections at the 31 March for each financial year set out below. 2022/23 Revised £m 2023/24 Forecast £m 2024/26 Forecast £m 2025/26 Forecast £m Capital Financing Requirement General Services 797.7 948.5 1,060.1 1,095.4 HRA 449.5 519.5 603.1 691.2 Total CFR 1,247.1 1,468.0 1,663.2 1,786.7 Movement in CFR 141.1 220.9 195.2 123.4 Table 8 – CFR Projections 2022/23 to 2025/26 8.2.3 The year on year movement in CFR is shown in Table 9 below. 2022/23 Revised £m 2023/24 Forecast £m 2024/25 Forecast £m 2025/26 Forecast £m CFR : Borrowing : General Services 89.6 114.6 115.9 45.1 CFR : Borrowing : HRA 58.5 81.9 97.1 103.6 Credit Arrangements - 49.3 13.0 9.0 Scheduled Loan Debt Amortisation - -22.2 -25.6 -29.4 Leasing Amortisation -0.5 -0.5 -1.4 -1.0 Education PPP Amortisation -6.5 -2.3 -3.7 -3.9 Movement in CFR 141.1 220.9 195.2 123.4 Table 9 – Movements in CFR 2022/23 to 2025/26 8.2.4 The scheduled loan debt and education PPP amortisation figures presented within Table 9 above are based on the current profile of the 5 year Capital Programme 2020/2021 to 2025/2026, and assume implementation of the changes to accounting for service concessions as a result of Scottish Government fiscal flexibilities options. 8.3 Prudential Indicator: Gross Debt and the Capital Financing Requirement: 8.3.1 Within the prudential indicators there are a number of key indicators to ensure the Council operates its activities within well-defined limits. For the first of these the Council needs to ensure that its total borrowing, does not, except in the short-term, exceed the total of the CFR in the preceding year plus the estimates of any additional CFR for 2023/2024 and the Page 31 of 54
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Appendix 1 Treasury Management Strategy 2023/2024, Treasury Management Indicators and Prudential Indicators 2023/2024 to 2025/2026 next two financial years. 2022/23 Revised £m 2023/24 Forecast £m 2024/25 Forecast £m 2025/26 Forecast £m Gross Borrowing : Loan Debt 815.7 961.5 1,149.8 1,266.8 Long term Liabilities 166.9 213.5 221.3 225.4 Gross Debt 982.6 1,175.0 1,371.1 1,492.2 Capital Financing Requirement 1,247.1 1,468.0 1,663.2 1,786.7 Prudential Margin 264.5 293.0 292.1 294.5 Gross Debt =< year 3 CFR Yes Yes Yes Yes Table 10 – Prudential Margins 2022/23 to 2025/26 8.3.2 The above table demonstrates that healthy prudential margins will continue to exist from 2023/2024 onwards and that the Council complies with this prudential indicator in the current year and does not envisage difficulties in the future. This view takes into account current commitments, existing plans and the proposals in respect of the capital investment levels proposed. 8.4 Prudential Indicator: Liability Benchmark 8.4.1 The Treasury Management Code 2021 states that organisations should evaluate the amount, timing and maturities needed for new borrowing in relation to planned borrowing needs, for example using a liability benchmark, in order to avoid borrowing too much, too little, too long or too short. The liability benchmark is an important tool to help establish whether the Council is likely to be a long-term borrower or long-term investor in the future, and so shapes its strategic focus and decision making. Essentially this benchmark identifies the projection of external debt/ borrowing required over the long term to fund approved revenue & capital budgets, while keeping treasury investments at the minimum level required to manage day-to-day cash flow. 8.4.2 This represents the comparison of the Council’s actual borrowing against an alternative strategy. A liability benchmark has been calculated showing the lowest risk level of borrowing. This utilises the forecasts for Capital Financing Requirement, long-term liabilities, current external borrowing, balance sheet resources i.e. reserves, and that cash and investment balances are kept to a minimum of £30.0m at each year-end to maintain sufficient liquidity but minimise credit risk. 8.4.3 This is shown in the chart below together with the maturity profile of the Council’s existing borrowing; Page 32 of 54
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Appendix 1 Treasury Management Strategy 2023/2024, Treasury Management Indicators and Prudential Indicators 2023/2024 to 2025/2026 8.4.4 The Loans CFR line (solid light blue) represents the total cost of the capital expenditure plans based on the current profile of the 5-year Capital Programme 2020/2021 to 2025/2026. This reduces over time as scheduled principal repayments are made to the loans fund. The Net Loans Requirement line (dotted red) represents the minimum external borrowing required to fund the current capital expenditure plans assuming all cash reserves and balances are utilised to offset borrowing requirements. The Liability Benchmark line (solid red) represents the estimated borrowing required, taken account of liquidity allowance required of £30.0m to be held to maintain liquidity and to manage day-to-day cashflows. 8.4.5 The solid grey section shows the maturity profile of current borrowing. The gap between the grey section and the liability benchmark line represents the estimated additional borrowing that is forecast will be required to fund the current capital expenditure plans, via long-term and short-term borrowing options. 8.5 Prudential Indicator: The Authorised Limit for External Debt. 8.5.1 This represents the maximum limit beyond which borrowing is prohibited. Although this limit is deemed to be affordable in the short-term, it is not desirable or a sustainable level of borrowing for the council and is therefore being set at a level as the maximum allowable in each of the years 2023/2024 through to 2025/2026. The initial level set for 2022/2023 is shown for comparison. The Local Authority (Capital Finance and Accounting) (Scotland) Regulations 2016 provide a statutory backing to the Prudential Code requirement for an authority to set an authorised limit for external debt. Authorised Limit 2022/23 Initial Limit £m 2023/24 Estimated £m 2024/25 Estimated £m 2025/26 Estimated £m Gross Borrowing :Loan Debt 1,215 1,350 1,490 1,645 Other Long-Term Liabilities 185 235 240 245 Total External Debt 1,400 1,585 1,730 1,890 Table 11 – Authorised Limit 2022/23 to 2025/26 8.6 Prudential Indicator: The Operational Boundary for External Debt. 8.6.1 This indicator is based on the expected maximum external debt during the course of the 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 £m Liability Benchmark -North Lanarkshire Fixed rate loans LOBO loans Loans CFR Liability benchmark Net loans requirement Page 33 of 54
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Appendix 1 Treasury Management Strategy 2023/2024, Treasury Management Indicators and Prudential Indicators 2023/2024 to 2025/2026 year; it is not a limit. This operational boundary allows flexibility to borrow, re-invest and undertake debt restructuring during the course of the year. It is therefore possible and acceptable, for actual borrowing to vary around this boundary for short periods during the year. Operational Boundary 2022/23 Initial Limit £m 2023/24 Estimated £m 2024/25 Estimated £m 2025/26 Estimated £m Gross Borrowing :Loan Debt 1,240 1,300 1,495 1,618 Other Long-Term Liabilities 185 235 240 245 Total External Debt 1,425 1,535 1,680 1,840 Table 12 – Operational Boundary 2022/23 to 2025/26 8.7 Prudential Indicators: Affordability 8.7.1 The previous sections cover the treasury management and overall capital and control of borrowing prudential indicators, but within this framework, prudential indicators are required to assess the affordability of the capital investment plans. These provide an indication of the impact of the capital investment plans on the overall Council finances. The Council is asked to approve the following affordability indicator. 8.8 Prudential Indicator: The Proportion of Financing Costs to Net Revenue Stream. 8.8.1 Since capital expenditure impacts on the revenue budget through financing charges, the Council needs to ensure that financing costs not only remain affordable, but also do not constitute an excessive proportion of the revenue resources available. The proportion of capital financing costs to revenue forecasts for the next 3 years are illustrated in Table 13 below showing that the General Services loan charges represent up to 6.98% of the total revenue budget available. The increase in the proportion still remains within prudent levels demonstrating that the capital programme investment appears to be affordable and sustainable. 8.8.2 In noting the percentage on loan charges within the HRA budget, a major element of revenue costs in the Housing Account is the funding support to sustain the substantial investment programme; the other main elements of expenditure being repair costs and management costs. The level of loan charges is acceptable and deemed prudent and affordable within the framework of the Council’s 30-year Housing investment plan. Page 34 of 54
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Appendix 1 Treasury Management Strategy 2023/2024, Treasury Management Indicators and Prudential Indicators 2023/2024 to 2025/2026 Proportion of Financing Costs to Net Revenue Stream Estimated 2023/24 Estimated 2024/25 Estimated 2025/26 £m £m £m Total General Fund (GF) Loan Charges 34.520 40.888 47.125 Total General Fund Finance Lease/PPP Costs 17.978 16.340 15.440 Total General Fund : Capital Financing Costs 52.498 57.228 62.565 General Fund : Net Revenue Stream 896.198 896.198 896.198 GF- Proportion of Financing Costs to Net Revenue Stream 5.86% 6.39% 6.98% Total Housing Revenue Account (HRA) Loan Charges 28.048 32.739 38.108 Total Housing Revenue Account Finance Lease Costs 0.325 0.325 0.325 Total HRA : Capital Financing Costs 28.373 33.064 38.433 HRA : Net Revenue Stream 148.178 155.737 164.769 HRA- Proportion of Financing Costs to Net Revenue Stream 19.15% 21.23% 23.33% Table 13 – Proportion of Financing Costs to Net Revenue Streams 2023/24 to 2025/26 8.8.3 The scheduled loan debt and education PPP amortisation figures presented within Table 9 above are based on the current profile of the 5 year Capital Programme 2020/2021 to 2025/2026, and the assumed implementation of the new circular in respect of accounting for service concessions. 8.9 Prudential Indicator: Affordability – Sensitivity Analysis 8.9.1 For the Prudential Indicators relating to affordability, the table within Annex E provides a summary of the sensitivity of the most likely outcomes outlined within the preceding paragraphs provided above to the following movements, all assessed independently of each other: (i) a plus or minus 10% change in the capital financing requirement i.e. the level of borrowing undertaken to retain average investment balances and under borrowing position at prudent levels. (ii) a plus or minus 50 bps change in the interest rates achievable for new long-term borrowing i.e. ½ percent movement (iii) a plus or minus 10% change in the net revenue stream used to calculate the proportion of financing costs to net revenue stream. 9.0 Policy on Repayment of Loans Fund Advances 2023/2024 9.1 The Local Authority (Capital Finance and Accounting) (Scotland) Regulations 2016 within Regulation 13 require the Council to make a loans fund advance equal to the amount of capital expenditure that the Council has determined will be financed by borrowing. The Capital Expenditure definition being that adopted by proper accounting practice, the statutory control framework and the Prudential Code. 9.2 Loans fund advances also incorporate grants to third parties on third party assets and loans to third parties where the other party meets the criteria laid out within Part 3 of the Regulations e.g. other local authorities or joint boards. Page 35 of 54
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Appendix 1 Treasury Management Strategy 2023/2024, Treasury Management Indicators and Prudential Indicators 2023/2024 to 2025/2026 9.3 Accounting for loans fund advances also changed from 1st April 2016. Prudent repayment of loans fund advances are required to be made in line with Scottish Government Statutory Guidance on Loans Fund Accounting (Circular 7/16). 9.4 The broad aim of prudent repayment is to ensure that the Authority’s capital expenditure is financed over a period of years which that expenditure is expected to provide a benefit, and that each year's repayment amount is reasonably commensurate with the period and pattern of the benefits. 9.5 The statutory guidance requires the Council to approve a policy on loans fund repayments each year and it is proposed the Council adopts the following options for calculating prudent repayments in 2023/24. 9.6 For pre-existing Loans Fund advances made up to 31st March 2016 and for the most part capital expenditure plans for the period up to and including the 31 March 2021, the Council continued to use Option 1 the Statutory Method. This approach taking into account the 5-year transitional period from 31/3/2016 to 31/3/2021 available within the new guidance, during which the current methodology may continue to be selected. The repayment of Loans Fund advances therefore being equal to the annual amount determined in accordance with Schedule 3 of the Local Government (Scotland) Act 1975. 9.7 However the Council undertook an initial review of the loans fund advances annuity models in 2021/22 and a review of the initial asset lives adopted and determined it would be prudent to adopt Option 3: Asset Life Method, with the Council applying this option accordingly for 2020/2021. This approach allows a retrospective review for ‘prudent repayment’ of all historic loans fund advances outstanding at 31 March 2020 with no distinction made between debt held prior to 31 March 2016 and since the prudent repayment methodology was introduced on 1 April 2016. 9.8 Following this initial exercise, a further review was carried out during 2020/2021 in conjunction with Treasury specialists to investigate further adaptations to the repayments policy. Per the report submitted to this Committee on the 26 November 2020 entitled Loans Fund Advance Repayment Policy Review a revised policy was approved. 9.9 This included the application of a fixed average life to all loans fund advances, and changes to the annuity rate adopted to calculate loans fund advance repayments, including the retrospective adjustment to the period over which historic loans fund advance repayments can be made and applying this approach to future loans fund advances. The repayment periods and annuity rate can be updated in future years, if deemed prudent to do so, to reflect the changing nature and durability of assets financed by loans fund advances linked to Treasury Management strategy. 9.10 The revised Policy resulted in a revised loans fund advance repayment profile, the Council adopting the flexibility within the policy and will consider alternative approaches including reprofiling back to initial advance date. A prudent approach specific to the Council’s financial position will be adopted including an assessment of the whole life impact both in nominal and NPV terms of this proposal. 9.11 Alternatively if it is determined that it may be prudent to recognise grant funding or other income streams when determining both the period of the repayment and/or the annual repayment of any loans fund advance, Option 4 Funding/Income profile method will be selected. Some examples of where this income approach may be considered prudent would include the deferred UK and Scottish Government grant support for the City Deal. Therefore, for capital expenditure incurred for specified projects where it is reasonable to link an income /funding stream, the annual repayment of Loans Fund advances may be profiled to reflect the income/funding stream. The Council will keep the income streams under review to ensure the provision for repayment remains prudent and, if required, address any shortfall. 9.12 The Statutory Guidance, allows a further option referred to as Option 2: the Depreciation method within the guidance and after due consideration the Council did not adopt this in 2021/2022. 9.13 In accordance with the Statutory Guidance, the Council has outlined within Annex F its commitments in respect of loans fund advance repayments, however these are based on the Page 36 of 54
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Appendix 1 Treasury Management Strategy 2023/2024, Treasury Management Indicators and Prudential Indicators 2023/2024 to 2025/2026 current profile of the 5 year Capital Programme 2021/2022 to 2025/2026, the implementation of approved loans funds advance repayment policy and the outcome of the discussions around the fiscal flexibilities. Material changes to these estimates/forecasts will be reported during the quarterly Treasury Management Monitoring Process. 9.14 In accordance with the statutory guidance the HRA Loans Fund advances and associated annual repayments have been identified separately from that of the General Fund. 10. Fiscal Flexibilities 10.1 In October 2020 the Council received notification of the availability of Local Government Financial Flexibilities for the cost of COVID, agreed by Scottish and UK Governments, which the Council broadly welcomed. 10.2 The three specific areas covered within the flexibilities applicable to the Treasury Management Strategy outlined above are; Capital Receipts 10.3 This flexibility would allow the Council to use capital receipts to meet significant one-off revenue funding pressures, and COVID related costs recognising that whilst COVID has also had an impact on the sale of assets, permitting this facility over three financial years up to 2022/2023 will support Councils with their financial recovery from COVID. 10.4 This would provide minimum benefit to the Council as the Councils capital receipts policy currently allows for capital receipts to be transferred to a capital fund. This innovative accounting approach already providing a revenue funding benefit, which allows this income to be allocated from the capital fund providing a contribution towards the annual repayment of loans fund debt advances. Service Concession Arrangements: Credit arrangements 10.5 Service concession arrangements are likened to a lease. The statutory intervention on service concession arrangements in Scotland was introduced in 2010 to address a financial impact when service concession assets, mostly schools, were first brought onto a local authority’s balance sheet. The current statutory arrangements require the repayment of the liability to be charged to the revenue account over the contract period. Accounting standards allow depreciation of the asset to be over the useful life of the asset where the asset will remain with the authority at the end of the contract period. For consistency the Scottish Government wish to see the statutory reforms, i.e. reverting to accounting standards, being applied to all leases and service concession arrangements. The Scottish Government assessed that this would generate a saving for Councils, as the cost is spread over the useful life of the asset rather than the contract period. This flexibility being applicable to existing service concession arrangements only. 10.6 In September 2022 the Scottish Government published new statutory guidance; Local government finance circular 10/2022 – accounting for service concession arrangements, leases and similar arrangements. The statutory guidance provides a temporary statutory override to the requirements of the Code of Practice for Local Authority Accounting in accounting for infrastructure assets. This essentially provides the details of the options available in accounting for PPP arrangements. 10.7 Officers have reviewed the guidance and have taken specialist independent advice to review and critically appraise the options available, and to model and verify the financial implications of such options. It should be noted that the option proposed must be adopted no later than financial year 2023/24. The guidance also stipulates that any change to accounting for service concessions as a result of this circular, requires full Council approval. 10.8 The change in accounting treatment will see a reduction in annual accounting charges for service concession arrangements, in the short to medium term, due to spreading them over the remaining useful life of the assets, rather than the shorter contract life, which is currently applicable, thus resulting in a short to medium term financial benefit for the Council. However, a further consequence of such action is that the Council will now incur charges beyond the contract period. Based on the analysis undertaken, an annual financial saving of £4 million is Page 37 of 54
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Appendix 1 Treasury Management Strategy 2023/2024, Treasury Management Indicators and Prudential Indicators 2023/2024 to 2025/2026 estimated to be prudent and sustainable over the short to medium term. It should also be noted there is a £44.8 million benefit arising from the retrospective application of the change in accounting. Any use of the one-off benefit will most likely requiring additional borrowing, which will incur additional material interest costs. 10.9 It should also be noted that CIPFA/LASAAC published the 2022/23 edition of its Code of Practice on Local Authority Accounting in the United Kingdom (the Code) in August 2022. This sets out the accounting for service concession arrangements under the new IFRS 16 Leases accounting standard, which the Council currently plans to adopt in 2024/25 financial year. Implementing the new standard is expected to generate a further financial benefit in respect of accounting for service concession arrangements which will be further clarified in future budgetary strategies. 10.10 It is proposed that the Council applies this Service Concessions flexibility in 2023/24 which provides the Council with a one-off revenue saving of £44.8m, and recurring annual savings of c.£4m with recognition that this will be ultimately repaid via increased financing and loan charges, and that budgetary provisions will be reviewed as part of the annual medium-term financial plan updates to ensure affordability, sustainability and prudence. This position was reported to Council on 23 February 2023. Loans Fund Repayment holiday 10.11 The statutory arrangements for the repayment of borrowing in Scotland, requires the Council to make an annual repayment of debt which it considers prudent. As an exceptional measure the Scottish Government has confirmed they will allow Councils to take a loans fund repayment holiday, the maximum permitted being the planned repayment for 2022-23, which the Council would be required to repay within the period of the loan fund advance, but where the loan period exceeds 20 years, within 20 years. 10.12 This would provide the Council with a one-off revenue saving in year of application but due to the conditions attached the Council will need to ensure that it makes the necessary provision within its Medium Term Financial Plan to meet the additional payments per the time horizons proposed. 10.13 It is proposed that the Council applies this Loan Debt Repayment Holiday flexibility in 2022/23, which provides the Council with a one-off revenue saving of £18.455m (General Fund £8.738m and HRA £9.807m) with recognition that this will be repaid over the following 20 years via increased loan charges, and revenue provisions will be reviewed as part of the annual Medium Term Financial Plan updates, to ensure affordability. 10.14 The Council seeks approval to use the fiscal flexibilities outlined above as appropriate. This will assist the Council in managing the on-going impact of COVID and other pressures with the implementation of the fiscal flexibilities managed in line with the principles detailed within this Treasury Management Strategy and the setting of prudential indicators. Page 38 of 54
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Annex A Treasury Management Policy Statement & Clauses adopted The Treasury Management Policy Statement adopted by North Lanarkshire Council: 1. The Council defines its Treasury Management activities as: “The management of the organisation’s borrowing 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.” 2. The Council regards the successful identification, monitoring and control of risk to be the prime criteria by which the effectiveness of its treasury management activities will be measured. Accordingly, the analysis and reporting of treasury management activities will focus on their risk implications for the Council and any financial instruments entered into to manage these risks. 3. The Council acknowledges that effective treasury management will provide support towards the achievement of its business and service objectives. It is therefore 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 4. The Council adopts a high-level approach to setting policies for borrowing and investment activity having in place an appropriate scheme of delegation and ensuring all staff employed in Treasury Management have the suitable skills and resources to carry out delegated treasury management activities effectively, efficiently and achieving value for money. CIPFA Treasury Management code clauses formally adopted by North Lanarkshire Council: 1. This Council will create and maintain, as the cornerstones for effective treasury management: • A treasury management policy statement, stating the policies, objectives and approach to risk management of its treasury management activities; • Suitable treasury management practices (TMPs), setting out the manner in which the Council will seek to achieve those policies and objectives, and prescribing how it will manage and control those activities. 2. The Council will receive reports on its treasury management policies, practices and activities, including as a minimum, an annual strategy and plan in advance of the year, a mid-year review and an annual report after its close, in the form prescribed in its TMPs. 3. The Council delegates responsibility for the development of the Treasury Management Strategy and implementation and monitoring of its treasury management policies and practices to the Finance and Resources Committee and for the execution and administration of treasury management decisions to the Head of Financial Solutions, who will act in accordance with the Council's Treasury Policy statement and TMPs and CIPFA's Standard of Professional Practice on Treasury Management. 4. The Audit and Scrutiny Panel will be responsible for ensuring effective scrutiny of the Treasury Management Strategy and policies as part of its work on reviewing the internal financial controls of the Council. 5. In accordance with The Local Government Investments (Scotland) Regulations 2010, the Council is responsible for the approval of the Annual Investment Strategy and Annual Investment Report. Page 39 of 54
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Annex B Explanation of Long-Term Rating Definitions Type of Rating Rating Explanation Fitch – long-term AAA Indicates exceptionally strong capacity for timely payment of financial commitments and this capacity is highly unlikely to be adversely affected by foreseeable events. AA- Indicates very strong capacity for timely payment of financial commitments and this capacity is not significantly vulnerable to foreseeable events. A- Indicates strong capacity for timely payment of financial commitments. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings. BBB Indicates an adequate capacity for timely payment of financial commitments but adverse business or economic conditions more likely to impair this capacity. Moody’s – long-term Aaa Offer excellent credit quality, with susceptibility to long-term risks that are mostly unlikely to materially impair the banks strong position. Aa Offer excellent credit quality, with susceptibility to long-term risks with a vulnerability to greater fluctuations within protective elements. A Offer excellent credit quality, but elements suggest a susceptibility to impairment over the long-term. Baa Rated as medium grade, with some speculative elements and moderate credit risk. Standard & Poor’s - long-term AAA Indicates extremely strong capacity for timely payment of financial commitments AA- Indicates very strong capacity for timely payment of financial commitments A- Indicates strong capacity for timely payment of financial commitments This capacity may, nevertheless, be more susceptible to the adverse effects of changes in circumstances or in economic conditions than is the case for higher rated category. BBB Indicates an adequate capacity for timely payment of financial commitments but adverse business or economic conditions more likely to impair this capacity. Page 40 of 54
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Annex C Permitted Investments, Associated Controls, Credit Rating, Money and Time Limits Type of Investment Treasury Management Risks Mitigating Controls Credit Rating Money Limits Time Limits a. Deposits with the Debt Management Account Facility (UK Government). Deposit with the UK Government and as such credit/counterparty and liquidity risk is very low, and there is no market risk to the principal sum. Little mitigating controls required as this is a UK Government investment. The monetary limit is unlimited to allow for a safe haven for investments. The sovereign rating is monitored with the impact of any changes to this sovereign rating evaluated and removal of the investment from the permitted list if necessary. Long-term rating n/a No limit O/night b. Deposits with other local authorities or public bodies Quasi UK Government debt and as such credit/counterparty risk is very low, and there is no market risk to principal sum. Liquidity may present a problem as deposits can only be broken with the agreement of the counterparty, and penalties can apply. Little mitigating controls required for local authority deposits, as this is a quasi UK Government investment. The sovereign rating is monitored with the impact of any changes to this sovereign rating evaluated and removal of the investment from the permitted list if necessary. Long-term rating n/a £20m Up to a max period of 3 years c. Instant Access Accounts These tend to be low risk investments, but will exhibit higher risks than categories (a) and (b) above. These investments are subject to risk of loss via bail-in should the regulator determine that the bank is failing or likely to fail. Lending will be restricted to those counterparties meeting the credit rating criteria with the selection defaulting to the lowest available credit rating to provide additional risk control measures. Assessment of credit worthiness will be further strengthened by the use of additional market intelligence including credit default swaps, sovereign support and share price data. Long-term rating Above or equal to A- or equivalent £20m Daily access if required BBB or equivalent £10m Page 41 of 54
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Annex C Permitted Investments, Associated Controls, Credit Rating, Money and Time Limits Type of Investment Treasury Management Risks Mitigating Controls Credit Rating Money Limits Time Limits d. Call Accounts These tend to be low risk investments, but will exhibit higher risks than categories (a) to (c) above. With this type of investment liquidity can be low or high, determined by the call account facility adopted e.g. 35 days. Call deposits can only be broken with the agreement of the counterparty, and penalties may apply. These investments are subject to risk of loss via bail-in should the regulator determine that the bank is failing or likely to fail. Lending will be restricted to those counterparties meeting the credit rating criteria with the selection defaulting to the lowest available credit rating to provide additional risk control measures. Assessment of credit worthiness will be further strengthened by the use of additional market intelligence including credit default swaps, sovereign support and share price data. Long-term rating Above or equal to A- or equivalent £20m up to a max of 364 days BBB or equivalent £10m up to a max of 30 days. e. Term Deposits These tend to be low risk investments, but will exhibit higher risks than categories (a) to (d) above. With this type of investment, liquidity is low and term deposits can only be broken with the agreement of the counterparty, and penalties may apply. These investments are subject to risk of loss via bail-in should the regulator determine that the bank is failing or likely to fail. Lending will be restricted to those counterparties meeting the credit rating criteria with the selection defaulting to the lowest available credit rating to provide additional risk control measures. Assessment of credit worthiness will be further strengthened by the use of additional market intelligence including credit default swaps, sovereign support and share price data. Long-term rating Above or equal to A- or equivalent £20m up to a max of 364 days. BBB or equivalent £10m up to a max of 30 days. Page 42 of 54
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Annex C Permitted Investments, Associated Controls, Credit Rating, Money and Time Limits Type of Investment Treasury Management Risks Mitigating Controls Credit Rating Money Limits Time Limits f. Money Market Funds (MMFs) The Council is no longer guaranteed preservation of capital i.e. for every £1 of principal invested the fund will no longer guarantee a return £1 of principal on withdrawal. However the day to day operation of LVNAV funds is very similar and has many of the attractive features of the former Constant Net Asset Value (CNAV) fund and the probability of the price changing and loss of capital, within the boundaries set for price changes i.e. “the collar”, is widely regarded as de minimis. Two types of funds are available to the Council • a Public Debt CNAV (assets invested in government debt); and • a ‘Low Volatility NAV’ (LVNAV) The Council will not use Variable NAV Funds. Assessment of credit worthiness will be underpinned by additional market intelligence including credit default swaps, sovereign support and share price data and information regularly received from the Council’s Treasury Advisors Arlingclose Ltd. Long-term rating n/a £10m per MMF fund up to a max of £40m in total or 0.5% of fund size. Daily access if required g. Instant Access Funds held with Council’s own bankers These tend to be low risk investments, but will exhibit higher risks than categories (a), (b) and (c) above. These investments are subject to risk of loss via bail-in should the regulator determine that the bank is failing or likely to fail. If the council’s own bankers fail to meet the credit rating criteria per c) above , for operational purposes limited funds may be held within this account but the Council will ensure funds kept at the lowest levels manageable Long-term rating n/a n/a Overnight basis only Page 43 of 54
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Annex C Permitted Investments, Associated Controls, Credit Rating, Money and Time Limits Type of Investment Treasury Management Risks Mitigating Controls Credit Rating Money Limits Time Limits h. Government Gilts and Treasury Bills These are marketable securities issued by the UK Government and as such counterparty and liquidity risk is very low, although there is potential risk to the market value arising from an adverse movement in interest rates (no loss if these are held to maturity). Little mitigating controls required as this is a UK Government investment. The monetary limit is unlimited to allow for a safe haven for investments. Any changes to the sovereign rating is evaluated and the removal of this type of investment from the permitted list if necessary. Assessment of credit worthiness will be further strengthened by additional market intelligence including credit default swaps, sovereign support and share price data. Cashflow management tools will endeavour to ensure that this type of investment is held until maturity to limit market risk. Long-term rating n/a No limit Up to a max period of 5 years i. Supranational Bonds These are bonds issued by institutions such as the European Investment Bank (EIB) and the World Bank as such counterparty and liquidity risk is very low, although there is potential market risk to principal amount arising from an adverse movement in interest rates (no loss if these are held to maturity). Lending restricted to those meeting credit rating criteria. Assessment of credit worthiness will be further strengthened by the use of additional market intelligence including credit default swaps, sovereign support and share price data. Cashflow management tools will endeavour to ensure that this type of investment is held until maturity to limit market risk Long-term rating A- or equivalent £20m max period of 5 years. Page 44 of 54
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Annex C Permitted Investments, Associated Controls, Credit Rating, Money and Time Limits Type of Investment Treasury Management Risks Mitigating Controls Credit Rating Money Limits Time Limits j. Certificates of deposits with financial institutions These are short dated marketable securities issued by financial institutions and as such counterparty risk is low, but will exhibit higher risks than categories (a) to (h) above. There is risk to value of capital loss arising from selling ahead of maturity if combined with an adverse movement in interest rates. Liquidity risk will normally be low. Lending will be restricted to those counterparties meeting the credit rating criteria with the selection defaulting to the lowest available credit rating to provide additional risk control measures. Assessment of credit worthiness will be further strengthened by the use of additional market intelligence including credit default swaps, sovereign support and share price data. Long-term rating A- or equivalent £20m Up to a max period of 364 days. k. Covered Bonds These are bonds issued by financial institutions and guaranteed by a group company that holds mortgage assets. There is risk of capital loss arising from selling ahead of maturity if combined with an adverse movement in interest rates. Liquidity risk will normally be low as highly liquid market. These investments are exempt from the bail-in provisions should the regulator determine that the bank is failing or likely to fail. These investments are secured on the borrower’s assets up to a value of 125% of the principal amount which limits the potential losses in the event of default. Process in place to monitor the value of the cover arrangements throughout the bond term. i.e. value of assets providing security Bonds will be restricted to those meeting credit rating criteria. Assessment of credit worthiness will be further strengthened by the use of additional market intelligence including credit default swaps, sovereign support and share price data. Cashflow management tools will endeavour to ensure that this type of investment is held until maturity to limit market risk. Long-term rating A- or equivalent (Criteria required for the covered bond.) £20m Up to 5 years. BBB or equivalent (Criteria required for the covered bond.) £10m Up to 6 months. Page 45 of 54
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Annex C Permitted Investments, Associated Controls, Credit Rating, Money and Time Limits Type of Investment Treasury Management Risks Mitigating Controls Credit Rating Money Limits Time Limits l. Reverse repurchase agreements and other collateralised arrangements These are bonds issued by financial institutions with collateral provided by the lender to the Council by transferring the custody and title to bonds or other investment securities valued at a price above par e.g. 105% of the principal amount. There is risk of capital loss arising from selling ahead of maturity if combined with an adverse movement in interest rates. Liquidity risk will normally be low as highly liquid market. These investments are exempt from the bail-in provisions should the regulator determine that the bank is failing or likely to fail. These investments are secured by the borrower giving the Council custody and title to marketable securities valued above par that will be retained in the event of default Process in place to monitor the value of the collateral in place throughout the bond term to ensure adequate cover. Collateral arrangements will be restricted to those meeting credit rating criteria. Assessment of credit worthiness will be further strengthened by the use of additional market intelligence including credit default swaps, sovereign support and share price data. Cashflow management tools will endeavour to ensure that this type of investment is held until maturity to limit market risk Long-term rating A- or equivalent (Criteria required for collateral arrangement) £20m Up to 5 years. BBB or equivalent (Criteria required for the collateral) £10m Up to 6 months. Page 46 of 54
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Annex C Permitted Investments, Associated Controls, Credit Rating, Money and Time Limits Type of Investment Treasury Management Risks Mitigating Controls Credit Rating Money Limits Time Limits m. Investment properties These are non-service properties which are being held pending disposal or for a longer term rental income stream. These are highly illiquid assets with high risk to value (the potential for property prices to fall or for rental voids). Funding for this type of investment must be met from revenue & balances as borrowing to on-lend for this purpose is prohibited per Scottish Government Investment guidance. In larger investment portfolios some small allocation of property based investment may counterbalance or compliment the wider cash portfolio. Property holding will be re-valued regularly and reported annually with gross and net rental streams. Strategy/Policy driven subject to scrutiny by Head of Financial Solutions. n/a Policy Driven Policy Driven, n. Loans to third parties including soft loans These are service investments either at market rates of interest or below market rates (soft loans). These types of investments may exhibit credit risk and are likely to be highly illiquid. Funding for this type of investment must be met from revenue & balances as borrowing to on-lend for this purpose is prohibited per Scottish Government Investment guidance. Prior to awarding loans to a third party the Service Strategy/Policy decision to award this type of loan/loans must be subject to scrutiny and approval by the Head of Financial Solutions. Full detail of the service rationale behind awarding the loan and the likelihood of partial or full default must be assessed. n/a Policy Driven Policy Driven, o. Loans to a local authority company These are service investments either at market rates of interest or below market rates (soft loans). These types of investments may exhibit credit risk and are likely to be highly illiquid. Funding for this type of investment must be met from revenue & balances as borrowing to on-lend for this purpose is prohibited per Scottish Government Investment guidance. Prior to awarding loans to a local authority company the Service Strategy/Policy decision to award this type of loan/loans must be subject to scrutiny and approval by the Head of Financial Solutions. Full detail of the service rationale behind awarding the loan and the likelihood of partial or full default must be assessed. n/a Policy Driven Policy Driven, Page 47 of 54
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Annex C Permitted Investments, Associated Controls, Credit Rating, Money and Time Limits Type of Investment Treasury Management Risks Mitigating Controls Credit Rating Money Limits Time Limits p. Shareholdings in a local authority company These are service investments which may exhibit market risk and are likely to be highly illiquid. Funding for this type of investment must be met from revenue & balances as borrowing to on-lend for this purpose is prohibited per Scottish Government Investment guidance. Each equity investment in a local authority company requires member approval and each application will be supported by the service rationale behind the investment and the likelihood of loss. Service Strategy/Policy driven subject to scrutiny by Head of Financial Solutions. n/a Policy Driven Policy Driven q. Non-local authority shareholdings These are non-service investments which may exhibit market risk, be only considered for longer term investments and will be likely to be liquid. Funding for this type of investment must be met from revenue & balances as borrowing to on-lend for this purpose is prohibited per Scottish Government Investment guidance. Any non-service equity investment will require separate Member approval and each application will be supported by the service rationale behind the investment and the likelihood of loss. Service Strategy/Policy driven subject to scrutiny by Head of Financial Solutions n/a Policy Driven Policy Driven Page 48 of 54
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Annex C Permitted Investments, Associated Controls, Credit Rating, Money and Time Limits Type of Investment Treasury Management Risks Mitigating Controls Credit Rating Money Limits Time Limits r. Subordinated debt in projects delivered via ‘Hubco/DBFM’ model The ‘Hubco/DBFM’ delivery model fails to meet its’ contractual obligations resulting in failure to repay the principal sum invested. The cash forming part of the Council’s reserves and balances is required during the term of the investment as the type of investment is highly illiquid. Fluctuations in the levels of interest rates create an unexpected or unbudgeted burden on the Council’s finances against which the Council has failed to protect itself adequately. The Council must assess the merits of each individual subordinated debt investment opportunity via the ‘Hubco/DBFM’ model prior to investing, carrying out a full risk/benefit analysis. Employ efficient cashflow management and forecasting tools including annual balance sheet analysis. Set a cap on the level of long term investments of this nature i.e. to avoid cash reserves being fully extinguished resulting in future non compliance with ‘borrowing to on lend’ restrictions. Implement Long term Financial Plans which are robust including the setting of contingencies and cash backed reserves at levels to leave prudent headroom to cater for long term cash commitments. Where possible consider selling subordinated debt to a secondary market provider. For investments in subordinated debt for projects delivered via the ‘Hubco’ model the rate of return is fixed over the term of the investment and in normal circumstances will not vary. n/a £1.5m per project Up to 30 years Page 49 of 54
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Annex D Interest Rate Forecast March 2023 until December 2025 (Source: Arlingclose Ltd December 2022) *Official Bank rate: (also called the Bank of England base rate or BOEBR) is the interest rate that the Bank of England charges Banks for secured overnight lending. **MM: the short term readily available from banks and building societies and similar financial organisations ***PWLB: Public Works Loan Board Central Forecast Mar June Sept Dec March June Sept Dec March June Sept Dec Official Bank Rate* 4.00% 4.25% 4.25% 4.25% 4.25% 4.00% 3.75% 3.50% 3.25% 3.25% 3.25% 3.25% 3-mth MM Rate** 4.40% 4.40% 4.40% 4.35% 4.30% 4.25% 4.00% 3.75% 3.50% 3.40% 3.40% 3.40% 5-yr PWLB*** 4.40% 4.60% 4.60% 4.60% 4.50% 4.40% 4.30% 4.20% 4.10% 4.10% 4.10% 4.10% 10-yr PWLB 4.30% 4.30% 4.30% 4.30% 4.30% 4.30% 4.30% 4.30% 4.30% 4.30% 4.30% 4.30% 20-yr PWLB 4.65% 4.65% 4.65% 4.65% 4.65% 4.65% 4.65% 4.65% 4.65% 4.65% 4.65% 4.65% 50-yr PWLB 4.40% 4.40% 4.40% 4.40% 4.40% 4.40% 4.40% 4.40% 4.40% 4.40% 4.40% 4.40% 2023 2024 2025 Page 50 of 54
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Annex E SENSITIVITY ANALYSIS OF PRUDENTIAL INDICATORS: AFFORDABILITY 2023/24, 2024/25 & 2025/26 The Tables below highlights the impact of (i) a plus or minus 10% change in the capital financing requirement i.e the level of borrowing undertaken to retain average investment balances and under borrowing at prudent levels Prudential Indicators : Affordability CFR Movement 23/24 24/25 25/26 £m £m £m Total Composite Capital Financing Costs +10% 52.62 57.51 63.00 No Change 52.50 57.23 62.57 -10% 52.38 56.96 62.15 Total HRA Capital Financing Costs +10% 28.45 33.31 38.90 No Change 28.35 33.06 38.43 -10% 28.26 32.83 37.97 General Fund : Ratio of financing costs to net revenue stream +10% 5.87% 6.42% 7.03% No Change 5.86% 6.39% 6.98% -10% 5.84% 6.36% 6.93% HRA : Ratio of financing costs to net revenue stream +10% 19.20% 21.39% 23.61% No Change 19.14% 21.23% 23.33% -10% 19.07% 21.08% 23.05% Page 51 of 54
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Annex E SENSITIVITY ANALYSIS OF PRUDENTIAL INDICATORS: AFFORDABILITY 2023/24, 2024/25 & 2025/26 (ii) a plus or minus 50bps change in the interest rates achievable for new long-term borrowing i.e. 1/2 per cent movement Prudential Indicators : Affordability Interest Rate Movement 23/24 24/25 25/26 £m £m £m Total Composite Capital Financing Costs +50bps 53.65 58.87 64.63 No Change 52.50 57.23 62.57 -50bps 51.35 55.59 60.51 Total HRA Capital Financing Costs +50bps 29.13 34.17 39.84 No Change 28.35 33.06 38.43 -50bps 27.58 31.97 37.04 General Fund : Ratio of financing costs to net revenue stream +50bps 5.99% 6.57% 7.21% No Change 5.86% 6.39% 6.98% -50bps 5.73% 6.20% 6.75% HRA : Ratio of financing costs to net revenue stream +50bps 19.66% 21.94% 24.18% No Change 19.14% 21.23% 23.33% -50bps 18.61% 20.53% 22.48% Page 52 of 54
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Annex E SENSITIVITY ANALYSIS OF PRUDENTIAL INDICATORS: AFFORDABILITY 2023/24, 2024/25 & 2025/26 (iii) Prudential Indicators : Affordability Movement in Net Revenue Steam 23/24 24/25 25/26 General Fund : Ratio of financing costs to net revenue stream +10% 5.33% 5.81% 6.35% No Change 5.86% 6.39% 6.98% -10% 6.51% 7.10% 7.76% HRA : Ratio of financing costs to net revenue stream +10% 17.40% 19.30% 21.21% No Change 19.14% 21.23% 23.33% -10% 21.26% 23.59% 25.92% a plus or minus 10% change in the net revenue stream used to calculate the proportion of financing costs to net revenue stream Page 53 of 54
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Annex F LOANS FUND REPAYMENT SCHEDULE Loans Fund Repayments Schedules Composite Estimated Loans Fund Pool Open Balance HRA Estimated Loans Fund Pool Open Balance Total £m £m £m Estimated Loans Fund Pool Open Balance 642.69 437.54 1,080.23 Estimated New Advances 23/24 114.60 81.89 196.49 Estimated New Advances 24/25 115.87 97.14 213.01 Estimated New Advances 25/26 45.14 103.56 148.70 Total Debt Repayments Due 918.30 720.13 1,638.43 Scheduled Debt Amortisation Composite HRA Total £m £m £m Within 1 year (10.49) (11.67) (22.16) Within 2 to 5 years (58.66) (62.90) (121.56) within 5 to 10 years (95.06) (96.92) (191.98) within 10 to 15 years (120.12) (119.11) (239.23) within 15 to 20 years (145.88) (121.60) (267.48) within 20 to 25 years (156.50) (104.81) (261.31) within 25 to 30 years (140.36) (93.23) (233.59) within 30 to 35 years (95.27) (60.30) (155.57) within 35 to 40 years (78.82) (38.50) (117.32) within 40 to 45 years (17.14) (11.09) (28.23) within 45 to 50 years 0.00 0.00 0.00 within 50 to 55 years 0.00 0.00 0.00 within 55 to 60 years 0.00 0.00 0.00 (918.30) (720.13) (1,638.43) Page 54 of 54