North Lanarkshire Council

Email hughesp@northlan.gov.uk Telephone 01698 302275

Executive SummaryThis report fulfils the key requirements of the Local Government Act 2003 in that it:

• Outlines the Treasury Management Strategy for 2017/2018 in accordance with the CIPFACode of Practice on Treasury Management

• Reports on the treasury and prudential indicators as required by the above code and theCIPFA Prudential Code for Capital Finance in Local Authorities

RecommendationsIt is recommended that:

a) Committee endorses the Treasury Management Strategy 2018/2019 and adopts theTreasury Management and Prudential Indicators for 2018/2019 to 202012021 and thepolicy on repayments of Loans Fund advances 2018/19 set out within Appendix 1 to thisreport.

b) Remits the Treasury Management Strategy to the Council for approval.

Supporting Documents

CouncilBusiness Improve the Council's Resource base.Plan to 2020

Appendix 1: Treasury Management Strategy 2018/2019 and the TreasuryManagement and Prudential Indicators for 2018/2019 to 2020/2021(see attached)

Agenda item L I approval 0 noting Ref Date 1 February 2018

From Paul Hughes, Head of Business for Financial Solutions

1. Background

1.1 Each year, in line with the Code of Practice, the Council produces a Treasury ManagementStrategy. The Treasury Strategy Statement 2017/2018 approved by Committee on 1 March2017, set out the Treasury Management policies, practices and activities undertaken by theFinance for Business Solutions in compliance with the Code.

1.2 In addition, the Treasury Management Strategy outlines the Prudential and TreasuryIndicators introduced and monitored on a regular basis to demonstrate that the Council'sinvestment plans are managed within a sound financial environment. This report nowupdates the TM Strategy for year 2018/2019.

1.3 This Strategy continues to emphasise, under the revised Code of Practice, an enhanced rolefor members in terms of accountability and awareness. The Policy & Resources (Financeand Organisational Business) Sub−Committee is responsible for the development of theStrategy, its implementation and monitoring while the Audit and Governance Panel has aspecified role in the effective scrutiny of the Treasury Management Strategy and policies aspart of its work on reviewing the internal financial controls of the Council.

1.4 The report also reflects The Local Government Investments (Scotland) Regulations 2010which were enacted from 1 April 2010 containing a requirement for the annual investmentstrategy and annual investment report to be approved by the full Council and not delegatedto a committee or sub−committee. As a result, this Strategy, if endorsed by committee,should be remitted to the Council for approval.

2. Report2.1 The Strategy fully detailed within Appendix 1 covers the:

• Council's debt and investment projections;• expected movement in interest rates;• Council's 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 havebeen incorporated within the 2018/2019 Strategy.

2.3 The introduction of the Prudential Code for Capital Finance in Local Authorities in April 2004brought about a change to capital spending controls giving councils the freedom to invest incapital projects without the 'imitation of legislative controls, provided their programmes canbe shown to be affordable, prudent and sustainable.

2.4 This report builds on this framework outlining the Council's prudential and treasurymanagement indicators for 2018/2019 to 2020/2021. The key mandatory indicators requiredby both the Treasury Management Code and the Prudential Code are illustrated for theseyears and, with a view to more fully informing the decision making process; local indicatorsare also included.

3. Implications

3.1 Financial Impact: No impact

3.2 HR/Policy/Legislative Impact: None identified

3.3 Environmental Impact: None Identified

3.4 Risk Impact: None identified

4. Measures of success4.1 The Treasury Management Strategy and the Prudential/TM indicators illustrated in the

appendix provide members with assurance that the key objectives of the PrudentialFramework (i.e. prudence and affordability) will be satisfied and the inherent risks ofTreasury Management risks will be controlled effectively and efficiently providing value formoney. When taken together, the indicators illustrate that the proposed capital investmentplans for 2018/2019 onwards are prudent and affordable. Healthy prudential margins from2018/2019 onwards justify the investment levels, the cost or affordability of which iscontained within the existing financial strategies.

4/f.Paul HughesHead of Business for Financial Solutions

Members seeking further information on the contents of this report are asked to contact Joseph Quinn, Finance Manager(Systems and Treasury Management) on telephone number 01698 302061.

Appendix I

Treasury ManagementStrategy 2018/2019

&

Treasury ManagementIndicators & Prudential

Indicators2018/2019 to 2020/202'

Appendix I

Index1 .Introduction

2.Annual Borrowing Requirement 2018/2019

3.Outlook for Interest Rates

4.Annual Borrowing Strategy 2018/2019

5.Annual Investment Strategy 2018/2019

.6.Performance Measurement Indicators and Benchmarking

7.Treasury Management Indicators 2018/2019 to 2020/2021

8.Prudential Indicators 2018/2019 to 2020/2021

9.PoIicy on Repayment of Loans Fund Advances 2018/2019

Annex A: Treasury Management Policy Statement and Clausesadopted

Annex B: Explanation of Long−term Rating Definitions

Annex C: Permitted Investments, Associated Controls CreditRating, Money and Time Limits

Annex D: Interest Rate Forecast March 2018 until December 2020

Annex E: Sensitivity Analysis of Prudential Indicators: Affordability2018/19, 2019/20 and 2020/21

Annex F: Loans Fund Repayment Schedule

Appendix I

Treasury Management Strategy 2018/2019, Treasury Management Indicators andPrudential Indicators 2018/2019 to 2020/2021

1. Introduction1.1 Treasury Management deals with the borrowing and investment activity of the Council, and is

an integral part of the financial management of the Council's affairs. It seeks to ensure that bothcapital borrowing requirements and day to day revenue cash transactions are fully funded. Itsimportance has increased as a result of the additional freedoms provided by the PrudentialCode, and there are specific treasury management and prudential indicators included in thisStrategy that require approval.

1.2 The treasury management indicators and prudential indicators outlined within section 7 and 8 ofthis appendix consider the affordability and impact of capital expenditure decisions, whilst thetreasury management service considers the effective funding of these decisions. Togetherthese 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 requirementsand a professional code of practice. In accordance with the Council's financial regulations theCouncil adopts the CIPFA "Treasury Management in the Public Services" Code of Practice (theCode) including the Treasury Management Policy statement and the adoption of the keyclauses outlined within Annex A. The Council also complies with the CIPFA Prudential Codeand the setting of three year prudential indicators.

1.4 CIPFA published revised editions of the Treasury Management Code and Prudential Code inDecember 2017. Unless otherwise stated the full impact of the changes will be reflected withinthe 2018/2019 TM strategy and in the preparation of the Treasury Management Indicators &Prudential Indicators for 2018/2019 to 2020/2021.

1.5 The main features of the Treasury Management code changes include

i) the type of investments covered by the Code now include those investments not made as partof the normal treasury management activity thus recognising all investments require anappropriate investment management and risk management framework.

ii) the removal of the requirement to set interest rate exposure indicators/limits, the strategy nowrequired to provide a narrative as to how interest rate exposure is managed and monitored.

iii) extends the maturity structure of borrowing TM management indicator to cover variable as wellas fixed rate debt.

1.6 The revised Prudential Code includes a new requirement for local authorities to produce aCapital Strategy, this is a summary document covering capital expenditure and financing,treasury management and non treasury management investments. Given the short lead−in timeto prepare for this change, CIPFA has published a statement recognising that Councils may notbe able to meet this requirement for 2018/19 with full implementation in 2019/20.

1.7 To ensure the Council develops the capital strategy, fully implementing all aspects of the newsummary requirements, the Council, at this time, will not be formally presenting a capitalstrategy for 2018/19, with full implementation planned for the 2019/20 financial year. It shouldbe recognised however, that a number of the information requirements to be included within thisnew strategy document, are currently provided within other reports presented to Committee,including the capital plan, medium/long term financial plan and within this TM strategydocument.

1.8 Within the revised Prudential Code, the prudential indicator on the incremental impact of capitalinvestment decisions on Council Tax and House Rents has been deleted. Although Councils willstill have to ensure that the revenue implications of capital finance, including finance costs, areproperly taken into account within option appraisal process, the capital programme andmedium/long term financial plans

1.9 The Code re−affirms the Audit and Governance Panel in its role providing effective scrutiny of theTreasury Management Strategy and policies while the Policy & Resources (Finance andOrganisational Business) Sub−Committee remains responsible for the development of theStrategy, its implementation and monitoring.

Appendix I

Treasury Management Strategy 201812019, Treasury Management Indicators andPrudential Indicators 201812019 to 2020/2021

10 The Code emphasises members' responsibility in this area, requiring increased memberawareness to enable greater member scrutiny of treasury management activity. The TreasuryManagement team provide in house awareness sessions, with members also provided with theopportunity to review the Councils Treasury Management Practices manual and attend theoffice to observe the daily Treasury Management activity.

11 In accordance with the CIPFA TM Code recommendations the Council has a TreasuryManagement advisory contract in place with the current providers being Arlingclose Ltd whoprovide specific advice on investment, debt and capital finance issues.

12 Per the CIPFA TM Code the Council adopts a high level approach to setting policies forborrowing and investment activity having in place an appropriate scheme of delegation andensuring all staff employed in Treasury Management have the suitable skills and resources tocarry out delegated treasury management activities effectively, efficiently and achieving valuefor money.

13 Treasury Management staff regularly attend training courses, seminars and workshopsprovided by the Council's advisors, the CIPFA Treasury Management Forum and other ad hocproviders including brokers and financial institutions. Staff also receive regular treasury relatedupdates/information and newsletters on a daily/weekly basis via email from banks and otherfinancial institutions. They also have access to treasury related websites to maintain awarenessof treasury management issues.

14 The requirements of the Code have been incorporated within the 2018/2019 TreasuryManagement Strategy and in the preparation of the Treasury Management Indicators &Prudential Indicators for 2018/2019 to 2020/2021.

15 The Code of Practice requires the Council to produce reports on its Treasury Managementpolicies, practices and activities on a regular and ongoing basis. This encompasses thepreparation and approval of an Annual Strategic Plan, which defines the arrangements formanaging the Treasury Management function in the incoming year. This report details theproposed Strategy for 2018/2019.

1.16 This Strategy covers:

• The Council's debt and investment projections;

• The expected movement in interest rates;

• The Council's borrowing and investment strategies;

• Treasury Management performance indicators;

• Specific limits on treasury managemen activities.17 The requirements of the Local Government Investments (Scotland) Regulations 2010 have

been incorporated within the 2018/2019 Strategy, including the preparation of an investmentstrategy which must be approved by the full Council.

2. Annual Borrowing Requirement 2018/20192.1 At the beginning of 2018/2019, it is anticipated that the Council's total debt outstanding

including long term liabilities will amount to £813.0m. Based on the proposed 2018/2019Composite Capital Programme for General Services and the HRA 30 year financial plan,updated to reflect the latest data available, indications are that there will be an approved CapitalProgramme of £1 65.5m for 2018/2019.

2.2 This will be resourced by capital grants, capital receipts and capital funded from current revenue(CFCR) with the balance of £87.2m representing an in year borrowing need which will contributetowards the net increase in the Capital Financing Requirement (CFR). Table 7 within Section 8below sets out the revised Capital Expenditure plans for 2017/2018 and forecast for the period2018/2019 to 2020/2021 for both the General Services and HRA Capital programmes.

Appendix I

Treasury Management Strategy 2018/2019, Treasury Management Indicators andPrudential Indicators 2018/2019 to 2020/2021

2.3 During 2017/2018 there has been no replacement long term borrowing undertaken with internalcash balances, short term borrowing, plus credits due to the scheduled principal repayments tothe loans fund from service departments (annuity based), being used in lieu of further long termborrowing. This strategy adopted in the light of interest rate expectations, the management ofcarrying costs and the availability of short term borrowing up to 364 days at attractive rates.

2.4 To meet the capital financing requirement, the replacement of maturing long term debt and themaintenance of cash balances necessary to meet on going daily liquidity requirements, it isestimated that the Council will source long term borrowing of £88.0m in 2018/2019, £88.Om in2019/2020 and £94.Om in 2020/2021.

2.5 These borrowing projections exclude temporary borrowing undertaken, with average levelsexpected to be approximately £120.Om over the three year period, with a further £40.Om ofmunicipal bank balances anticipated to be available to the Council on a short term basis. Thislevel of short term borrowing proving attractive to the Council, due to the low rates currentlyavailable, with these rates anticipated to remain at these levels for the foreseeable future.

2.6 The Council's borrowing requirement is set firmly within the framework of wider Council activityand will be driven by the corporate plan, capital investment plan and medium to long− termfinancial strategies.

3. Outlook for Interest Rates3.1 The major external influence on the Council's treasury management strategy for 2018/19 will be

the UK's progress in negotiating its exit from the European Union and agreeing future tradingarrangements.

3.2 The domestic economy has remained relatively robust since the surprise outcome of the 2016referendum but there are indications that uncertainty over the future is now weighing on growth.Transitional arrangements may prevent a cliff−edge, but will also extend the period ofuncertainty for several years. Economic progress is therefore forecast to remain sluggishthroughout 2018/2019.

3.3 Consumer price inflation reached 3.0% in September 2017 as the post referendum devaluationof sterling continued to feed through to imports. Unemployment continued to fall and the Bank ofEngland's Monetary Policy Committee judged that the extent of spare capacity in the economyseemed limited and the pace at which the economy can grow, without generating inflationarypressure, had fallen over recent years. This resulted in an increase to the official Bank rate from0.25% to 0.50% in November 2017.

3.4 The Council's Treasury Management advisors Arlingclose predict that the Bank Rate will remainat 0.50% throughout 2018/19. Future expectations for higher short term rates are subdued andon−going decisions remain data dependant and negotiations on exiting the EU cast a shadowover monetary policy decisions.

3.5 Medium to longer term interest rates are expected to remain similar to current levels (January2018) throughout financial year 2018/19 although the UK governments seemingly deterioratingfiscal stance being a potential upside risk.

3.6 Annex D provides details of the forecast official Bank rate, 1 year London Inter−bank Bid Rate(LIBID) and PWLB rates over the next three years which are underpinned by the economic risksand uncertainties outlined in the preceding paragraphs above.

3.7 The Council's main source of borrowing is the Public Works Loan Board (PWLB), with the boardper the PWLB Circular 147, maintaining a 1.00% margin above the equivalent gilt yield with anyforecast movements in PWLB interest rates closely correlated to gilt movements.

Appendix I

Treasury Management Strategy 2018/2019, Treasury Management Indicators andPrudential Indicators 2018/2019 to 2020/2021

3.8 Table 1 below includes forecast average PWLB rates anticipated for a range of maturity periodsover the next 3 years based on the forecast per Annex D. The interest rates shown takeaccount of the 0.20% reduction in the standard rates, which will apply, if the Council, asexpected meets the qualifying criteria for the certainty rate in 2018/19.

Annual Bank LIBID PWLB RatesAverage Rate Rate

1 year 5 year 10 year 20 year 50 year2018 0.50% 0.73% 1.59% 2.05% 2.65% 2.50%2019 0.50% 0.80% 1.70% 2.14% 2.73% 2.63%2020 0.50% 10.80% 1.83% 2.31% 2.63% 2.75%

laDle 1 − Methum Term Interest Rate Est imates (averages)

3.9 These projections underpin the borrowing and investment strategies outlined in the followingparagraphs.

4.0 Annual Borrowing Strategy 2018/20194.1 The Council uses a combination of internally accumulated cash funds, temporary borrowing (up

to 364 days) and external borrowing from both the markets and PWLB to source its capitalfinancing requirement (CFR). In recent years the Council has used its revenuereserves/balances plus working capital to support its capital programme in lieu of borrowing.This minimises the amount of investment balances held, managing credit and counterparty riskand the impact of low investment returns, resulting in the Council currently being in an underborrowed position which is in line with the strategic approach adopted.

4.2 In lieu of future long term borrowing, the borrowing strategy to meet the current year(2017/2018) capital financing requirement of £46.9m (excluding credit arrangements), has beenprimarily to use internal cash balances, undertake short term borrowing where available atattractive rates plus credits due to the scheduled principal repayments. This strategy supportedby efficient cashflow management, balance sheet analysis of reserves and provisions andeffective treasury risk management.

4.3 In June 2017, the final stage of the new Greenfaulds High School campus project relating to theplaying fields was completed, with the project being financed under a Subhubco/DBFMstructure, in conjunction with the private sector and the Scottish Futures Trust. In line withtreatment of the main school campus this is accounted for as a credit arrangement, with acorresponding increase in the Council's 2017/2018 Capital Financing Requirement of £3.8m toreflect this.

4.4 A similar financing structure has been put in place for the Cumbernauld Academy campus whichwill not be delivered until 201 9/2020.This being financed under a Subhubco/DBFM structure inconjunction with the private sector and the Scottish Futures Trust. This will be accounted for asa credit arrangement, with a corresponding increase of £37.Om in the Council's projected2019/2020 Capital Financing Requirement included in Table 7 within Section 8.0 below.

4.5 At the 31 March 2018 it is anticipated that the Capital Financing Requirement will haveincreased by a total of £50.7m, which comprises the capital investment funded by borrowingand a credit arrangement.

4.6 It is estimated that the Council will source long term borrowing of £88.0m in 2018/2019, £88.Omin 2019/2020 and £94.Om in 2020/2021 to meet the on−going capital financing requirements, thereplacement of maturing long term debt and the maintenance of cash balances necessary tomeet on going daily liquidity requirements.

4.7 These borrowing projections exclude monies borrowed and repayable over a shorter period, withaverage levels held expected to be approximately £120.0m over the three year period, with afurther £40.0m of municipal bank balances projected to be available to the Council on a shortterm basis, based on current depositor levels. This level of short term borrowing provingattractive to the Council due to the low rates currently available, with these rates anticipated toremain at these levels, for the foreseeable future.

Appendix I

Treasury Management Strategy 2018/2019, Treasury Management Indicators andPrudential Indicators 2018/2019 to 2020/2021

4.8 The Council's capital expenditure planning processes and investment/borrowing analysisenables it to time its borrowing to take advantage of opportunities that may arise to achievebeneficial borrowing rates, minimising interest rate risk.

4.9 The timing of new borrowing will also take into account the level of cash balances andinvestments held so that there may be an option of postponing borrowing and continuing to usethese balances in the short term, particularly given the low investment returns currentlyprevailing.

4.10 The Councils borrowing strategy will be underpinned not only by the absolute borrowing ratesbut 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 aretemporarily held as investments because of the difference between what is paid on theborrowing and what is earned on the investment. The cost of carry is likely to be an issue for theforeseeable future.

4.11 The Council will closely monitor movements in long and short term interest rates to manage itsinterest rate risk.

4.12 The repayment terms of new borrowing will take account of the debt maturity profile to ensurethat an acceptable amount matures in any one year, managing the refinancing risk, whilst beingundertaken at the most advantageous rate.

4.13 The forecast debt maturity profile at the 31 March 2018 per the graph below highlights thatthere are a number of points in the maturity spectrum at which the Council has little or no debtdue for repayment. In general the current maturity profile provides the Council with flexibility indetermining the maturity period for new borrowing whilst ensuring the strategy adoptedminimizes the debt interest costs.

4.14 It should be noted that the debt maturity profile per the graph is based on the maturity date ofLOBO (Lender's Option Borrower's Option) loans whilst noting the Code requires the Council toclassify 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 on theloan, at which point the Council can accept the revised terms or reject them and repay the loan.

35

30

25

20U)Z0 15−J−J

10

5

FORECAST LONG TERM DEBT MATURITY PROFILE 31 MARCH, 2018

FINANCIAL YEAR

D P W I , R M A R K F . T . L O A N S−

p ($•• (2cP O.D

Appendix I

Treasury Management Strategy 2018/2019, Treasury Management Indicators andPrudential Indicators 2018/2019 to 202012021

4.15 The Council currently has a £35.Om exposure to LOBO loans which can be called within2018/2019 which represents less than 7.0% of the projected long−term debt held at the 31March 2018.The interest rates on the LOBO loans held range from 5.90% to 11.625%,averaging almost 7.5%.

4.16 A comparison of the LOBO loan option 2018/2019 call dates to the maturity date is providedwithin Table 2 below:

2017/2018 Year of CurrentLoan Value Call Dates Maturity Interest Rate

£1,000,000 8 April & 8 October 2018/2019 7.25%£5,000,000 15 June & 15 December 2018/2019 5.95%£1,000,000 27 July & 27 January 2019/2020 11.625%£1,000,000 13 July & 13 January 2019/2020 9.40%£2,000,000 l5 August & 15 February 2019/2020 11.375%£2,000,000 13 September& 13 March 2019/2020 11.125%£10,000,000 15 June & 15 December 2021/2022 5.89%£2,000,000 1 June & 1 December 2025/2026 10.625%£1,000,000 3 April & 3 October 2026/2027 10.937%£10,000,000 25 February 2059/2060 7.00%

Table 2 −Lobo Loans Summary

4.17 Based on the current and the forecast interest rates, the likelihood of these loans being calledhas been assessed as minimal. In the event that the call option were to be exercised, thedefault position will be the repayment of the LOBO without penalty with the associated treasurymanagement risks (refinancing/interest rate/liquidity) managed in line with the borrowingstrategy for other maturing debt.

4.18 The Council's Treasury Management advisors provide forecasts of interest rates for differentmaturity dates in future years. Using these forecasts, it is projected over the years 2018/2019,2019/2020 and 2020/2021 respectively, the borrowing rates will average between 1.79% and2.03% (up to 5 years) and between 2.70% and 2.95% (up to 50 years)

4.19 Uncertainty over future interest rate movements increases the risks associated with treasurymanagement borrowing activity, therefore it should be noted, that the period over which anynew borrowing is taken will be guided by movements and fluctuations in the interest rate yieldcurve and capital financing requirement.

4.20 No more than 25% of the total debt outstanding shall be taken from any one lender at any onetime, except for borrowing from Public Works Loan Board (or its successor body), unlessexpressly approved by the Head of Business for Financial Solutions in line with current policy.

4.21 The Council's borrowing options should be considered taking account of PWLB Circular 147,which increased the average interest rate on all new PWLB loans to an average 1.00% abovethe Government's cost of borrowing. This applies to all fixed and variable rate PWLB loansacross the maturity spectrum.

4.22 To partially alleviate this, the Government in 2012−13 introduced a 20 basis point (bps)discount on loans from the Public Works Loan Board (PWLB) under the prudential borrowingregime with this rate being offered to Councils that can demonstrate transparency in itslong−term

borrowing and associated capital spending plans.

4.23 The Council must apply annually to be eligible for this discount and in October 2017 theCouncil was successful in its application to the PWLB, meeting the criteria and obtainingeligibility for the certainty rate discount on PWLB loans, accessible from 1 November 2017. Notewithin Table 1 above the medium term interest rate average forecasts for the PWLB interestrates include the 20 basis point (bps) discount.

Appendix I

Treasury Management Strategy 2018/2019, Treasury Management Indicators andPrudential Indicators 2018/2019 to 202012021

4.24 The Council will consider a number of borrowing structures in 2018/2019 which will include

• Short−term Borrowing

The Council may borrow on a temporary basis (up to 364 days) which would significantlyreduce the carrying costs whilst managing the refinancing and interest rate risk. Forexample for loans up to 364 days, other local authorities are currently offering better termsthan 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 incash 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 generallylinked to movements in short term rates, with increases in interest rates expected to belimited over the next three years and costs expected to remain cheaper than long termrates.

• PWLB Fixed Rate Maturity Loans (< 20 years)

New loans for periods up to 20 years, which fit in with the existing debt maturity profile, areattractive, providing relatively low refinancing risk as short term rates are expected toremain lower than their longer dated counterparts in the foreseeable future. These couldoffer greater flexibility to repay/reschedule on beneficial terms in the future, depending onthe volatility of interest rates.

• PWLB Equal Instalment Payment and Annuity Loans (< 20years)

These loans are different from fixed rate maturity loans as the repayments are made up ofboth interest and principal with the principal outstanding reducing at 6 monthly intervalsthroughout the life of the loan, with corresponding reduction in interest payments on thebalance outstanding. The interest rates payable are lower than the fixed rate maturity loansfor short and medium dated maturities with an additional benefit being a smoother debtmaturity profile on the debt e.g. £2.5m every year for 10 years as opposed to £25m payablein 10 years. This also spreads the refinancing risk and may also present beneficialopportunities dependant 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 maturityprofile, the higher interest rate profile and the additional cost of carry. These loans currentlyoffer less flexibility in terms of debt restructuring as a result of PWLB Circular 147, whichleft the premature repayment rates unaltered. As a result these are the least attractiveoption at present but circumstances will be monitored to identify beneficial opportunities tosource PWLB loans within this maturity spectrum.

• Market Loans

At present availability is limited, but in the future these loans may become more attractivegiven the 1.0% margin on PWLB loan rates, as these loans could be cheaper than similarlong term PWLB loans despite this being partially offset by the certainty rate. In addition tothe possibility of advantageous interest rates, there is also the ability to fix the rate forreceipt at a date in the future, avoiding the cost of carry for example to cover futurematurities in 2019/2020 and 2020/2021.

• Local Authority Bonds

Local authority bonds can be issued by a public stock exchange listing, a private placementor a retail bond but would only become a viable option if the size of funds to be borrowedreached a minimum of £150m.Prior to undertaking a bond issuance, the Council wouldcarry out a due financial diligence process. Factors to be considered would be the type ofbond issue e.g. index linked, the set−up costs, the timing of the issue, the potential cost ofcarry, the credit rating process, the projected long term capital financing requirementposition and the nature of the projects being funded e.g. income streams index linked.

Appendix I

Treasury Management Strategy 2018/2019, Treasury Management Indicators andPrudential Indicators 2018/2019 to 2020/2021

Leasing

On occasions, leasing will be used if an option appraisal review identifies this as beingadvantageous to the Council.

4.25 As part of its borrowing strategy, the Council will seek to identify and evaluate opportunities fordebt 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.

4.26 The Council will continue to monitor its debt portfolio and movements in interest rates acrossPWLB interest rate structures, to identify opportunities to generate interest savings, whilststrategically managing any premiums or discounts incurred as a result of therescheduling/restructuring.

4.27 The Local Authority (Capital Finance and Accounting) (Scotland) Regulations 2016 legislationenacted on 1 April 2016, and associated Local Government Circular 7/16 Statutory Guidance onLoans Fund Accounting provide the legislative background governing the Council's borrowingactivity.

5.0 Annual Investment Strategy 2018/20195.1 Investment Regulations

5.1.1 The Investment Regulations became statutory instruments by force of the Scottish Parliamenton the 1 April 2010 in conjunction with the associated Code on the Investment of Money byLocal Authorities. This requires the Council to approve all the types of investments to be usedand set appropriate time and money limits for the amount that can be held in each investmenttype. These types of investments are termed permitted investments and any investmentsused which have not been approved as a permitted investment will be considered as ultravires.

5.1.2 As a result of the second Markets in Financial Instruments (MiFID III), from the 3 January2018, local authorities were to be treated as retail clients, with the option to opt up toprofessional status provided certain criteria was met. The Council was successful in meetingthe conditions to opt up to professional status and has done so in order to maintain its MiFDstatus prior to January 2018. The Council will continue to have access to products includingmoney market funds, pooled funds, treasury bills, bonds shares and to financial advice.

5.2 Risk Management5.2.1 In accordance with the revised code the Council recognises the importance of risk

management and the effective management of all the associated treasury management risksencountered in working with the approved permitted list of investments. The treasurymanagement 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 itscontractual obligations to the Council, particularly as a result of the counterparty'sdiminished creditworthiness and the resulting detrimental effect on the Council'scapital or revenue resources. There are no counterparties where the risk is zeroalthough AAA rated organisations have a very high level of creditworthiness. TheCouncil has in place minimum credit criteria to determine which counterparties andcountries 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 itcould be said that all counterparties are subject to at least a very small level ofliquidity risk, the Council measures this risk on the basis as to whether or not instantaccess to cash can be obtained from each form of investment. The Council hasdeveloped a detailed cashflow model to record known and forecast income andpayment events arising in the short, medium to long term.

Appendix I

Treasury Management Strategy 2018/2019, Treasury Management Indicators andPrudential Indicators 2018/2019 to 2020/2021

Interest Rate Risk: This is the risk that fluctuations in the levels of interest ratescreate an unexpected or unbudgeted burden on the Council's finances against whichthe Council has failed to protect itself adequately. To manage this risk, the Counciltakes a view of the future course of interest rates and formulates a TreasuryManagement Strategy accordingly, aiming to maximise investment earnings andminimise borrowing costs, whilst giving full regard to other treasury management riskfactors including security and liquidity.

Price Risk Management: This risk primarily relates to financial instruments that areregularly traded in the various financial market exchanges. This is the risk that theCouncil is required to redeem this type of investment prematurely at prices above andbelow 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 theinvestment is held to maturity the principal sum is guaranteed with it being redeemedat par value. The Council will only use those which appear on its permitted investmentlist, if their redemption price is not expected to vary much during its short life or forexample in the case of treasury bills they offer a higher rate of return than depositingin 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 organisationwith which it is dealing in its treasury management activities fails to act in accordancewith its legal powers or regulatory requirements and the Council suffers lossesaccordingly. In the event of any doubt as to the legal and regulatory issues theCouncil has recourse to its own in−house legal services team and also the Council'sappointed treasury advisors Arlingclose Ltd. The Council also currently has in place ahighly experienced and qualified Treasury Management team.

5.3 Permitted Investments5.3.1 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;I. 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

Appendix I

Treasury Management Strategy 201812019, Treasury Management Indicators andPrudential Indicators 2018/2019 to 2020/2021

5.3.2 In respect of Money Market funds (MMF) listed per f) above, these funds invest in high−qualityshort−term fixed income instruments and adhere to very strict credit quality, diversification andmaturity guidelines with preservation of capital constituting the primary objective. The Councilcurrently uses Constant Net Asset Value Funds meaning for every £1 of principal invested thefund will return £1 of principal on withdrawal by the investor, plus interest.

5.3.3 However on the 21 January 2019, as a result of MMF Industry reform, all existing moneymarket funds will face change with constant net asset value funds no longer available.

5.3.4 On this date two types of funds will be available to the Council:

− a Public Debt CNAV f assets invested in government debt); and− a 'Low Volatility NAy' (LVNAV) that is a hybrid between CNAV and VNAV

5,3.5 Prior to transferring the Council's interest in the CNAV funds to the new fund types available, aproper risk assessment will be carried out to consider the impact of the changes and thecontinued use of MMFs as an investment instrument and if necessary the use of MMF's will besuspended/terminated.

5.3.6 Bail−in legislation which ensures that large investors including local authorities will rescuefailing banks instead of taxpayers in the future, has now been fully implemented in the UK.Under the UK Financial Services Compensation Scheme and similar European Schemes mostprivate sector investors are now partially or fully exempt from contributing to a bail−in. Thecredit risk associated with making unsecured bank deposits has therefore increased relative tothe risk of other investment options.

5.3.7 To manage the bail−in risk, covered bonds, reverse repurchase arrangements and othercollateral arrangements with financial institutions are included within the permitted investmentlist. These investments are secured on the assets of the borrower, which limits the potentiallosses 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, thecollateral upon which the investment is secured has a credit rating, with the highest of thecollateral credit rating and the counterparty credit rating being used to determine cash andtime limits. Note the combined secure and unsecured investments in any one bank should notexceed the cash limit for that counterparty.

5.3.9 Investments in subordinated debt in projects delivered via the 'Hubco/DBFM' model includedwithin the permitted investments list will be only be undertaken, following a full risk/benefitanalysis, subject to a maximum investment amount of £1 .5m per project and for a maximumterm of 30 years.

5.3. 10 For cash investments, there is a risk of capital loss arising from selling ahead of maturity ifcombined with an adverse movement in interest rates and for term deposits and loans if theyare redeemed early. Therefore the Council will undertake these investments in conjunctionwith its cashflow/liquidity projections and medium term financial plans to manage this risk.

5.3.11 Within the TM code, it suggests the use of financial derivatives but given that the legalpower to use derivative instruments remains unclear, the Council does not intend to usederivatives. Should the legal position change, the Council may seek to develop a detailed androbust risk management framework, governing the use of derivatives, but prior to adoption, fullCouncil approval will be sought.

5.4 Investment Security5.4.1 Although the yield on investment is a key consideration, the primary principle governing the

Council's investment criteria is the security of its investments.

Appendix I

Treasury Management Strategy 2018/2019, Treasury Management Indicators andPrudential Indicators 2018/2019 to 2020/2021

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 treasurymanagement indicators covering the maximum principal sums invested.

> It maintains a policy covering the categories of investment types it will invest in, the criteria forchoosing investment counterparties with adequate security, and to continually monitor security.

5.4.3 The Council minimises risk by identifying those financial institutions that the Council mayinvest in, to maximise security and liquidity of investment including the specification ofmaximum time and money limits for each type of permitted investment offered by financialinstitutions. The counterparty must meet the relevant credit rating requirement with the focusbeing on the minimum acceptable quality adding a further security overlay to the investmentactivity of the Council.

5.4.4 The Council utilises the research of the world's foremost providers of independent creditratings (Fitch, Moody's and Standard & Poors).The ratings provided by these bodies definethe likelihood of an investor such as the Council receiving their money back on the terms inwhich 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 creditrating of A− or higher that are domiciled in the UK or a foreign country with a sovereign ratingof AA+ or higher. For money market funds and other pooled funds the Council defines a highcredit rating as those having a credit of A− or higher. investments with organisations with longterm ratings in the BBB long term category will therefore be restricted by cash and maturitylimits.

5.4.6 The Council also supplements its credit rating information by accessing and applyingadditional operational market information before making any specific investment decision fromthe agreed pool of counterparties.

5.4.7 This additional market information will be applied to compare the relative security of differinginvestment counterparties and will include:

• Credit Default swap prices;

• Quality financial press;• Share prices;

• Government support status I 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 financialinstitution, 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 creditrating information from Arlingclose Ltd (the Council's advisors) as and when ratings changeand counterparties are checked promptly. If a ratings change results in the counterparty failingto meet the Council's strict criteria, they are removed immediately from the list. Similarly if acounterparty rating is updated and they meet the Council's strict criteria, they will be added tothe list.

5.4.10 Full details of the Council's investment approach including the type of investments, treasurymanagement risks, associated controls, credit rating, money and time limits are shown inAnnex C. The credit rating criteria indicated within the Annex stipulates a long term ratingrequirement as this is considered the ultimate driver of credit worthiness of financialinstitutions. This represents a rating agency view of an institutions capacity to honour itsfinancial obligations and its vulnerability to foreseeable events. The Council in conjunction withits advisors will continue to monitor other information provided from credit rating agencies interms of short term, individual rating, support rating and outlook.

Appendix I

Treasury Management Strategy 2018/2019, Treasury Management Indicators andPrudential Indicators 2018/2019 to 2020/2021

5.4.11 The Council will give due care when considering the country, group and sector exposure ofthe Council's investments and will endeavour to have no more than 25% placed with anynon−UK

country at any time. A group of banks under the same ownership will be treated as asingle organisation for limit purposes with industry /sector activity monitored regularly forappropriateness.

5.5 Investment Strategy5.5.1 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 overa longer period up to the maximum limits as defined within Annex C. This will achieve theoptimum performance, spreading investment periods and security of return, subject toover−riding

credit counterparty security.

5.5.2 The 2018/2019 Treasury Management Strategy has been developed assuming that the annualborrowing requirement and debt repayments, net of credits due to the scheduled principalrepayments 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 investmentwill be average approximately £30.Om throughout the period 2018/2019 to 2020/2021.

5.5.3 This projected balance being subject to variation dependant upon actual level and timing ofexternal borrowing undertaken, which will reflect positive and negative movements in workingcapital 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 5.5above and 5.7 below.

5.6 Borrowing and the Investment of Money5.6.1 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.

5.6.2 Borrowing in advance will only be taken for risk management reasons subject to soundjustification. When considering borrowing in advance the Council will balance investmentrisks, such as the credit and interest risks resulting from the temporary investment of theproceeds of borrowing, against the risk of adverse interest rate movements if borrowing isdeferred. Consideration will also be given to the existing debt maturity profile over the mediumterm.

5.6.3 The Council will appraise all risk associated with advance borrowing activity and it will besubject to prior appraisal with subsequent reporting either within the mid year or annualreporting mechanism. This report will comply with the minimum data and analyticalrequirements outlined within The Local Government Investments (Scotland) Regulations 2010.

5.7 Non Treasury Management Investment Activity5.7.1 As mentioned in the opening paragraphs, the CIPFA Treasury Management Code has recently

been revised and now covers Non Treasury Management investment activity and has a newseparate section covering this area This activity would normally be for those investmentsmade 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 forpurposes of operational services

• commercial investments which are taken mainly for financial reasons and to achieve afinancial return

5.7.2 Normal treasury management activity would cover those investments which arise from theorganisation's cashflows and debt management activity and ultimately represent balanceswhich need to be invested until cash is required for use in the course of the Council's normalbusiness.

Appendix I

Treasury Management Strategy 2018/2019, Treasury Management Indicators andPrudential Indicators 2018/2019 to 2020/2021

5.7.3 For investments that fall outwith normal treasury management activity the Council will ensurethat 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 not illegal

• 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 willinstances wherewhether due theservice reasons

carry out more careful risk assessment, as it recognises there may besuch investments do not give priority for security and liquidity over yieldnature of the transaction itself e.g. commercial investments or for valid

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 andreturns, the requirement to seek specialist advice if sought and the potential impact on futuresustainability if risks come to pass.

5.7.6 This would also include any external underwriting of those risks e.g. guarantees. Given theincrease in Councils creating ALEO's and increasing partnership working, the Council may beasked to provide a financial guarantee to enable other parties to access funds which maynot otherwise be available due to their size/ lack of credit history. This may also result inexternal funds being accessed at more favourable terms than they are likely to receive whichwill 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'sfinancial obligation if that company cannot meet its obligation. Prior to agreeing to theprovision of a financial guarantee , due financial diligence of the terms of the financialguarantee must be carried out, including an assessment as to the likelihood of the guaranteebeing called and potential financial liability to the Council.

5.7.8 The responsibility for proper scrutiny and final approval is the Council's Head of Business forFinancial Solutions. Information in respect of non Treasury Management investments must beclearly laid out and available within the Council's statutory accounts.

6.0 Performance Measurement Indicators & Benchmarking6.1 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 andincorporate benchmarking to assess performance which is reported within the AnnualTreasury Management Activity report. These are distinct historic indicators, which areadditional to the predominantly forward−looking prudential indicators outlined in later sectionsof this report.

6.2 In respect of liquidity which is defined as the Council "having adequate, though not excessivecash resources, borrowing arrangements, overdrafts or standby facilities to enable it at alltimes to have the level of funds available to it which are necessary for the achievement of itsbusiness/service objectives" (CIPFA Treasury Management Code of Practice) the Council willseek 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:

− the 7 day/1 Month London Interbank Bid Rate (LIBID);− the Council's own bank: Instant Access Account;− the Council's Advisors benchmarking club

Appendix I

Treasury Management Strategy 201812019, Treasury Management indicators andPrudential Indicators 2018/2019 to 202012021

6.4 In the context of benchmarking security, this is a much more subjective area to assess. TheCouncil currently evidences this by the application of minimum quality criteria to investmentcounterparties, through the use of credit ratings, supplied by the three main credit ratingagencies, together with additional market information available as described earlier within thisreport and outlined within Annex C.

7.0 Treasury Management Local and Mandatory Indicators 2018/2019 to 2020/2021

7.1 Treasury Management Local Indicator: Interest Rate Exposure

7.1. Per the revised CIPFA TM code, the Council is no longer required to set a mandatoryindicator for limits with regard to fixed and variable interest rate exposure. The Councilwill monitor its interest rate exposure by the local indicator shown in Table 3 below. Theproportion of fixed interest rate costs to variable interest costs will be monitored on aquarterly basis to identify if there are any potential risks if interest rates were to movesignificantly upwards. The Council will also monitor debt maturity profile, the spendprofile of the capital programme and also continue to adopt a prudent approach to use ofinternal balances in lieu of future long term borrowing i.e. monitor under borrowingposition. The economic outlook and interest rate forecast will supplement this on−goingreview of interest rate exposure.

Content of loan portfolio 2018/19 2019/20 2020/21Em I % £m % £m %

External Interest Council is due to pay:Fixed rate loan debt 22.3 87.5% 24.3 89.3% 25.7 92.1%Variable rate loan debt 3.2 12.5% 2.9 10.7% 2.2 7.9%

25.5 100.0% 27.2 100.0% 27.9 100.0%External Interest Council is due to receive:lnvestments −variableterms 0.2 100.0% 0.2 100.0% 0.2 100.0%Net Loan Interest Payments 25.3 2 7 . 0 2 7 . 7

________Table 3 − Local Indicators Interest Rate Exposures 2018119 to 2020121

7.1.2 Table 3 above relates only to external interest payments, excluding interest on revenuebalances and includes a number of assumptions regarding the timing and nature of thenew borrowing anticipated. As mentioned previously the Council capital planning processand investment/borrowing analysis enables it to take advantage of opportunities that mayarise to achieve beneficial borrowing rates over the same period.

7.1.3 Table 3 highlights that the Council anticipates net loan external interest payments ofapproximately £25.3 million for 2018/2019. Of this total, £22.3million relates to interestpayable on fixed rate debt, and for which interest payments are guaranteed until theloans mature, £3.2million relates to interest payable on variable rate debt, and almost£0.2million relates to interest receivable on funds invested. Variable rate loans and fundsdeposited are subject to changes in interest rates, and will be monitored as part of theCouncil's Treasury Management Strategy on an ongoing basis.

7.1.4 The table below highlights the estimated impact of a one basis point increase ordecrease (e.g. 4.0% variable rate rising to 5.0% or falling to 3.0%) in interest rates totreasury management costs/income for next year. Fixed interest rate debt will not beaffected by interest rate changes.

Financial Year : 2018/19 Estimate +1% −1%Em Em Em

Net impact on C o u n c i l 3 . 0 i i I+1.0 −0.6laDle 4 −sensitivity to Interest Rate Movements 2018119

Appendix I

Treasury Management Strategy 2018/2019, Treasury Management Indicators andPrudential Indicators 201812019 to 2020/2021

7.2 Treasury Management Mandatory Indicator: Maturity Structure of Borrowing7.2.1 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 riskassociated with the Council having to replace large sums of long term debt at a time whenthere may be uncertainty over interest rate exposure.

7.2.2 Table 3 illustrated that the Council has high levels of fixed rate debt however the currentmaturity profile of this debt is unlikely to be a major risk factor for the Council. The limits offixed and variable rate maturity are set out within Table 5 below

Maturity Structure of 12m to 2 to 5 to 10 to 20 toborrowing <12m 2yrs 5yrs lOyrs 20yrs 40yrs 40yrs+Upper limit − long term debt 20.0% 20.0% 25.0% 25.0% 30.0% 45.0% 25.0%Lower limit − long term debt − − 5.0% 1 5.0% 5.0% 10.0% 5.0%

Table 5− Matur i ty St ruc ture o f F ixed Rate Borrowing

7.2.3 The upper limit for long−term rate debt, maturing in less than 12 months, is set at 20% toaccommodate the requirement within CIPFA TM Code to recognise the possibility of theCouncil loans classified as LOBO type loans having their option or call exercised withinthe next 12 months, under the terms of the loans as described within paragraph 4.14above.

7.3 Treasury Management Indicator: Credit Risk7.3.1 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 creditmonitoring the value weighted average credit rating of its investment portfolio.calculated by applying a score to each investment and taking the arithmeticweighted by the size of each investment.

TargetPortfolio Average Credit RatingA−Table

6 − Credi t R isk Ind ica to r 2018119

8.0 Prudential Indicators 2018/2019 to 2020120218.1 Prudential Indicator: The Capital Expenditure Plans

risk byThis is

average

8.1.1 The Prudential Code requires the Council to outline its capital expenditure plans takinginto account the sources of funding available and also the cost to the council in supportingany additional borrowing burden which will require to be paid for from the Council's ownresources. The Government has power to control the level of prudential borrowingalthough no control has yet been implemented.

8.1.2. Some of the estimates for other sources of funding, such as capital receipts, may also besubject to change over this timescale.

Appendix I

Treasury Management Strategy 2018/2019, Treasury Management Indicators andPrudential Indicators 201812019 to 202012021

8.1.3 Table 7 sets out theforecast for the periodCapital programmes.

revised Capital Expenditure plans for 2017/2018 (Revised) and2018/2019 to 2020/2021 for both the General Services and HRA

2017/18 2018/19 2019/20 2020/21Capital Expenditure Revised Forecast Forecast Forecast

Ern Ern EM EmGeneral Services 60.0 91.5 103.5 90.8HRA 78.7 74.0 89.8 80.7Subhubco /DBFM 3.8 − 37.0 −Total Capital Investment r 142.5 165.5 230.3 171.5Financed by:Capital Receipts 12.9 6.1 5.5 4.1Capital Grants 51.2 44.3 70.1 44.6Capital from Current Revenue 27.7 27.9 27.3 26.3Borrowing : Capital Financing 46.9 87.2 90.4 96.5Credit Arrangement: Subhubco/DBFM 3.8 − 37.0 −

Table 7− Capital Expenditure Plans 2017118 to 20201210

8.2 Prudential Indicator: Capital Financing Requirement8.2.1 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 newborrowing will increase the CFR. The CFR includes long term liabilities representingoutstanding obligations under the education PPP and the finance leasing arrangementsfor overcladding.

8.2.2 However the Council pays off an element of the accumulated capital spend each yearthrough a revenue charge, comprising scheduled debt repayments from servicedepartments (annuity based) which reduces the CFR. Committee is asked to approve theCFR projections at the 31 March for each financial year set out below.

2017/18 2018/19 2019/20 2020/21Revised Forecast Forecast Forecast

Em Em Em EmCapital Financing RequirementGeneral Services 254.6 288.5 318.9 361.6HRA 652.4 669.1 726.5 737.7Total CFR 907.0 957.6 1045.4 1099.3Movement in CFR +16.6 +50.6 +87.8 +53.9Table 8 − CFR Projections 2017118 to 2020121

8.2.3 The year on year movement in CFR is shown in Table 9 below.

2017/18 2018/19 2019/20 2020/21Revised Forecast Forecast Forecast

Em Em Ern ErnBorrowing : Capital Financing 46.9 87.2 90.4 96.5Subhubco IDBFM 3.8 − 37.0 −Scheduled Debt Amortisation −29.0 −31.1 −33.5 −35.8Leasing Amortisation −0.1 −0.2 −0.2 −0.2Education PPP Amortisation −5.0 −5.3 −5.9 −6.6Movement in CFR +16.6 +50.6 +87.8 +53.9T h h I O _ i n ( ' E D 9 f l 1 7 I 1 0 #, , 'flfl/l

Appendix I

Treasury Management Strategy 2018/2019, Treasury Management Indicators andPrudential Indicators 2018/2019 to 2020/2021

8.3 Prudential Indicator: Limits to Borrowing Activity: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 toensure that its total borrowing , does not, except in the short−term, exceed the total of theCFR in the preceding year plus the estimates of any additional CFR for 2018/2019 andthe next two financial years.

2017/18 2018/19 2019120 2020/21Revised Forecast Forecast Forecast

£m £m £mGross

Borrowing: Loan Debt 661.0 721.3 780.5 847.2Long term Liabilities 152.0 146.7 177.6 170.8External Debt 813.0 868.0 958.1 1,018.0Capital Financing Requirement 907.0 957.6 1045.4 1,099.3Prudential Margin 94.0 89.6 87.3 81.3Gross Borrowing =< year 3 CFR Yes Yes Yes YesTable 10− Prudential Margins 2017118 to 2020121

8.3.2 The above table demonstrates that healthy prudential margins will continue to exist from2018/2019 onwards and that the Council complies with this prudential indicator in thecurrent year and does not envisage difficulties in the future. This view takes into accountcurrent commitments, existing plans and the proposals in respect of the capital investmentlevels proposed.

8.4 Prudential Indicator: The Authorised Limit for External Debt.8.4.1 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 levelof borrowing for the council and is therefore being set at a level as the maximumallowable in each of the years 2018/2019 through to 2020/2021. The initial level set for2017/2018 is shown for comparison. The Local Authority (Capital Finance andAccounting) (Scotland) Regulations 2016 provide a statutory backing to the PrudentialCode requirement for an authority to set an authorised limit for external debt.

2017118 2018/19 2019/20 2020/21Authorised Limit Initial Limit Estimated Estimated Estimated

Em Em Em EmGross Borrowing :Loan Debt 690 850 930 930Other Long−Term Liabilities 160 160 190 190Total External Debt 850 1,010 1,120 1,120Table 11− Authorised Limit 2017118 to 2020121

8.5 Prudential Indicator: The Operational Boundary for External Debt.8.5.1 This indicator is based on the expected maximum external debt during the course of the

year; it is not a limit. This operational boundary allows flexibility to borrow, re−invest andundertake debt restructuring during the course of the year. It is therefore possible andacceptable, for actual borrowing to vary around this boundary for short periods during theyear.

perational Boundary

wing :Loan DebtTerm Liabilities

2017/18Initial Limit

680150

2018/19 1 2019120 1 2020/21Estimated I Estimated I Estimated

Em Em840 920160 190

1.000 1.110

925190

1.115

Em

lotal I 830Table 12− Operational Boundary 2017118 to 2020/21

Appendix I

Treasury Management Strategy 2018/2019, Treasury Management Indicators andPrudential Indicators 2018/2019 to 2020/2021

8.6 Prudential Indicators: Affordability8.6.1 The previous sections cover the treasury management and overall capital and control of

borrowing prudential indicators, but within this framework, prudential indicators arerequired to assess the affordability of the capital investment plans. These provide anindication of the impact of the capital investment plans on the overall Council finances.The Council is asked to approve the following affordability indicator.

8.7 Prudential Indicator: The Proportion of Financing Costs to Net Revenue Stream.

8.7.1 Since capital expenditure impacts on the revenue budget through financing charges, theCouncil needs to ensure that financing costs not only remain affordable, but also do notconstitute an excessive proportion of the revenue resources available. The proportion ofborrowing costs to revenue forecasts for the next 3 years are illustrated in Table 13 belowshowing that the General Services loan charges represent up to 9.36% of the totalrevenue budget available. The increase in the proportion still remains within prudentlevels demonstrating that the capital programme investment appears to be affordable andsustainable.

8.7.2 In noting the percentage on loan charges within the HRA budget, a major element ofrevenue costs in the Housing Account is the funding support to sustain the substantialinvestment programme; the other main elements of expenditure being repair costs andmanagement costs. The level of loan charges is acceptable and deemed prudent andaffordable within the framework of the Council's 30−year Housing investment plan.

Proportion of Financing Costs to Net Revenue Estimated Estimated EstimatedStream 2018/19 2019/20 2020/21

Total General Fund (GF) Loan Charges 42,014,722 44,845,255 46,184,809Total General Fund Finance Lease/PPP Costs 16,389,894 18,735,519 20,599,169

Total General Fund : Capital Financing Costs 58,404,616 63,580,774 66,783,978

General Fund: Net Revenue Stream 728,767,000 721,403,000 713,294,000

GF− Proportion of Financing Costs to Net Revenue 8.01% 8.81% 9.36%Stream

Total Housing Revenue Account (HRA) Loan Charges 17,144.560 18,354,623 20,025,137Total Housing Revenue Account Finance Lease Costs 324,861 324,861 324,852

Total HRA: Capital Financing Costs 17,469,421 18,679,484 20,349,989

HRA: Net Revenue Stream 117,193,000 1 121,572,000 126,475,000

HRA− Proportion of Financing Costs to Net Revenue 14.91% 15.36% 16.09%Stream

Table 13− Proportion of Financing Costs to Net Revenue Streams 2018119 to 2020121

Appendix I

Treasury Management Strategy 2018/2019, Treasury Management Indicators andPrudential Indicators 201812019 to 2020/2021

8.10 Prudential Indicator: Affordability − Sensitivity Analysis8.10.1 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 precedingparagraphs provided above to the following movements, all assessed independently ofeach other:

(I) a plus or minus 10% change in the capital financing requirement i.e. the level ofborrowing undertaken to retain average investment balances and under borrowingposition at prudent levels.

(ii) a plus or minus 50 bps change in the interest rates achievable for new long termborrowing i.e. 1/2 percent movement

(iii) a plus or minus 10% change in the net revenue stream used to calculate theproportion of financing costs to net revenue stream.

9.0 Policy on Repayment of Loans Fund Advances 2018/20199.1 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 capitalexpenditure that the Council has determined will be financed by borrowing. The timing of theborrowing being in accordance with treasury management principles with the timing notinforming when a loans funds advance has been made. The Capital Expenditure definitionbeing that adopted by proper accounting practice, the statutory control framework and thePrudential Code

9.2 Loans fund advances also incorporate grants to third parties on third party assets and loans tothird parties where the other party meets the criteria laid out within Part 3 of the Regulationse.g. other local authorities or joint boards.

9.3 Accounting for loans fund advances also changed from 1st April 2016. Prudent repayment ofloans fund advances are required to be made in line with Scottish Government StatutoryGuidance on Loans Fund Accounting (Circular 7/16).

9.4 The broad aim of prudent repayment is to ensure that the Authority's capital expenditure isfinanced over a period of years which that expenditure is expected to provide a benefit andthat each year's repayment amount is reasonably commensurate with the period and patternof the benefits.

9.5 The statutory guidance requires the Council to approve a policy on loans fund repaymentseach year and it is proposed the Council adopts the following options for calculating prudentrepayments in 2018/19.

9.6 For pre−existing Loans Fund advances made up to 31st March 2016 and for the most partcapital expenditure plans for the period up to and including the 31 March 2021, the Council willcontinue to use Option 1 the Statutory Method. This approach taking into account the 5−yeartransitional period from 31/3/2016 to 31/3/2021 available within the new guidance, duringwhich the current methodology may continue to be selected. The repayment of Loans Fundadvances will therefore be equal to the annual amount determined in accordance withSchedule 3 of the Local Government (Scotland) Act 1975.

9.7 However, where circumstances determine that it may be prudent to recognise grant funding orother income streams when determining both the period of the repayment and/or the annualrepayment of any loans fund advance Option 4 Funding/Income profile method will beselected. Some examples of where this income approach may be considered prudent wouldinclude the City Deal and Tax Increment Financing projects. Therefore for capital expenditureincurred after 31st March 2016 for specified projects where it is reasonable to link an income/funding stream, the annual repayment of Loans Fund advances will be profiled to reflect theincome/funding stream. The Council will keep the income streams under review to ensure theprovision for repayment remains prudent and, if required, address any shortfall.

Appendix I

Treasury Management Strategy 2018/2019, Treasury Management Indicators andPrudential Indicators 2018/2019 to 2020/2021

9.8 After due consideration of the other options available within the Statutory Guidance theCouncil does not anticipate adopting Option 2: the Depreciation method or Option 3: Asset LifeMethod for loans fund repayments in 2018/2019. This will be reviewed on annual basis but inthe event that due to unforeseen events, this approach changes during the reporting periodthe Council will seek approval from members to approve a change as part of the normalquarterly reporting arrangements.

9.9 In accordance with the Statutory Guidance, the Council has outlined within Annex F itscommitments in respect of loans fund advance repayments. This reflects the estimated loansfund advances in 2018/19, 2019/20 and 2020/21 and the repayments policy outlined above.

9.10 In accordance with the statutory guidance the HRA Loans Fund advances and associatedannual repayments have been identified separately from that of the General Fund.

Annex ATreasury Management Policy Statement & Clauses adopted

The Treasury Management Policy Statement adopted by North Lanarkshire Council:The Council defines its Treasury Management activities as:

"The management of the organisation's borrowing investments and cash flows, itsbanking, money market and capital market transactions; the effective control of the risksassociated with those activities; and the pursuit of optimum performance consistent withthose risks."

2. The Council regards the successful identification, monitoring and control of risk to be theprime criteria by which the effectiveness of its treasury management activities will bemeasured. Accordingly, the analysis and reporting of treasury management activities willfocus on their risk implications for the Council and any financial instruments entered intoto manage these risks.

3. The Council acknowledges that effective treasury management will provide supporttowards the achievement of its business and service objectives. It is therefore committedto the principles of achieving value for money in treasury management, and to employingsuitable comprehensive performance measurement techniques, within the context ofeffective risk management

4. The Council adopts a high level approach to setting policies for borrowing and investmentactivity having in place an appropriate scheme of delegation and ensuring all staffemployed in Treasury Management have the suitable skills and resources to carry outdelegated treasury management activities effectively, efficiently and achieving value formoney.

CIPFA TM code clauses formally adopted by North Lanarkshire Council:This Council will create and maintain, as the cornerstones for effective treasurymanagement:

• A treasury management policy statement, stating the policies, objectives and approachto risk management of its treasury management activities;

Suitable treasury management practices (TMP5), setting out the manner in which theCouncil will seek to achieve those policies and objectives, and prescribing how it willmanage and control those activities.

2. The Council will receive reports on its treasury management policies, practices andactivities, including as a minimum, an annual strategy and plan in advance of the year, amid 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 ManagementStrategy and implementation and monitoring of its treasury management policies andpractices to the Policy & Resources (Finance and Organisational Business) Sub−Committeeand for the execution and administration of treasury management decisions to the Head ofBusiness for Financial Solutions , who will act in accordance with the Council's TreasuryPolicy statement and TMPs and CIPFA's Standard of Professional Practice on TreasuryManagement.

4. The Audit and Governance Panel will be responsible for ensuring effective scrutiny of theTreasury Management Strategy and policies as part of its work on reviewing the internalfinancial controls of the Council.

5. In accordance with The Local Government Investments (Scotland) Regulations 2010, theCouncil is responsible for the approval of the Annual Investment Strategy and AnnualInvestment Report.

Annex BExplanation of Long−Term Rating Definitions

Type of Rating Rating Explanation

Fitch − long−term Indicates exceptionally strong capacity for timely payment ofAAA financial commitments and this capacity is highly unlikely to be

adversely affected by foreseeable events.

Indicates very strong capacity for timely payment of financialAA− commitments and this capacity is not significantly vulnerable to

foreseeable events.

Indicates strong capacity for timely payment of financialcommitments. This capacity may, nevertheless, be moreA− vulnerable to changes in circumstances or in economicconditions than is the case for higher ratings.

Indicates an adequate capacity for timely payment of financialBBB commitments but adverse business or economic conditions

more likely to impair this capacity.

Moody's − long−term Offer excellent credit quality, with susceptibility to long−termAaa risks that are mostly unlikely to materially impair the banks

strong position.

Offer excellent credit quality, with susceptibility to long−termAa risks with a vulnerability to greater fluctuations within

protective elements.

Offer excellent credit quality, but elements suggest aA susceptibility to impairment over the long−term.

Rated as medium grade, with some speculative elements andBaa moderate credit risk.

Standard & Poor's −Indicates extremely strong capacity for timely payment of

AAAlong−term f inancia l commitments

Indicates strong capacity for timely payment of financialAA commitments

Indicates strong capacity for timely payment of financialcommitments This capacity may, nevertheless, be more

A− susceptible to the adverse effects of changes in circumstancesor in economic conditions than is the case for higher ratedcategory.

Indicates an adequate capacity for timely payment of financialBBB commitments but adverse business or economic conditions

more likely to impair this capacity.

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I

Annex FLOANS FUND REPAYMENT SCHEDULE

Loans Fund Repayments Schedules

Estimated Loans Fund Pool Open Balance

GF EstimatedLoans FundPool Open

BalanceErn

502.8

45.352.044.7

142.0

HRAEstimated

Loans FundPool Open

BalanceEm

252.2

TotalEm

755.0

Estimated New Advances 18/19Estimated New Advances 19/20Estimated New Advances 20/21

3 Year Total Estimated New Advances

41.938.451.8

132.1

87.290.496.5

274.1

Total Debt Repayments Due 1 644.81 384.3 I 1,029.1 IScheduled Debt Amortisation

Within 1 yearWithin 2 to 5 years

within 5 toloyearswithin 10 to 15 yearswithin 15 to 20 yearswithin 20 to 25 yearswithin 25 to 30 yearswithin 30 to 35 yearswithin 35 to 40 yearswithin 40 to 45 yearswithin 45 to 50 yearswithin 50 to 55 yearswithin 55 to 60 years

General Fund HRAEm Em

23.4106.3110.493.193.572.056.450.020.111.93.23.01.5

7.737.557.565.178.272.049.216.60.5

TotalEm

31.1143.8167.9158.2171.7144.0105.666.620.611.93.23.01.5

Total Scheduled Debt Amortisation 644.81 384.31 1,029.1