Treasury management

Every year we invest and borrow money in order to manage the council's fluctuating cash flow.

These activities are undertaken in accordance with strict criteria that complies with statutory guidance and council approved limits.

We also have long-term investments that are managed by external fund managers, and long-term debt with HM Treasury. 

We also seek advice on our strategy and activities from Treasury Management Consultants.

Treasury Management and Prudential indicators frequently asked questions

What is the difference between capital expenditure and capital financing requirement?

The Capital Expenditure is the forecast expenditure on new capital projects in line with the Capital Programme.

It excludes all of the Council's existing capital assets, for example, Land, buildings, vehicles etc.

The Capital Financing Requirement (CFR) is the Council's capital assets (existing and planned) less all of the Councils' capital and revenue resources which have been applied to pay for it.

This is the amount of capital expenditure that the Council has to charge to revenue or to finance through other resources. The CFR is normally funded by external borrowing.

What does the term 'financing' mean?

The term 'financing' does not refer to the payment of cash but the resources that will be applied to ensure that the capital payment amounts is dealt with over the longer term.

A number of financing options are available to Councils:

• ­­capital receipts (eg. sale of land or buildings) ­
• contribution from revenue expenditure ­
• capital grant ­
• contribution from a third party
• ­borrowing

Does the Council link long term loans to particular capital assets/projects?

The Council does not associate loans with particular capital assets/projects, as it is not best practice.

The Council will, at any point in time, have a number of cash flows both positive and negative and will be managing its position in terms of its borrowings and investments in accordance with its treasury management strategy and practices.

This is best practice in line with the Chartered Institute of Public Finance and Accountancy (CIPFA) Prudential Code.

What does the term 'net borrowing should not exceed the total of the CFR' mean?

The CFR determines the amount that the Council needs to borrow for a capital purpose.

Net borrowing will remain below the CFR to ensure that the Council is only borrowing for a capital purpose.

The Council is permitted to borrow in advance for a capital purpose over the medium term.

The term 'total of the CFR' is the CFR of the current year plus increases in the CFR of the previous financial year and next two financial years.

In other words, the total of the Council's existing assets plus additions to assets resulting from forecast Capital Programme expenditure, eg. vehicles, upgrades to the Crematorium burners.

This gives the Council some headroom to borrow early for a capital purpose in order to secure low interest rates.

Is the cash that is being managed in-house revenue or capital?

The short term surplus cash that is managed during the year in house may be revenue or capital, for example the Council receives a capital receipt in April but capital expenditure is incurred throughout the year giving rise to increased cash balances in the early part of the financial year which is invested short term in house.

The Council receives Council Tax which is classed as revenue income.

This is typically received in the months of April to January as Council Tax payers make 10 instalments. Therefore, the Council has less cash in the months of February and March and may need to borrow cash short-term in line with the cash flow forecast.

What does the Council invest in?

The Council is restricted in where it can invest its surplus funds.

The restrictions are prescribed by statute (Local Government Act 2003 section 15(1)(a)).

Councils are also required to have regard to supplementary investment guidance provided by the Communities and Local Government.

The Council's investments are typically short term, ie. less than a year, and are made in sterling with institutions with high credit ratings.

What is Prudential Borrowing?

This Council borrowing that is not funded via grants but from the Council's own resources and is conditional upon prudence being demonstrated.

What is the role of internal and external auditors in respect of treasury management?

The focus of external auditors work is a Council's annual accounts and the financial management systems and processes that underpin them.

The external audit will enquire as to whether the Treasury Management Code has been adopted and whether its principles and recommendations have been implemented and adhered to.

External auditors cannot comment or advise on authority's treasury management strategy or policies through a process of review. The role of Internal Audit is to provide an opinion of the adequacy, application and reliability of the key internal controls put in place by management to ensure that the identified risks are sufficiently mitigated.

This will assist Treasury Management in meeting its desired objectives and help to ensure that the risk of fraud and/or error is minimised.

Internal Audit will also look to identify other areas of potential risk which could usefully be included as well as any inefficiencies in existing processes and procedures where improvements can be made.

What are the qualifications of Council staff involved in treasury management practices?

Staff are either working towards or have achieved professional accountancy qualifications from CIPFA (Charted Institute of Public Finance Accountants), ACCA (Association of Chartered Certified Accountants) or CIMA (Chartered Institute of Management Accountants).

Staff work closely with Treasury Management Advisors and attend treasury training and updates provided by the Treasury Management Advisors.

Glossary of Treasury Terms

• Certificate of Deposit (CD)  - A deposit with a bank or building society. The CD can be sold to a third party before the maturity date.
• Counterparty - Another party to an agreement.
• Credit rating  - A measure of the credit worthiness of an institution, corporation, or a country. Credit ratings are calculated from financial history and current assets and liabilities. Typically, a credit rating tells a lender or investor the probability of the subject being able to pay back a loan.
• Gilt  - Registered British government securities giving the investor an absolute commitment from the government to honour the debt that those securities represent.
• Liquidity  - As assessment of how readily available an investment is, the length of term.
• Money Market Fund (MMF)  - A well rated, highly diversified pooled investment fund whose assets mainly comprise of short term instruments.
• Prudential Borrowing  - Borrowing that is not funded via the Revenue Support Grant or other grant aid system but rather from the Council's own resources, this is conditional upon prudence being demonstrated.
• Public Works Loan Board (PWLB)  - The PWLB is part of HM Treasury and lends money to local authorities.
• Rating agency  - Bodies that assess the financial strength of companies and governments, both domestic and foreign, particularly their ability to meet the interest and principal payments on their bonds and other debt.
• Security  - An assessment of the creditworthiness of a counterparty.
• Treasury adviser  - External consultancy firms that provide information to local authorities, including information regarding counterparty creditworthiness.