Capital and Investment Strategy

Capital and Investment Strategy 2024/25 to 2028/29

Adopted at Council on 7 March 2024

Contents

Introduction

The Capital Strategy

Minimum Revenue Provision Policy

Treasury Management Strategy 2024/25 to 2028/29

Borrowing Strategy 2024/25 to 2028/29

Investment Strategy 2024/25 to 2028/29

Commercial Investments

Appendix (i)

Appendix (ii) Pooled Funds - in Fair Value Since Acquisition

Appendix (iii) Current Book Value of Non-Treasury Investments

Appendix (iv) Glossary

Introduction

1. The Local Government Act 2003 requires the Council to comply with the CIPFA Prudential Code for Capital Finance in Local Authorities when carrying out capital and treasury management activities.

2. The Department for Levelling Up, Housing & Communities (DLUHC) has issued Guidance on Local Council Investments that requires the Council to approve an investment strategy before the start of each financial year.

3 .This report fulfils the Council’s legal obligation under the Local Government Act 2003 to have regard to both the CIPFA Code and the DLUHC Guidance.

The Capital Strategy

4. The Council’s capital expenditure plans are summarised below and forms the first of the prudential indicators. Capital expenditure needs to have regard to:

Corporate objectives (e.g. strategic planning);
Stewardship of assets (e.g. asset management planning);
Value for money (e.g. option appraisal);
Prudence and sustainability (e.g. implications for external borrowing and whole life costing);
Affordability (e.g. implications for council tax);
Practicability (e.g. the achievability of the Corporate Strategy);
Proportionality (e.g., risks associated with investment are proportionate to financial capacity); and
Environmental Social Governance (ESG) (e.g., address environmental sustainability in a manner which is consistent with our corporate policies. This is now a requirement of the TM Code)

5. Each year the Council will produce a Capital Programme to be approved by Full Council in March as part of the Council Tax setting.

6. Each scheme is supported by a detailed appraisal (which may also be a Cabinet Report), as set out in the Council’s Financial Regulations. The capital appraisals will address the following:

A detailed description of the project;
How the project contributes to the Council’s s Corporate Priorities and Strategic Commitments (particularly the Council’s environmental and carbon policies);
Anticipated outcomes and outputs;
A consideration of alternative solutions;
An estimate of the capital costs and sources of funding;
An estimate of the revenue implications, including any savings and/or future income generation potential;
A consideration of whether it is a new lease agreement;
How the project affects the Council’s Environmental targets;
Any other aspects relevant to the appraisal of the scheme as the S151 Officer may determine.

The appraisal requirement applies to all schemes except where there is regular grant support and if commercial negotiations are due to take place and further reporting to Cabinet or Full Council is therefore required.

7. From time-to-time unforeseen opportunities may arise, or new priorities may emerge, which will require swift action and inclusion in the Capital Programme. These schemes are still subject to the appraisal process and the Capital Programme will contain a contingency sum to allow such schemes to progress without disrupting other planned capital activity.

Capital Prudential Indicators

a) Capital Expenditure Estimates

8. Capital expenditure can be financed immediately through the application of capital resources, for example, capital receipts, capital grants or revenue resources. However, if these resources are insufficient or a decision is taken not to apply resources, the capital expenditure will give rise to a borrowing need. The table below summarises the capital expenditure projections and anticipated financing.

Projected Capital Expenditure and Financing
Category	2023/24 Original £'000	2023/24 Revised £'000	2024/25 Estimate £'000	2025/26 Estimate £'000	2026/27 Estimate £'000	2027/28 Estimate £'000	2028/29 Estimate £'000
Capital Expenditure	9,576	10,562	11,079	8,196	2,005	1,620	1,852
Less Financed by:	-	-	-	-	-	-	-
Capital Receipts	3,387	3,826	2,989	5,999	292	0	0
Capital Grants / Contributions	3,739	4,824	6,037	1,517	695	695	695
Reserves	1,450	1,912	2,053	680	1,018	925	1,157
Total Financing	8,576	10,562	11,079	8,196	2,005	1,620	1,852
Underlying need to Borrow	1,000	0	0	0	0	0	0

9. The key risks to the capital expenditure plans are that the level of grants estimated is subject to change, anticipated capital receipts are not realised/deferred or spend is more than expected in the medium term. There is uncertainty surrounding the future of New Homes Bonus which has impacted on the level of capital grants received going forward. The allocation for 2024/25 as been assumed to be £1.5m with nothing anticipated in future years.

b) The Council's Underlying Need to Borrow and Investment Position

10. The Council’s cumulative outstanding amount of debt finance is measured by the Capital Financing Requirement (CFR) which remains a key indicator under the Prudential Code. The CFR increases with new debt-financed capital expenditure and reduces with Minimum Revenue Provision (MRP) and capital receipts used to replace debt. In addition the CFR will reduce with any voluntary
contributions (VRP) made, as a result of financing requirements in relation to the Rushcliffe Arena development.

11. The Council also holds usable reserves and working capital which represent the underlying resources available for investment. The Council’s current strategy is to use these resources, by way of internal borrowing, to avoid the need to externalise debt.

12. The table below summarises the overall position regarding borrowing and available investments. It shows a decrease in CFR due to the anticipated capital receipt from the sale of land Hollygate Lane being used to reduce the additional CFR resulting from the completion of the Rushcliffe Oaks Crematorium and Bingham Arena and Enterprise Centre.

Capital Financing Requirement and Investment Resources
Description	2023/24 Forecast £'000	2024/25 Forecast £'000	2025/26 Forecast £'000	2026/27 Forecast £'000	2027/28 Forecast £'000	2028/29 Forecast £'000
Opening CFR	13,266	9,511	7,863	6,685	5,942	5,764
CFR in year	-	-	-	-	-	-
Less MRP etc	(1,255)	(1,178)	(1,178)	(743)	(178)	(178)
Less Capital Receipts Applied	(2,500)	(470)	-	-	-	-
Closing CFR	9,511	7,863	6,685	5,942	5,764	5,586
Less External Borrowing	-	-	-	-	-	-
Internal Borrowing	9,511	7,863	6,685	5,942	5,764	5,586
Less Usable Reserves	(25,560)	(22,663)	(19,662)	(17,314)	(15,707)	(14,251)
Less Working Capital	(42,906)	(40,906)	(38,906)	(36,906)	(34,906)	(32,906)
Available for Investment	(58,955)	(55,706)	(51,883)	(48,278)	(44,849)	(41,571)

13. The Council is currently debt free and the assumption in the capital expenditure plan is that the Council will not need to externally borrow over the period of the MTFS predominantly due to CIL and S106 monies. Available resources (usable reserves and working capital) gradually reduce with usable reserves being used over the medium term to finance both capital and revenue expenditure. Working capital is projected to steadily reduce as S106 monies in relation to Education are no longer paid to the Council.

14. Projected levels of the Council’s total outstanding debt are shown below, compared with the capital financing requirement (see above). Statutory guidance is that debt should remain below the CFR, except in the short term. As can be seen from the table below, the Council expects to comply with this.

Capital Financing Requirement and Investment Resources
Description	2023/24 Forecast £'000	2024/25 Forecast £'000	2025/26 Forecast £'000	2026/27 Forecast £'000	2027/28 Forecast £'000	2028/29 Forecast £'000
Opening CFR	13,266	9,511	7,863	6,685	5,942	5,764
CFR in year	-	-	-	-	-	-
Less MRP etc	(1,255)	(1,178)	(1,178)	(743)	(178)	(178)
Less Capital Receipts Applied	(2,500)	(470)	-	-	-	-
Closing CFR	9,511	7,863	6,685	5,942	5,764	5,586
Less External Borrowing	-	-	-	-	-	-
Internal Borrowing	9,511	7,863	6,685	5,942	5,764	5,586
Less Usable Reserves	(25,560)	(22,663)	(19,662)	(17,314)	(15,707)	(14,251)
Less Working Capital	(42,906)	(40,906)	(38,906)	(36,906)	(34,906)	(32,906)
Available for Investment	(58,955)	(55,706)	(51,883)	(48,278)	(44,849)	(41,571)

15. CIPFA's Prudential Code for Capital Finance in Local Authorities recommends that the Authority’s gross external debt should be lower than its highest forecast CFR over the next three years. Table 2 shows that the Authority expects to comply with this recommendation.

16. The new accounting standard IFRS16 has been delayed a further year and comes into force on 1 April 2022. IFRS 16 affects how leases are measured, recognised and presented in the accounts and essentially means that some leases may have to be classified as capital expenditure. The full impact of this change is still yet to be determined and this is likely to impact on the CFR. As we currently have no external borrowing this is unlikely to affect the Authorised Limit.

Minimum Revenue Provision Policy

17. Revised MHCLG Regulations have been issued which require the Governance Scrutiny Group to consider a Minimum Revenue Provision (MRP) Statement in advance of each year. Further commentary regarding financing of the debt is provided in paragraphs 30-34 A variety of options are provided to Councils, so long as there is prudent provision. The Council has chosen the Asset Life Method (Option 3 within the Guidance) with the following recommended MRP Statement:

MRP will be based on the estimated life of the assets, in accordance with Option 3 of the regulations. Estimated life periods within this limit will be determined under delegated powers, subject to any statutory override. (DCLG revised guidance states maximum asset lives of 40 and 50 years for property and land respectively).

As some types of capital expenditure incurred by the Council are not capable of being related to an individual asset, asset lives will be assessed on a basis which most reasonably reflects the anticipated period of benefit that arises from the expenditure. Also, whatever type of expenditure is involved, it will be grouped together in a manner which reflects the nature of the main component of expenditure and will only be divided up in cases where there are two or more major components with substantially different useful economic lives.

This option provides for a reduction in the borrowing need over approximately the asset’s life.

18. As well as the need to pay off an element of the accumulated General Fund borrowing requirement used to fund capital expenditure each year (the capital financing requirement - CFR) through a revenue charge (the MRP) it is also allowed to make additional voluntary contributions (voluntary revenue provision – VRP). In times of financial crisis the Council has the flexibility to reduce voluntary contributions.

Treasury Management Strategy 2021/22 to 2025/26

19. The CIPFA Treasury Management Code defines treasury management activities as:

“The management of the local authority’s 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.

The code also covers non-cash investments which are covered at paragraph 67 below.

20. The CIPFA Code of Practice for Treasury Management in the Public Services (the “CIPFA Treasury Management Code”) and the CIPFA Prudential Code require local authorities to produce a Treasury Management Strategy Statement on an annual basis.

21. This Strategy Statement includes those indicators that relate to the treasury management functions and help ensure that the Council’s capital investment plans are affordable, prudent and sustainable, while giving priority to the security and liquidity of those investments.

The Current Economic Climate and prospects for Interest Rates

22. The UK faces a long road to economic recovery in the wake of the COVID-19 pandemic. The furlough scheme was set to end October but has now been extended to the end of March 2021 due to the fear that its withdrawal will lead to many job losses. Consumers will also probably remain cautious in spending and this will dampen growth. While the UK has been gripped by the long running saga of whether or not a deal would be made by 31.12.20, the final agreement on 24.12.20, followed by ratification by Parliament and all 27 EU countries in the following week, has eliminated a significant downside risk for the UK economy. The initial agreement only covers trade so there is further work to be done on the services sector where temporary equivalence has been granted in both directions between the UK and EU; that now needs to be formalised on a permanent basis. Economic recovery is expected to be only gradual and, therefore, prolonged. The trajectory will be dependent on factors such as the success of the Coronavirus vaccine.

23. The November lockdown in England is expected to see economic growth fall again in Q4. As a result, output in 2020 as a whole will contract by 11.3%. A partial recovery in 2021 could see growth of 5.5% next year but it is not anticipated that output will reach pre-Covid levels before Q2 2022.

24. The extension of the furlough scheme in November has potentially forestalled a sharp increase in unemployment in the final quarter of 2020. The rate of unemployment is now expected to peak at 7.5% around May next year before gradually subsiding, reaching 4.4% by the end of 2024.

25. The current Bank of England base rate is 0.1%. The Bank of England took emergency action in March to cut the Bank Rate to first 0.25% and then to 0.1%. It has remained unchanged, but some forecasters are suggesting that a cut into negative territory could happen. The Bank of England suggest such a move would do more damage than good. Link (the Council’s Treasury Advisors) are forecasting no change within the forecast horizon ending on 31 March 2023.

26. Inflation levels are expected to increase to 2% in 2021 and 2.1% in 2022 and 2023.

27. The table below shows the assumed average interest (which reflects a prudent approach) that will be made over the next five years for budget setting purposes.

Budgetary Impact of Assumed Interest Rate
Category	2021/22	2022/23	2023/24	2024/25	2025/26
Anticipated Interest Rate (%)	0.10	0.25	0.50	0.50	0.50
Expected Interest from Investments (£)	373,100	422,500	484,900	488,400	486,700
Other Interest (£)	89,000	81,000	72,000	64,000	59,000
Total Interest (£)	462,100	503,500	556,900	552,400	545,700
Sensitivity	£	£	£	£	£
-0.25% Interest Rate	(14,500)	(12,500)	(19,500)	(21,300)	(21,300)
+0.25% Interest Rate	14,500	12,500	19,500	21,300	21,300

28. In the event that a bank suffers a loss, the Council could be subject to bail-in to assist with the recovery process. The impact of a bail-in depends on the size of the loss incurred by the bank or building society, the amount of equity capital and junior bonds that can be absorbed first and the proportion of insured deposits, covered bonds and other liabilities that are exempt from bail-in.

29. The Council has managed bail-in risk by both reducing the amount that can be invested with each institution to £10 million and by investment diversification between creditworthy counterparties.

Borrowing Strategy 2021/22 to 2025/26

Prudential Indicators for External Debt

30. The Capital Financing table above identifies that the Council may need to externally borrow over the MTFS if it is not possible to internally borrow. This would result in borrowing costs. Anticipated levels of external borrowing are reflected in the figures.

31. The approved sources of long term and short term borrowing are:

Internal borrowing
Municipal Bond Agency
Public Works Loan Board (PWLB) (or the body that will replace the PWLB in the future)
Local authorities
UK public and private sector pension funds
Commercial banks
Building Societies in the UK
Leasing
Capital market bond investors
Special purpose companies created to enable local authority bond issues.

Following the recent consultation PWLB have published new lending terms effective from 26 November and now General Fund Borrowing is in line with HRA at Gilts +80bps (certainty rate). There is also now the need to categorise the capital programme into five categories including service, housing, regeneration etc. If any Authority has assets that are being purchased ‘primarily for yield’ anywhere in their capital programme they will not be able to access PWLB funding.

a) Authorised Limit for External Debt

32. The authorised limit is the “affordable borrowing limit” required by section 3 (1) of the Local Government Act 2003 and represents the limit beyond which borrowing is prohibited. It shows the maximum amount the Council could afford to borrow in the short term to maximise treasury management opportunities and either cover temporary cash flow shortfalls or use for longer term capital investment.

Authorised Limit for External Debt
Description	2020/21 Estimate £'000	2021/22 Estimate £'000	2022/23 Estimate £'000	2023/24 Estimate £'000	2024/25 Estimate £'000	2025/26 Estimate £'000
Authorised Limit	25,000	25,000	25,000	25,000	25,000	25,000

b) Operational Boundary for External Debt

33. The operational boundary is the expected borrowing position of the Council during the course of the year. The operational boundary is not a limit and actual borrowing can be either below or above the boundary subject to the authorised limit not being breached. The Operational Limit has been set at £20m as the Council is expected to borrow over the period of the MTFS.

Operational Boundary for External Debt
Category	2020/21 Estimate £'000	2021/22 Estimate £'000	2022/23 Estimate £'000	2023/24 Estimate £'000	2024/25 Estimate £'000	2025/26 Estimate £'000
Operational Boundary	20,000	20,000	20,000	20,000	20,000	20,000

34. The Prudential indicators for debt discussed are shown in the table below:

Prudential Indicators
Description	2020/21 £'000	2021/22 £'000	2022/23 £'000	2023/24 £'000	2024/25 £'000	2025/26 £'000
External Debt	-	4,965	7,378	7,271	7,161	7,048
Authorised Limit	25,000	25,000	25,000	25,000	25,000	25,000
Operational Boundary	20,000	20,000	20,000	20,000	20,000	20,000
Capital Financing Requirement	11,527	16,909	15,635	14,361	13,361	12,111

The Prudential Indicators for Affordability

35. Affordability indicators provide details of the impact of capital investment plans on the Council’s overall finances.

a) Actual and estimates of the ratio of net financing costs to net revenue stream

36. This indicator identifies the trend in net financing costs (borrowing costs less investment income) against net revenue income. The purpose of the indicator is to show how the proportion of net income used to pay for financing costs (a credit indicates interest earned rather than cost) is changing over time. The trend below reflects the decision to temporarily remove the voluntary element of the amount charged to revenue in 2022/23 and 2023/24, to set aside a provision for repaying external borrowing. Treasury investments will benefit in the interim years despite non-treasury capital commitments in the Crematorium and Bingham Hub.

Proportion of Financing Costs to Net Revenue Stream
Description	2020/21 Estimate	2021/22 Estimate	2022/23 Estimate	2023/24 Estimate	2024/25 Estimate	2025/26 Estimate
General Fund	5.88%	5.45%	7.53%	7.54%	4.99%	6.99%

Investment Strategy 2020/21 to 2025/26

37. The movement in investments are due to increases in capital receipts related to Sharphill and S106 receipts as shown below.

Investment Projections
Description	2020/21 Estimate £'000	2021/22 Estimate £'000	2022/23 Estimate £'000	2023/24 Estimate £'000	2024/25 Estimate £'000	2025/26 Estimate £'000
Investments at 31 March	26,457	20,752	25,986	26,956	27,966	27,516

38. Both the CIPFA Code and the MHCLG Guidance require the Council to invest its funds prudently, and to have regard to the security and liquidity of its investments before seeking the highest rate of return. The Council’s objective when investing money is to strike an appropriate balance between risk and return, minimising the risk of incurring losses from defaults and the risk of receiving unsuitable low investment income. Accordingly, the Council ensures that robust due diligence procedures cover all external investments.

39. The Council will not knowingly invest directly in businesses whose activities and practices pose a risk of serious harm to individuals or groups, or whose activities are inconsistent with the Council’s Corporate Objectives and values. This would include avoiding direct investment in institutions with material links to:

Human rights abuse (e.g. child labour, political oppression);
Environmentally harmful activities (e.g. pollutants, destruction of habitat, fossil fuels); and
Socially harmful activities (e.g. tobacco, gambling).

40. The Council will keep under review the sensitivity of its treasury assets and liabilities to inflation and will seek to manage the risk accordingly in the context of the whole of the Council’s inflation exposures.

41. The Council will invest its surplus funds with approved counterparties. Where appropriate, the Council is registered as a professional client (under “MIFID II”) with the counterparty limits shown below and counterparties included at Appendix (i):

Counterparty Details
Credit Rating	Banks* Unsecured	Banks* Secured	Government	Corporates	Registered Providers
UK Government	not applicable	not applicable	£ unlimited 20 years	not applicable	not applicable
AAA	£3.0m 3 years	£10.0m 10 years	£10.0m 20 years	£3.0m 10 years	£5.0m 10 years
AA+	£3.0m 2 years	£10.0m 10 years	£10.0m 5 years	£3.0m 4 years	£5.0m 4 years
AA	£3.0m 1 year	£10.0m 4 years	£10.0m 3 years	£3.0m 2 years	£5.0m 4 years
AA-	£3.0m 1 year	£10.0m 2 years	-	-	£5.0m 4 years
A+	£3.0m 6 months	£10.0m 2 years	-	-	£5.0m 2 years
A	£3.0m 6 months	£10.0m 1 year	-	-	£5.0m 2 years
A-	£3.0m 3 months	£10.0m 6 months	-	-	£5.0m 2 years
Pooled Funds**	£10m per fund	£10m per fund	£10m per fund	£10m per fund	£10m per fund

*Banks includes Banks and Building Societies.

**Pooled funds do not have a defined maturity date. Monies in Money Market Funds can be withdrawn on the same date; monies in other pooled funds can be withdrawn giving the requisite notice, generally between 1 and 7 days.

Monies in the CCLA Property Fund can be withdrawn on each monthly redemption date, if required; it is the Council’s intention to hold its investment over a reasonable time frame for property investments, which is 5 years, subject to cash flow requirements.

42. Although the above table details the counterparties that the Council could invest funds with, it would not invest funds with counterparties against the advice of Link (our TM Advisors) even if they met the criteria above.

43. Changes to any of the above can be authorised by the Section 151 Officer or the Financial Services Manager and thereafter will be reported to the Governance Scrutiny Group. This is to cover exceptional circumstances so that instant decisions can be made in an environment which is both fluid and subject to high risk.

44. The Authority may incur operational exposures, for example though current accounts, collection accounts and merchant acquiring services, to any UK bank with credit ratings no lower than BBB- and with assets greater than £25 billion. These are not classed as investments but are still subject to the risk of a bank bail-in, and balances will therefore be kept below £2,000,000 per bank. The Bank of England has stated that in the event of failure, banks with assets greater than £25 billion are more likely to be bailed-in than made insolvent, increasing the chance of the Authority maintaining operational continuity.

45. Credit rating information is provided by Link on all active counterparties that comply with the criteria above. A counterparty list will be maintained from this information and any counterparty not meeting the criteria will be removed from the list.

46. Where an entity has its credit rating downgraded so that it fails to meet the approved investment criteria then:
•   no new investments will be made,
•   any existing investments that can be recalled or sold at no cost will be, and
•   full consideration will be given to the recall or sale of all other existing investments with the affected counterparty.

47. Where a credit rating agency announces that a credit rating is on review for possible downgrade (also known as “rating watch negative” or “credit watch negative”) so that it may fall below the approved rating criteria, then only investments that can be withdrawn [on the next working day] will be made with that organisation until the outcome of the review is announced. This policy will not apply to negative outlooks, which indicate a long-term direction of travel rather than an imminent change of rating.

Credit Risks

48. The CIPFA Treasury Management Code recommends that organisations should clearly specify the minimum acceptable credit quality of its counterparties; however they should not rely on credit ratings alone and should recognise their limitations. Full regard will therefore be given to other available information on the credit quality of the organisations, in which it invests, including credit default swap prices, financial statements, information on potential government support and reports in the quality financial press. No investments will be made with an organisation if there are substantial doubts about its credit quality, even though it may meet the credit rating criteria.

49. When deteriorating financial market conditions affect the creditworthiness of all organisations, as happened in 2008 and 2011, this is not generally reflected in credit ratings, but can be seen in other market measures. In these circumstances, the Authority will restrict its investments to those organisations of higher credit quality and reduce the maximum duration of its investments to maintain the required level of security. The extent of these restrictions will be in line with prevailing financial market conditions. If these restrictions mean that insufficient commercial organisations of high credit quality are available to invest the Authority’s cash balances, then the surplus will be deposited with the UK Government, via the Debt Management Office or invested in government treasury bills for example, or with other local authorities. This will cause a reduction in the level of investment income earned but will protect the principal sum invested.

Current Investments

50. The Council uses its own processes to monitor cash flow and determine the maximum period for which funds may prudently be committed. The forecast is compiled on a prudent basis to minimise the risk of the Council being forced to borrow on unfavourable terms to meet its financial commitments. Limits on long-term investments are set by reference to the Authority’s medium term financial strategy and cash flow forecast.

51. Surplus funds are invested based on the most up to date forecasts of interest rates and in accordance with the Council’s cash flow requirements in order to gain the maximum benefit from the Council’s cash position throughout the year. Funds are separated between specified and non-specified investments as detailed below.

Specified Investments

52. The MHCLG guidance defines specified investments as those:

•   Denominated in pound sterling,
•   Due to be repaid within 12 months of arrangements,
•   Not defined as capital expenditure by legislation, and
•   Invested with one of:
•   The UK Government
•   A UK local authority, parish council, or community council, or
•   A body or investment scheme of “high credit quality”

53. The Council now defines “high credit quality” organisations as those having a credit rating of A- and above.

54. Any investment not meeting the definition of a specified investment is classed as non-specified. The Council does not intend to make any investments denominated in foreign currencies, nor any that are defined as capital expenditure by legislation, such as company shares. Non-specified investments will therefore be limited to long-term investments, i.e. those that are due to mature 12 months or longer from the date of arrangement, and investments with bodies and scheme not meeting the definition on high credit quality. Limits on non-specified investments are shown in the following table:

Non-specified Investment Limits
Description	Cash Limit
Total long-term investments	£15m
Total investments without credit ratings or rated below A- (except UK Government and local authorities)	£5m
Total investments (except pooled funds) with institutions domiciled in foreign countries rated below AA+	£3m
Total non-speficied investments	£15m

55. The Authority's revenue reserves available to cover investment losses in a worst-case scenario are forecast to be £18.7 million on 31st March 2021. The maximum that will be lent to any one organisation (other than the UK Government) will be £10.0 million. This figure is constantly under review to assess risk in the case of a single default. A group of banks under the same ownership will be treated as a single organisation for limit purposes. Limits will also be placed on fund managers, investments in brokers’ nominee accounts, foreign countries and industry sectors as below. Investments in pooled funds and multilateral development banks do not count against the limit for any single foreign country, since the risk is diversified over many countries.

Investment Limits
Description	Cash Limit
Any single organisation, except the UK Central Government	£10m each
UK Central Government	Unlimited
Any group of organisations under the same ownership	£10m per group
Any group of pooled funds under the same management	£10m per manager
Negotiable instruments held in a broker’s nominee account	£10m per broker
Foreign Countries	£3m per country
Registered providers	£5m in total
Unsecured investments with any building society	£3m in total
Loans across unrated corporates	£5m in total
Money Market Funds	£30m in total

56. The Council measures and manages its exposures to treasury management risks using the following indicators.

a) Interest Rate Exposure

57. This indicator is set to control the Authority’s exposure to interest rate risk. The upper limits on fixed and variable rate interest rate exposures, expressed as the amount of net interest payable will be:

Interest Rate Exposure
Category	2020/21	2021/22	2022/23	2023/24	2024/25	2025/26
Transformation Savings	50%	50%	50%	50%	50%	50%
Service Efficiencies	100%	100%	100%	100%	100%	100%

58. Fixed rate investments and borrowings are those where the rate of interest is fixed for at least 12 months, measured from the start of the financial year or the transaction date if later. All other instruments are classed as variable rate.

Principal Sums Invested over one year

59. This limit is intended to contain exposure to the possibility of any loss that may arise as a result of the Council having to seek early repayment of any investments made. The limits on the long-term principle sum invested to final maturities beyond the period end are set at 50% of the sum available for investment (to the nearest £100k), as follows:

Principal sums invested over one year
Description	2020/21 Estimate £'000	2021/22 Estimate £'000	2022/23 Estimate £'000	2023/24 Estimate £'000	2024/25 Estimate £'000	2025/26 Estimate £'000
Limit on Principal Invested over one year	13,200	10,400	13,000	13,500	14,000	13,800

Policy on the use of financial derivatives

60. Local authorities have previously made use of financial derivatives embedded into loans and investments both to reduce interest rate risk (e.g. interest rate collars and forward deals) and to reduce costs or increase income at the expense of greater risk (e.g. LOBO loans and callable deposits). The general power of competence in Section 1 of the Localism Act 2011 removes much of the uncertainty over local authorities’ use of standalone financial derivatives (those that are not embedded into a loan or investment).

61. The Council will only use standalone financial derivatives (such as swaps, forwards, futures and options) where they can be clearly demonstrated to reduce the overall level of the financial risks that the Authority is exposed to. Additional risks presented, such as credit exposure to derivative counterparties, will be taken into account when determining the overall level of risk. Embedded derivatives, including those present in pooled funds and forward starting transactions, will not be subject to this policy, although the risks they present will be managed in line with the overall treasury risk management strategy.

62. Financial derivative transactions may be arranged with any organisation that meets the approved investment criteria. The current value of any amount due from a derivative counterparty will count against the counterparty credit limit and the relevant foreign country limit.

Treasury Management Advisors

63. Link Asset Services will act as the Council’s treasury management advisors until 31 October 2022. The company provides a range of services which include:

•   Technical support on treasury matters and capital finance issues
•   Economic and interest rate analysis
•   Generic investment advice on interest rates, timing and investment instruments; and
•   Credit ratings/market information service comprising the three main credit rating agencies.

64. Whilst the treasury management advisors provide support to the internal treasury function, the current market rules and the CIPFA Treasury Management Code confirms that the final decision on treasury management matters rests with the Council. The service provided by the Council’s treasury management advisors is subject to regular review.

Member and Officer Training

65. The increased member consideration of treasury management matters and the need to ensure that officers dealing with treasury management are trained and kept up to date requires a suitable training process for members and officers. In general, members training needs are reported through the Member Development Group, however, the Council will also specifically address this important issue by:

Periodically facilitating workshops for members on finance issues;
Interim reporting and advising members of Treasury issues via GSG;

With regards to officers:

Attendance at training events, seminars and workshops; and
Support from the Council’s treasury management advisors;
Identifying officer training needs on treasury management related issues through the Performance Development and Review appraisal process.

Other Options Considered

66. The MHCLG Guidance and the CIPFA Code do not prescribe any particular treasury management strategy for local authorities to adopt. The Executive Manager – Finance and Corporate Services, having consulted the Cabinet Member for Finance, believes that the above strategy represents an appropriate balance between risk management and cost effectiveness. Some alternative strategies, with their financial and risk management implications, are listed below.

Investment strategy
Alternative	Impact on Income and Expenditure	Impact on Risk Management
Invest in a narrower range of counterparties and/or for shorter times	Interest income will be lower	Lower chance of losses from credit related defaults, but any such losses may be greater
Invest in a wider range of counterparties and/or for longer times	Interest income will be higher	Increased risk of losses from credit related defaults, but any such losses may be smaller

Commercial Investments

67. The definition of investments in CIPFA’s definition of treasury management activities above (paragraph 19) covers all financial assets of the organisation as well as other non-financial assets which the organisation holds primarily for financial returns, such as investment property portfolios. This may therefore include investments which are not managed as part of normal treasury management or under treasury management delegations. All investments require an appropriate investment management and risk management framework, which is outlined below.

68. The Council's committed to becoming self-sustainable as Central Government funding reduces. This previously included ensuring that the Council maximised any income from existing assets and, where there was a business case, investing in assets where there was a commercial return. PWLB will no longer allow Local Authorities to borrow if they invest ‘primarily for yield’. The Council has historically held significant capital funding resources, but these have been committed to major schemes and, going forward, it may need to undertake external borrowing. Current resources are invested with various financial institutions in line with the Treasury Management Strategy.

69. In recent years, the Council identified specific sums for its Asset Investment Strategy within the Capital Programme which totalled £20m. This included commercial investment in areas such as property and subsidiaries, or loans that supported service outcomes. Of the £8.382m balance at the start of the year, £4.554m was committed to two acquisitions of Business Units in West Bridgford. The purchase of Unit 1 Edwalton Business Park was completed 9 July for £2.083m and Unit 3 Edwalton Business Park was completed 13 October for £2.449m. These were reported to Governance Scrutiny Group in November 2020. The balance £3.828m will be referred to Council for removal from the Programme and will not require funding.

70. The Council will maintain a summary of current material investments, subsidiaries, joint ventures and liabilities, including financial guarantees (i.e. Streetwise) and the organisation’s risk exposure. The current summary is included at Appendix (ii).

71. Individual commercial investment proposals included within the Asset Investment Strategy are subject to specific business appraisals. The governance surrounding such decisions is included in the AIS. As well as considering the Net Present Value, Internal Rate of Return and impact on the General Fund of any commercial investment proposals, the decision to invest also takes into account the following assessment matrix:

Asset Assessment Matrix
Assessment Criteria	Excellent / Very Good	Good	Satisfactory	Marginal	Uncertain
Tenancy strength	Multiple tenants with strong financial covenant	Single tenant with strong financial covenant	Single or multiple tenants with good financial covenant	Tenants with average financial covenant	Tenants with poor financial covenant
Lease length and break (for main tenants / income)	11 to 15 years	8 to 10 years (10 year lease)	5 to 7 years (5 year lease)	Less than 5 years or vacant
Rate of return - % rent against capital	Greater than 8%	7% to 8%	5% to 7%	3% to 5%	Less than 3%
Portfolio mix (asset type is balanced in portfolio - no more than x% of portfolio)	Less than 50%	50% to 60%	60% to 70%	70% to 80%	Over 80% of portfolio
Property Sector and Risk	Industrial (lower risk)	Office (lower-mid risk)	Warehouse Retail (medium risk)	Retail, Leisure (higher risk)	Residential (not part of investment strategy)
Void (after lease end including marketing, fit out and rent free)	0 to 9 months	9 to 12 months	12 to 18 months	18 to 24 months	Over 24 months
Location	Prime	Not prime but in an established location	Secondary	Remote from other developments	Isolated, undeveloped area, limited infrastructure links
Tenure	Freehold	Lease over 200 years	Lease 100 to 199 years	Lease 75 to 99 years	Lease less than 75 years
Repairing terms links to building quality	Full repairing and insuring	Internal repairing 100% recoverable	Internal repairing partially recoverable	Internal repairing non-recoverable	Landlord
Building Quality / Age	Less than 10 years	10 to 20 years	21 to 30 years	31 to 35 years	Over 35 years
Rental Growth	Within one year	Within 2 to 5 years	Within 5 to 7 years	Within 7 to 10 years	Over 10 years
Purchase Price	Less than £2m	Between £2m and £3m	Between £3m and £4m	Between £4m and £7m	Over £7m
Proximity to Borough	Within Borough	Within Nottinghamshire	Within East Midlands	Within the Midlands	National
Energy Rating (2018 legislation can't let with F/G assessment)	A/B	C	D	E	F/G

72. To be considered for investment 50% of the criteria above must be excellent, good or satisfactory.

73. The matrix above is supplemented by additional contextual information covering resale opportunities (liquidity), location, risks, benefits and economic conditions.

74. The Government has issued revised guidance on Local Government Investments, effective from April 2018. This guidance introduces additional disclosure requirements some of which are specific to investments of a commercial nature. These disclosures and indicators cover items included in the Council’s Asset Investment Strategy, as well as pre-existing commercial investments and are detailed below:

a) Dependence on commercial income and contribution non-core investments make towards core functions

75. The expected contributions from commercial investments included in the Asset Investment Strategy are shown in Table 13. In order to manage the risk to the Council’s budget, income from commercial investments should not be a significant proportion of the Council’s income. Our objective is that this ratio should not exceed 30%, subject to annual review (as demonstrated below).

Commercial Investment income and costs
Category	2020/21 £'000	2021/22 £'000	2022/23 £'000	2023/24 £'000	2024/25 £'000	2025/26 £'000
Commercial Property Income	(1,557)	(1,660)	(2,015)	(2,160)	(2,240)	(2,302)
Running Costs	618	516	517	517	517	517
Net Contribution to core functions	(939)	(1,144)	(1,499)	(1,644)	(1,724)	(1,786)
Interest from Commercial Loans	(83)	(89)	(80)	(72)	(63)	(60)
Total Contribution	(1,022)	(1,233)	(1,579)	(1,716)	(1,787)	(1,846)
Sensitivity: +/- 10% Commercial Property Income	156	166	202	216	224	230
Indicator: Investment Income as a percentage of total Council income	20%	22.8%	24.7%	23.9%	24.3%	24.6%
Total Income	8,209	7,669	8,500	9,341	9,485	9,590

b) Risk exposure indicators

76. The Council can minimise its exposure to risk by spreading investments across sectors and by avoiding single large-scale investments. Generally there is a spread of investment across sectors. The Council’s commitment to economic regeneration (not purely financial return) has meant that many of its investments have been in industrial units, which have been very successful.

Income spread by sector:

Industrial sites - 41%
Offices - 36%
Retail - 10%
Other - 7%
Commercial loans - 6%

c) Security and liquidity

% Split by Asset Value (number of investments)

Under £500k - 13% (23)
£500k to £1m - 16% (5)
£1m to £2m - 28% (5)
£4m to £5m - 15% (1)
Over £7m - 28% (1)

77. Commercial investments are held for longer term asset appreciation as well as yield. Investments or sales decisions will normally be planned as part of the consideration of the 5-year capital strategy to maximise the potential return. Nevertheless, the local and national markets are monitored to ensure any gains are maximised or losses minimised.

78. To help ensure asset values are maintained the assets are given quarterly inspections, together with a condition survey every 3 years. Any works required to maintain the value of the property will then form part of Council’s spending plans.

79. The liquidity of the assets is also dependent on the condition of the property, the strength of the tenants and the remaining lease lengths. The Council keeps these items under review with a view to maximising the potential liquidity and value of the property wherever possible.

80. The liquidity considerations for commercial investments are intrinsically linked to the level of cash and short-term investments, which help manage and mitigate the Council’s liquidity risk.

81. The Investments are subject to ongoing review with regards to their financial viability or indeed whether they are surplus to requirement.

Appendix (i)

Counterparty Registrations under MIFID II

The Council is registered with the following regulated financial services organisations who may arrange investments with other counterparties with whom they have themselves registered:

BGC Brokers LP
Royal London Asset Management
Tradition UK Ltd
King & Shaxson
Aberdeen Asset Management
Aviva
Institutional Cash Distributors Ltd
Federated Investors (UK) LLP
NEX Treasury
Invesco Asset Management Ltd
CCLA
Goldman Sachs Asset Management
Black Rock
HSBC Asset Management
Imperial Treasury Services

Appendix (ii)

Asset Valuations
Asset	Current Book Value £'000	Previous Book Value £'000
The Point Office Accommodation	4,017	3,200
Hollygate Lane, Cotgrave Industrial Units	2,709	2,435
Bardon, Single Industrial Unit	1,800	1,800
Trent Boulevard	1,407	1,400
Colliers Business Park Phase 2	1,315	1,250
Bridgford Hall Apart Hotel and Registry Office	1,214	1,220
Finch Close	0,959	0,925
Boundary Court	0,816	0,805
Unit 10 Chapel Lane	0,677	0,670
Colliers Business Park Phase 1	0,721	0,610
New Offices Cotgrave	0,452	0,345
Mobile Home Park	0,476	0,330
Cotgrave Precinct Shops	0,500	0,450
Total Investment Property - Values are at 31 March 2019 and 2020	17,063	15,440
Notts County Cricket Club Loan	1,775	1,775
Total	18,838	17,215

Glossary of Terms

CCLA Property Fund - this a local authority property investment fund. The property fund is designed to achieve long term capital growth and a rising income from investments in the commercial property sector.

Covered Bonds – these investments are secured on the bank’s assets, which limits the potential losses in the unlikely event of insolvency, and means they are exempt from bail-in.

Financial Derivatives – A financial contract that derives its value from the performance of an underlying asset.

LIBID – London Inter Bank Bid Rate. The rate at which banks are willing to borrow from other banks.

Money Market Funds – these funds are pooled investment vehicles consisting of money market deposits and similar instruments. They have the advantage of providing wide diversification of investment risks.

Pooled Funds – shares in diversified investment vehicles consisting of different investment types including banks, equity shares and property, these funds have the advantage of providing wide diversification of investment risks.

Appendix 6 Use of Earmarked Reserves

Earmarked Reserves
Description	Projected Opening Balance £'000	Projected Income £'000	Projected Expenditure £'000	Net Change in Year £'000	Ref	Projected Opening Closing £'000
Investment Reserves	-	-	-	-	-	-
Regeneration and Community Projects	1,721	188	(50)	138	1	1,859
Sinking Fund - Investments	179	271	(450)	(179)	2	0
New Homes Bonus (NHB)	8,420	1,633	(1,074)	559	3	8,979
Corporate Reserves	-	-	-	-	-	-
Organisation Stabilisation	7,176	0	(4,777)	(4,777)	4	2,399
Climate Change Action	800	0	0	0	-	800
Development Corporation	400	0	0	0	-	400
Risk and Insurance	100	0	0	0	-	100
Planning Appeals	350	0	0	0	-	350
Elections	100	50	0	50	5	150
Operating Reserves	-	-	-	-	-	-
Planning	209	0	(78)	(78)	6	131
Leisure Centre Maintenance	7	0	0	0	-	7
Total	19,462	2,142	(6,429)	(4,287)	-	15,175

Notes:

Net £138k being the movement on this reserve to support Special Expenses capital schemes.
£271k from Investment Property income to support future capital expenditure. £450k used for enhancement works at The Point and Manvers Business Park.
£1.633m Receipts; MRP release: Arena £1.012m and Cotgrave Redevelopment £62k.
£4m release of S31 Grant Surplus needed in 21/22; £753k to meet the in-year budget deficit and £24k release of Council Tax reimbursement payment.
£50k to replenish the Elections Reserve.
£78k release for Local Plan Examinations.

Appendix 7 - Pay Policy Statement 2021/22

1. Introduction

1.1 This Statement sets out the Council’s policies in relation to the pay of its workforce, particularly its Senior Officers, in line with Section 38 of the Localism Act 2011. The Statement is approved by full Council each year and published on the Council’s website demonstrating an open and transparent approach to pay policy.

1.2 This Statement draws together the Council’s policies relating to the payment of the workforce particularly:

Senior Officers
Its lowest paid employees; and
The relationship between the pay of Senior Officers and the pay of other employees

1.3 For the purposes of this statement ‘pay’ includes basic salary, pension and all other allowances arising from employment.

2. Objectives of this Statement

2.1 This Statement sets out the Council’s key policy principles in relation to pay evidencing a transparent and open process. It does not supersede the responsibilities and duties placed on the Council in its role as an employer and under employment law. These responsibilities and duties have been considered when formulating the Statement.

2.2 This Statement aims to ensure the Council’s approach to pay attracts and retains a high performing workforce whilst ensuring value for money. It sits alongside the information on pay that the Council already publishes as part of its responsibilities under the Code of Practice for Local Authorities on Data Transparency. Further details of this information can be found on the Role and Remuneration webpage.

3. Senior Officers

3.1 The Localism Act sets out a definition of Senior Officers for the purposes of pay policy statements. Applying that definition to roles at Rushcliffe Borough Council, the following 10 posts from an overall current establishment of 259, would be included:

Chief Executive
Executive Manager – Finance and Corporate Services (Section 151 Officer)
Executive Manager - Transformation
Executive Manager - Neighbourhoods
Executive Manager - Communities
Service Manager – Finance and Commercial
Service Manager – Transformation
Service Manager – Neighbourhoods
Service Manager – Communities
Borough Solicitor & Monitoring Officer

4. The Policies

4.1 The Council consults when setting pay for all employees. The Council will meet or reimburse authorised travel, accommodation and subsistence costs for attendance at approved business meetings and training events. The Council does not regard such costs as remuneration but as non-pay operational costs.

5. Pay of the Council’s Lowest Paid Employees

5.1 The Council has defined its lowest paid employees as those on the lowest pay point of the Council’s pay and grading structure, excluding apprentices. On this basis the lowest paid full-time equivalent employee of the Council earns £17,841. The hourly rate of this salary, at £9.25 is above the National Living Wage which is currently £8.72 per hour for employees aged 25 or over and exceeds the National Minimum Wage maximum of £8.20 for employees aged 21-24. From 1 April 2021, these statutory rates will be increasing to £8.91 and £8.36 per hour respectively.

5.2 The Council does not explicitly set the pay of any individual or group of posts by reference to a pay multiple. The Council feels that pay multiples cannot capture the complexity of a dynamic and highly varied workforce in terms of job content, skills and experience required. In simple terms, the Council sets different levels of basic pay to reflect differences in levels of responsibility.

5.3 The Head of Paid Service, or her delegated representative, will give due regard to the published Pay Policy Statement before the appointment of any Officers. Full Council will have the opportunity to discuss any appointment exceeding £100,000 before an offer of appointment is made, in line with the Council’s Officer Employment procedure rules within Part 4 of the Council’s Constitution.

6. Additional Payments Made to Chief Officers – Election Duties.

6.1 The Chief Executive is nominated as the Returning Officer. In accordance with the national agreement, the Chief Executive is entitled to receive and retain the personal fees arising from performing the duties of Returning Officer, Acting Returning Officer, Deputy Returning Officer or Deputy Acting Returning Officer and similar positions which he or she performs subject to the payment of pension contributions thereon, where appropriate.

6.2 The role of Deputy Returning Officer may be applied to any other post and payment may not be made simply because of this designation. Payments to the Returning Officer are governed as follows:

for national elections, fees are prescribed by legislation;
for local elections, fees are determined within a local framework used by other district councils within the county. This framework is applied consistently and is reviewed periodically by lead Electoral Services Officers within Nottinghamshire. This includes proposals on fees for all staff employed in connection with elections. These fees are available for perusal on the Council’s website.

6.3 As these fees are related to performance and delivery of specific elections duties, they are distinct from the process for the determination of pay for Senior Officers.

Appendix to the Pay Policy -Policies on other aspects of pay

Process for setting the pay of Senior Officers

The pay of the Chief Executive is based on an agreed pay scale which is agreed by Council prior to appointment. Changes to this are determined by the Leader, Deputy Leader and Leader of the Opposition, who are advised by an agreed external professional and the Council’s Strategic Human Resources Adviser. This pay scale is subject to pay awards which are negotiated nationally by the JNC for Chief Executives of Local Authorities.

The pay of all Officers including Senior Officers is determined by levels of responsibility, job content and the skills and experience required. Consideration is also given to benchmarking against other similar roles, market forces and the challenges facing the authority at that time and to maximise efficiency. The pay of these posts is determined through the Chief Executive, or her nominated representative, in consultation with the Council’s Strategic Human Resources Adviser and in line with the Council’s pay scales and its agreed scheme of delegation.

The Council moved away from the national conditions of service in 1990 and pay scales are set locally.

As with all employees, the Council would look to appoint on the best possible terms to secure the best candidate for the job. However, there are factors that could influence the rate offered to an individual, including the relevant experience of the candidate, their current rate of pay and market forces.

All Senior Officers are expected to devote the whole of their service to the Authority and are excluded from taking up additional business, ad hoc services or additional appointments without consent as set out in the Councils code of conduct.

Terms and Conditions

All employees are governed by the local terms and conditions as set out in the Employee handbook.

Local Government Pension Scheme

Every employee is automatically enrolled into the Local Government Pension Scheme. Employer and employee contributions are based on pensionable pay, which is salary plus, for example, shift allowances, bonuses, contractual overtime, statutory sick pay and maternity pay as relevant.

For more comprehensive details of the local government pension scheme see: Local Government Pension Scheme and Nottinghamshire Pension Fund

Neither the scheme nor the Council adopt different policies with regard to benefits for any category of employee and the same terms apply to all staff. It is not normal Council policy to enhance retirement benefits but there is flexibility contained within the policy for enhancement of benefits and the Council will consider each case on its merits.

Car Allowances

The Council pays mileage rates at HMRC recommended rates.

Pay Increments

Where applicable pay increments for all employees are paid on an annual basis until the maximum of the scale is reached. The Chief Executive, or her nominated representative, has the discretion to award and remove increments of officers’ dependant on satisfactory or unsatisfactory performance.

Relocation Allowance

Where it is necessary for a newly appointed employee to relocate to take up appointment, the Council may make a contribution towards relocation expenses. The same policy applies to Senior Officers and other employees. Payment will be made against a range of allowable costs for items necessarily incurred in selling and buying a property and moving into the area. The costs include estate agents’ fees, legal fees, stamp duty, storage and removal costs, carpeting and curtains, short term rental etc. The Council will pay 80% of some costs and 100% of others or make a fixed sum available. If an employee leaves within two years of first employment, they may be required to reimburse a proportion of any relocation expenses.

Professional fees

The Council currently meets the cost of professional fees and subscriptions for employees where it is a requirement of their employment or their contract.

Returning Officer Payments

In accordance with the national agreement the Chief Executive is entitled to receive and retain the personal fees arising from performing the duties of returning officer, acting returning officer, deputy returning officer or deputy acting return officer and similar positions which he or she performs subject to the payment of pension contributions thereon, where appropriate.

Fees for returning officer and other electoral duties are identified and paid separately for local government elections, elections to the UK Parliament and EU Parliament and other electoral processes such as referenda. As these relate to performance and delivery of specific elections duties, they are distinct from the process for the determination of pay for Senior Officers.

Managing Organisational Change Policy

The original Managing Organisation Change Policy was agreed by Council in March 2007 (revised 2010). The Council’s policy on the payment of redundancy payments is set out in this policy. The redundancy payment is based on the length of continuous local government service which is used to determine a multiplier which is then applied to actual pay.

The policy provides discretion to enhance the redundancy and pension contribution of the individual and each case would be considered taking into account individual circumstances. Copies of the policy are available on the Council’s website.

The policy is subject to review to ensure it is compliant with any new legislation and regulations which affect redundancy payments.

Payments on termination

The Council does not provide any further payment to employees leaving the Council’s employment other than in respect of accrued leave which by agreement is untaken at the date of leaving or payments that are agreed or negotiated in line with current employment law practices.

Publication of information relating to remuneration of Senior Officers

The Pay Policy Statement will be published annually on the Council’s website following its approval by full Council each year.

Gender Pay gap reporting

The Council publishes its Gender Pay Gap information annually on the Council’s website and on the Government's website.

Pay Multiple

The pay multiple is defined as the ratio between the highest paid taxable earnings for the given year (including base salary, variable pay, bonuses, allowances and the cash value of benefits-in-kind) and the median earnings figure of the whole of the Council’s workforce. This information is shown on the pay multiple webpage.

Appendix 8 - Capital and Investment Strategy 2024/25 - 2028/29

Introduction

1. The Local Government Act 2003 requires the Council to comply with the CIPFA Prudential Code for Capital Finance in Local Authorities when carrying out capital and treasury management activities.

3 .This report fulfils the Council’s legal obligation under the Local Government Act 2003 to have regard to both the CIPFA Code and the DLUHC Guidance.

The Capital Strategy

4. The Council’s capital expenditure plans are summarised below and forms the first of the prudential indicators. Capital expenditure needs to have regard to:

Corporate objectives (e.g. strategic planning);
Stewardship of assets (e.g. asset management planning);
Value for money (e.g. option appraisal);
Prudence and sustainability (e.g. implications for external borrowing and whole life costing);
Affordability (e.g. implications for council tax);
Practicability (e.g. the achievability of the Corporate Strategy)
Proportionality (e.g., risks associated with investment are proportionate to financial capacity); and
Environmental Social Governance (ESG) (e.g., address environmental sustainability in a manner which is consistent with our corporate policies. This is now a requirement of the TM Code).

5. Each year the Council will produce a Capital Programme to be approved by Full Council in March as part of the Council Tax setting.

6. Each scheme is supported by a detailed appraisal (which may also be a Cabinet Report), as set out in the Council’s Financial Regulations. The capital appraisals will address the following:

A detailed description of the project;
How the project contributes to the Council’s s Corporate Priorities and Strategic Commitments (particularly the Council’s environmental and carbon policies);
Anticipated outcomes and outputs;
A consideration of alternative solutions;
An estimate of the capital costs and sources of funding;
An estimate of the revenue implications, including any savings and/or future income generation potential;
A consideration of whether it is a new lease agreement;
How the project affects the Council’s Environmental targets;
Any other aspects relevant to the appraisal of the scheme as the S151 Officer may determine.

Capital Prudential Indicators

a) Capital Expenditure Estimates

Projected Capital Expenditure and Financing
Category	2023/24 Original £'000	2023/24 Revised £'000	2024/25 Estimate £'000	2025/26 Estimate £'000	2026/27 Estimate £'000	2027/28 Estimate £'000	2028/29 Estimate £'000
Capital Expenditure	9,576	10,562	11,079	8,196	2,005	1,620	1,852
Less Financed by	-	-	-	-	-	-	-
Capital Receipts	3,387	3,826	2,989	5,999	292	0	0
Capital Grants / Contributions	3,739	4,824	6,037	1,517	695	695	695
Reserves	1,450	1,912	2,053	680	1,018	925	1,157
Total Financing	8,576	10,562	11,079	8,196	2,005	1,620	1,852
Underlying need to Borrow	1,000	0	0	0	0	0	0

9. The key risks to the capital expenditure plans are that the level of grants estimated is subject to change, anticipated capital receipts are not realised or are more than expected in the medium term. There is uncertainty surrounding the future of New Homes Bonus which has impacted on the level of capital grants received going forward. The allocation for 2024/25 as been assumed to be £1.5m with nothing anticipated in future years.

b) The Council's Underlying Need to Borrow and Investment Position

Gross Debt and Capital Financing Requirement
Description	2023/24 Forecast £'000	2024/25 Forecast £'000	2025/26 Forecast £'000	2026/27 Forecast £'000	2027/28 Forecast £'000	2028/29 Forecast £'000
Debt (including PFI and leases)	0	0	0	0	0	0
Capital Financing Requirement	9,511	7,863	6,685	5,942	5,764	5,586

Minimum Revenue Provision Policy

16. DLUHC Regulations require the Governance Scrutiny Group to consider a Minimum Revenue Provision (MRP) Statement in advance of each year. Further commentary regarding financing of the debt is provided in paragraphs 28-34. A variety of options are provided to Councils, so long as there is prudent provision. The Council has chosen the Asset Life Method (Option 3 within the
Guidance) with the following recommended MRP Statement:

MRP will be based on the estimated life of the assets, in accordance with Option 3 of the regulations. Estimated life periods within this limit will be determined under delegated powers, subject to any statutory override. (DCLG revised guidance states maximum asset lives of 40 and 50 years for property and land respectively).

17. As well as the need to pay off an element of the accumulated General Fund borrowing requirement used to fund capital expenditure each year (the capital financing requirement - CFR) through a revenue charge (the MRP) the Council is also allowed to make additional voluntary contributions (voluntary revenue provision – VRP). In times of financial crisis the Council has the flexibility to reduce voluntary contributions. The CFR table above in paragraph 12 includes the use of capital receipts to bring the CFR down by funding capital expenditure.

Treasury Management Strategy 2024/25 to 2028/29

18. The CIPFA Treasury Management Code (2021) defines treasury management activities as:

“The management of the organisation’s borrowing, investments and cash flows, including 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".

The code also covers non-cash investments which are covered at paragraph 66 below. Under the revised Prudential code, investments are separated into categories for Treasury Investment, Service Investment and Commercial Investment.

19. The CIPFA Code of Practice for Treasury Management in the Public Services (the “CIPFA Treasury Management Code”) and the CIPFA Prudential Code require local authorities to produce a Treasury Management Strategy Statement on an annual basis.

20. This Strategy Statement includes those indicators that relate to the treasury management functions and help ensure that the Council’s capital investment plans are affordable, prudent, and sustainable, while giving priority to the security and liquidity of those investments. TMP 1 (Treasury Management Practices) sets out the Council’s practices relating to Environmental Social Governance (ESG) and is a developing area.

The Current Economic Climate and prospects for Interest Rates

21. At the August 2023 meeting the Monetary Policy Committee (MPC) backed a hike in interest rates of 0.25 percentage points increasing Bank Rate to 5.25% as part of the monetary policy to meet Governments inflation target of 2%. It has remained at this level.

22. The Bank of England started raising interest rates from a record low of 0.1% in December 2021. Since then, the base rate has increased 14 consecutive times in an attempt to balance out inflation. The latest Monetary Policy report predicts that interest rates have peaked and are expected to remain around 5.25% until autumn 2024 and then decline gradually to 4.25% by the end of 2026.
Arlingclose (the Council’s Treasury Advisors) are forecasting cuts from quarter three 2024 to a low of around 3% by early to mid-2026.

23. The Consumer Prices Index (CPI) rose by 4.6% in the 12 months to October 2023, down from 6.7% in September. The target is to get inflation to 2% which causing pressure on the MPC to increase interest rates to the current peak. Inflation is expected to fall to a little above 4% by the end of 2023 and then gradually fall back towards 2% by the June 2024.

24. The unemployment rate in the UK is currently 4.3% (Nov 2023) and is projected to increase rise steadily to around 5% in late 2025 to early 2026.

25. The table below shows the assumed average interest (which reflects a prudent approach) that will be made over the next five years for budget setting purposes.

Budgetary Impact of Assumed Interest Rate
Category	2024/25	2025/26	2026/27	2027/28	2028/29
Anticipated Interest Rate (%)	4.50	3.30	2.75	2.50	2.50
Expected Interest from Investments (£)	1,005,400	917,000	668,400	533,500	499,600
Other Interest (£)	63,000	59,000	59,000	59,000	59,000
Total Interest (£)	1,068,400	976,000	727,400	592,500	558,600
Sensitivity	£	£	£	£	£
-0.25% Interest Rate	60,400	46,600	41,000	32,200	33,900
+0.25% Interest Rate	(60,400)	(46,600)	(41,000)	(32,200)	(33,900)

26. In the event that a bank suffers a loss, the Council could be subject to bail-in to assist with the recovery process. The impact of a bail-in depends on the size of the loss incurred by the bank or building society, the amount of equity capital and junior bonds that can be absorbed first and the proportion of insured deposits, covered bonds and other liabilities that are exempt from bail-in.

27. The Council has managed bail-in risk by both reducing the amount that can be invested with each institution to £10 million and by investment diversification between creditworthy counterparties.

Borrowing Strategy 2024/25 to 2028/29

Prudential Indicators for External Debt

28. The table in paragraph 12 identifies that the Council will not need to externally borrow over the MTFS instead choosing to internally borrow. Whilst this means that no external borrowing costs (interest/debt management) are incurred, there is an opportunity cost of using internal borrowing by way of lost interest on cash balances.

29. The approved sources of long term and short term borrowing are:

Municipal Bond Agency
HM Public Works Loan Board (PWLB) lending facility
Local authorities
UK public and private sector pension funds
Commercial banks in the UK
Building Societies in the UK
Money markets
Leasing
Capital market bond investors
Special purpose companies created to enable local authority bond issues
UK Infrastructure Bank
Any institution approved for investments
Retail investors via a regulated peer-to-peer platform

Public Works Loan Board (PWLB) borrowing is at Gilts +80bps (certainty rate). If applying, there is the need to categorise the capital programme into 5 categories including service, housing and regeneration. If any Council has assets that are being purchased ‘primarily for yield’ anywhere in their capital programme they will not be able to access PWLB funding.

a) Authorised Limit for External Debt

30. The authorised limit is the “affordable borrowing limit” required by section 3 (1) of the Local Government Act 2003 and represents the limit beyond which borrowing is prohibited. It shows the maximum amount the Council could afford to borrow in the short term to maximise treasury management opportunities and either cover temporary cash flow shortfalls or use for longer term capital investment. It should be set higher than the CFR plus a safety margin of £5m to £10m.

Authorised Limit for External Debt
Description	2023/24 Estimate £'000	2024/25 Estimate £'000	2025/26 Estimate £'000	2026/27 Estimate £'000	2027/28 Estimate £'000	2028/29 Estimate £'000
Authorised Limit	25,000	20,000	20,000	20,000	20,000	20,000

b) Operational Boundary for External Debt

31. The operational boundary is the expected borrowing position of the Council during the course of the year. The operational boundary is not a limit and actual borrowing can be either below or above the boundary subject to the authorised limit not being breached. The Operational Limit has been set at £15m and, whilst the Council is not expected to externally borrow over the period of the MTFS, this provides a cushion and gives flexibility should circumstances significantly change.

Operational Boundary for External Debt
Category	2020/21 Estimate £'000	2021/22 Estimate £'000	2022/23 Estimate £'000	2023/24 Estimate £'000	2024/25 Estimate £'000	2025/26 Estimate £'000
Operational Boundary	20,000	20,000	20,000	20,000	20,000	20,000

The Prudential Indicators

Prudential Indicators
Description	2023/24 £'000	2024/25 £'000	2025/26 £'000	2026/27 £'000	2027/28 £'000	2028/29 £'000
Authorised Limit
Operational Boundary
Capital Financing Requirement

32. The Council’s is required to show the maturity structure of borrowing. The Council had no debt and is unlikely to need to borrow over the medium term and if it did, it would only be for small amounts so there is no significant refinancing risks and
the limits in the strategy do not need to be restrictive.

Prudential Indicator: Refinancing Risk Indicator

TABLE

CHART + TABLE

33. The Liability Benchmark reflects the real need to borrow and can be seen in table 8. In accordance with the Code this must also be shown graphically (Chart 2). The Council’s CFR is reducing due to MRP repayments, reserves are being used to fund future capital expenditure and working capital/S106 monies are returning to a normal level. The Council has no need to borrow over the medium term.

The Prudential Indicators for Affordability

34. Affordability indicators provide details of the impact of capital investment plans on the Council’s overall finances.

a) Actual and estimates of the ratio of net financing costs to net revenue stream

35. This indicator identifies the trend in net financing costs (borrowing costs less investment income) against net revenue income. The purpose of the indicator is to show how the proportion of net income used to pay for financing costs is changing over time. A credit indicates interest earned rather than an interest cost. The figures fluctuate over the MTFS period but remain fairly close to a breakeven position reflecting both the downward trend in interest rates and the reducing MRP repayments, as payments in relation to Rushcliffe Arena are finalised. Although there are new non-treasury capital commitments in relation to Rushcliffe Oaks Crematorium and Bingham Arena and Enterprise Centre which give rise to further MRP, repayments are lower because they are spread over a longer period. Net revenue streams remain steady over the period.

Proportion of Financing Costs to Net Revenue Stream
Description	2023/24 Estimate	2024/25 Estimate	2025/26 Estimate	2026/27 Estimate	2027/28 Estimate	2028/29 Estimate
General Fund	-0.72%	0.88%	1.73%	0.42%	-2.84%	-2.55%

b) Estimates of net income to net revenue stream

36. This is a new indicator that looks at net income from commercial and service investments (for example it includes Rushcliffe Oaks Crematorium and Bingham Market) and expresses it as a percentage of net revenue streams. The increase reflects rent increases and full year effect of the crematorium becoming operational.

Proportion of Net Income to Net Revenue Stream

Proportion of Net Income to Net Revenue Stream
Description	2023/24 Estimate	2024/25 Estimate	2025/26 Estimate	2026/27 Estimate	2027/28 Estimate	2028/29 Estimate
General Fund	10.9%	8.8%	10.1%	11.8%	12.0%	11.8%

Investment Strategy 2024/25 to 2028/29

37. The below shows the Council’s investment projections. The downward movement reflects the use of capital receipts to finance capital expenditure. In addition, it reflects the release of S106 monies and the loss of S106 receipts for Education which are no longer paid to the Council.

Investment Projections
Description	2023/24 Estimate £'000	2024/25 Estimate £'000	2025/26 Estimate £'000	2026/27 Estimate £'000	2027/28 Estimate £'000	2028/29 Estimate £'000
Investments at 31 March	58,955	55,706	51,883	48,278	44,849	41,571

38. Both the CIPFA Code and the DLUHC Guidance require the Council to invest its funds prudently, and to have regard to the security and liquidity of its investments before seeking the highest rate of return. The Council’s objective when investing money is to strike an appropriate balance between risk and return, minimising the risk of incurring losses from defaults and the risk of receiving unsuitable low investment income. Accordingly, the Council ensures that robust due diligence procedures cover all external investments.

39. Environmental, social and governance (ESG) considerations are increasingly a factor in global investors’ decision making, but the framework for evaluating investment opportunities is still developing and therefore the Council’s ESG policy does not currently include ESG scoring or other real-time ESG criteria at an individual investment level. When investing in banks and funds, the Council will (in accordance with treasury advice) 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.

Counterparty Details
Credit Rating	Time Limit	Counterparty Limit	Sector Limit
UK Government	50 years	Unlimited	not applicable
Local authorities and other government entities	25 years	£10m	Unlimited
Secured investments	25 years	£10m	Unlimited
Bank (unsecured)	13 months	£3m	Unlimited
Building societies (unsecured)	13 months	£3m	£3m
Registered provider	5 years	£5m	£5m
Money market funds	not applicable	£10m	Unlimited
Strategic pooled funds	not applicable	£10m	£30m
Real estate investment trusts	not applicable	£5m	£10m
Other investments	5 years	£5m	£10m

Secured Investments

Investments secured on the borrower’s assets, which limits the potential losses in the event of insolvency. The amount and quality of the security will be a key factor in the investment decision. Covered bonds and reverse repurchase agreements with banks and building societies are exempt from bail-in. Where there is no investment specific credit rating, but the collateral upon which the investment is
secured has a credit rating, the higher of the collateral credit rating and the counterparty credit rating will be used. The combined secured and unsecured investments with any one counterparty will not exceed the cash limit for secured investments.

Banks and building societies (unsecured)

Accounts, deposits, certificates of deposit and senior unsecured bonds with banks and building societies, other than multilateral development banks. These investments are subject to the risk of credit loss via a bail-in should the regulator determine that the bank is failing or likely to fail. See below for arrangements relating to operational bank accounts.

Registered providers (unsecured)

Loans to, and bonds issued or guaranteed by, registered providers of social housing or registered social landlords, formerly known as housing associations. These bodies are regulated by the Regulator of Social Housing (in England), the Scottish Housing Regulator, the Welsh Government and the Department for Communities (in Northern Ireland). As providers of public services, they retain the likelihood of receiving government support if needed.

Money market funds

Pooled funds that offer same-day or short notice liquidity and very low or no price volatility by investing in short-term money markets. They have the advantage over bank accounts of providing wide diversification of investment risks, coupled with the services of a professional fund manager in return for a small fee. Although no sector limit applies to money market funds, the Council will take care to diversify its liquid investments over a variety of providers to ensure access to cash at all times.

Strategic pooled funds

Bond, equity and property funds that offer enhanced returns over the longer term but are more volatile in the short term. These allow the Council to diversify into asset classes other than cash without the need to own and manage the underlying investments. Because these funds have no defined maturity date, but are available for withdrawal after a notice period, their performance and continued
suitability in meeting the Council’s investment objectives will be monitored regularly.

Real estate investment trusts

Shares in companies that invest mainly in real estate and pay the majority of their rental income to investors in a similar manner to pooled property funds. As with property funds, REITs offer enhanced returns over the longer term, but are more volatile especially as the share price reflects changing demand for the shares as well as changes in the value of the underlying properties.

Other investments

This category covers treasury investments not listed above, for example unsecured corporate bonds and company loans. Non-bank companies cannot be bailed-in but can become insolvent placing the Council’s investment at risk.

42. Credit rating information is provided by Arlingclose on all active counterparties that comply with the criteria above. A counterparty list will be maintained from this information and any counterparty not meeting the criteria will be removed from the list.

43. Where an entity has its credit rating downgraded so that it fails to meet the approved investment criteria then:

no new investments will be made,
any existing investments that can be recalled or sold at no cost will be, and
full consideration will be given to the recall or sale of all other existing investments with the affected counterparty.

44. Where a credit rating agency announces that a credit rating is on review for possible downgrade (also known as “rating watch negative” or “credit watch negative”) so that it may fall below the approved rating criteria, then only investments that can be withdrawn (on the next working day), will be made with that organisation until the outcome of the review is announced. This policy will not apply to negative outlooks, which indicate a long-term direction of travel rather than an imminent change of rating.

Credit Risk

45. The CIPFA Treasury Management Code recommends that organisations should clearly specify the minimum acceptable credit quality of its counterparties; however, they should not rely on credit ratings alone and should recognise their limitations. Full regard will therefore be given to other available information on the credit quality of the organisations, in which it invests, including credit default swap prices, financial statements, information on potential government support and reports in the quality financial press. No investments will be made with an organisation if there are substantial doubts about its credit quality, even though it may meet the credit rating criteria.

46. When deteriorating financial market conditions affect the credit worthiness of all organisations, as happened in 2008 and 2011, this is not generally reflected in credit ratings, but can be seen in other market measures. In these circumstances, the Council will restrict its investments to those organisations of higher credit quality and reduce the maximum duration of its investments to
maintain the required level of security. The extent of these restrictions will be in line with prevailing financial market conditions. If these restrictions mean that insufficient commercial organisations of high credit quality are available to invest the Council’s cash balances, then the surplus will be deposited with the UK Government, via the Debt Management Office or invested in government
treasury bills for example, or with other local authorities. This will cause a reduction in the level of investment income earned but will protect the principal sum invested.

Current Investments

47. The Council uses its own processes to monitor cash flow and determine the maximum period for which funds may prudently be committed. The forecast is compiled on a prudent basis to minimise the risk of the Council being forced to borrow on unfavourable terms to meet its financial commitments. Limits on long-term investments are set by reference to the Council’s medium term financial strategy and cash flow forecast.

48. Surplus funds are invested based on the most up to date forecasts of interest rates and in accordance with the Council’s cash flow requirements in order to gain the maximum benefit from the Council’s cash position throughout the year. Generally speaking, in times of rising interest rates it is prudent to invest short term, whilst also ensuring a diversified portfolio. Funds are separated between service investment and non-specified investments as detailed in paragraphs 50 to 52 below.

49. The Council purchased £15m in pooled/diversified funds. The fair value of these funds fluctuates, the current value of these investments can be seen in Appendix ii. The downward trend experienced by the political turmoil last year coupled with high levels of inflation and monetary policies surrounding interest rates has impacted on these. The fluctuations in capital value of the pooled funds to date is a loss of £1.234m. This is currently reversed by the statutory override preventing any accounting loss impacting on the revenue accounts. This is due to end 31 March 2025. The risk of this loss crystallising after this period has been largely mitigated by appropriations of £1.173m to the Pooled Funds reserve. It should be noted that whilst the value of this type of investment can fluctuate, the revenue returns make up a significant proportion of the overall returns on investments (the fair value of these investments accounted for 18% of average investment balances in 2022/23 but generated 32% interest). The Council will
continue to monitor the position on these investments and take advice from the treasury advisors.

Service Investments

50. The Council invests its money for three broad purposes:

because it has surplus cash as a result of its day-to-day activities (treasury management),
to support local public services by lending to or buying shares in other organisations (service investments), and
to earn investment income (known as commercial investments where this is the main purpose).

51. The Council can lend money to its suppliers, parish councils, local businesses, local charities, employees, housing associations to support local public services and stimulate local growth. The Council has existing loans to Nottinghamshire Cricket Club which not only stimulates the local economy but provides social outcomes. The Trent Bridge: Community Trust, delivers projects that have
positive impacts on local communities such as tackling social exclusion and anti-social behaviour. The main risk when making service loans is that the borrower may be unable to repay the principal lent and/or the interest due. In order to limit this risk and ensure that total exposure to service loans remains proportionate to the size of the Council, the upper limit on any category of borrower will be £5 million.

Non-Specified Investments

52. Shares are the only investment type that the Council has identified that meets the definition of a non-specified investment in the government guidance. The Council does not intend to make any such investments, that are defined as capital expenditure by legislation.

Investment Limits

53. The Council's revenue reserves available to cover investment losses in a worst-case scenario are forecast to be around £15 million on 31 March 2024. The maximum that will be lent to any one organisation (other than the UK Government) will be £10.0 million. This figure is constantly under review to assess risk in the case of a single default. A group of banks under the same
ownership will be treated as a single organisation for limit purposes. Limits will also be placed on fund managers, investments in brokers’ nominee accounts, foreign countries, and industry sectors as below. Investments in pooled funds and multilateral development banks do not count against the limit for any single foreign country since the risk is diversified over many countries.

Investment Limits
Description	Cash Limit
Any group of pooled funds under the same management	£10m per manager
Negotiable instruments held in a broker’s nominee account	£10m per broker
Foreign Countries	£3m per country
Loans across unrated corporates	£5m in total

Treasury Management Limits on Activity

54. The Council measures and manages its exposures to treasury management risks using the following indicators.

a) Interest Rate Exposure

55. This indicator is set to control the Council’s exposure to interest rate risk. The upper limits on fixed and variable rate interest rate exposures, expressed as the amount of net interest payable will be:

Interest Rate Exposure
Category	2020/21	2021/22	2022/23	2023/24	2024/25	2025/26
Upper limit on fixed interest rate exposure	50%	50%	50%	50%	50%	50%
Upper limit on variable interest rate exposure	100%	100%	100%	100%	100%	100%

56. Fixed rate investments and borrowings are those where the rate of interest is fixed for at least 12 months, measured from the start of the financial year or the transaction date if later. All other instruments are classed as variable rate.

Principal Sums Invested Over One Year

57. This limit is intended to contain exposure to the possibility of any loss that may arise as a result of the Council having to seek early repayment of any investments made. The limits on the long-term principal sum invested to final maturities beyond the period end are set at 50% of the sum available for investment (to the nearest £100k), as follows:

Principal sums invested over one year
Description	2023/24 Estimate £'000	2024/25 Estimate £'000	2025/26 Estimate £'000	2026/27 Estimate £'000	2027/28 Estimate £'000	2028/29 Estimate £'000
Limit on Principal Invested over one year	29,500	27,900	25,900	24,100	22,400	20,800

Policy on the Use of Financial Derivatives

58. Local authorities have previously made use of financial derivatives embedded into loans and investments both to reduce interest rate risk (e.g., interest rate collars and forward deals) and to reduce costs or increase income at the expense of greater risk (e.g., LOBO (Lender Option Borrowers Option) loans and callable deposits). The general power of competence in Section 1 of the
Localism Act 2011 removes much of the uncertainty over local authorities’ use of standalone financial derivatives (those that are not embedded into a loan or investment).

59. The Council will only use standalone financial derivatives (such as swaps, forwards, futures and options) where they can be clearly demonstrated to reduce the overall level of the financial risks that the Authority is exposed to. Additional risks presented, such as credit exposure to derivative counterparties, will be considered when determining the overall level of risk. Embedded
derivatives, including those present in pooled funds and forward starting transactions, will not be subject to this policy, although the risks they present will be managed in line with the overall treasury risk management strategy.

60. Financial derivative transactions may be arranged with any organisation that meets the approved investment criteria. The current value of any amount due from a derivative counterparty will count against the counterparty credit limit and the relevant foreign country limit.

Treasury Management Advisors

61. Arlingclose will act as the Council’s treasury management advisors until 31st October 2026 and replace Link Treasury Services. The company provides a range of services which include:

•   Technical support on treasury matters and capital finance issues
•   Economic and interest rate analysis
•   Generic investment advice on interest rates, timing and investment instruments; and
•   Credit ratings/market information service comprising the three main credit rating agencies.

62. Whilst the treasury management advisors provide support to the internal treasury function, the current market rules and the CIPFA Treasury Management Code confirms that the final decision on treasury management matters rests with the Council. The service provided by the Council’s treasury management advisors is subject to regular review.

Other Options Considered

63. The DLUHC Guidance and the CIPFA Code do not prescribe any particular treasury management strategy for local authorities to adopt. The Director of Finance and Corporate Services, having consulted the Cabinet Member for Finance, believes that the above strategy represents an appropriate balance between risk management and cost effectiveness. Our policy is to have a feathered approach i.e., a range of counterparties spread over different time periods (short/medium/long term), this mitigates risk of changes in credit ratings and interest rates whether they go up or down.

Commercial Investments

64. The CIPFA definition of investments in treasury management activities above (paragraph 18) covers all financial assets of the organisation as well as other non-financial assets which the organisation holds primarily for financial returns, such as investment property portfolios. This may therefore include investments which are not managed as part of normal treasury management or under treasury management delegations.

65. Under the updated Prudential code Local Authorities are no longer be allowed to borrow to fund non-financial assets solely to generate a profit.

66. The Council will maintain a summary of current material investments, subsidiaries, joint ventures, and liabilities, including financial guarantees and the organisation’s risk exposure. The current summary is included at Appendix iii.

67. The Council will also monitor past Commercial Property investments against original objectives and consider plans to divest as part of a biennial review. The last report was presented to Governance Scrutiny Group in February 2024.

68. Proportionality is included as an objective in the Prudential Code. Clarification and definitions to define commercial activity and investment are also included, and the purchase of commercial property purely for profit cannot lead to an increased capital financing requirement (CFR).

69. The Council must disclose its dependence on commercial income and the contribution non-core investments make towards core functions. This covers assets previously purchased through the Council’s Asset Investment Strategy (AIS), as well as other pre-existing commercial investments.

a) Dependence on commercial income and contribution non-core investments make towards core functions

70. The expected contributions from from existing commercial investments are shown in below. To manage the risk to the Council’s budget, income from commercial investments should not be a significant proportion of the Council’s income. Our objective is that this ratio should not exceed 30%, subject to annual review and is estimated to be around 16% in 2024/25. This percentage has reduced leaving the Council less exposed to risks surrounding commercial property.

Commercial Investment income and costs
Category	2023/24 £'000	2024/25 £'000	2025/26 £'000	2026/27 £'000	2027/28 £'000	2028/29 £'000
Commercial Property Income	(1,832)	(1,902)	(1,953)	(2,014)	(2,014)	(2,018)
Running Costs	480	581	586	589	593	597
Net Contribution to core functions	(1,352)	(1,321)	(1,366)	(1,425)	(1,421)	(1,420)
Interest from Commercial Loans	(67)	(63)	(59)	(59)	(59)	(59)
Total Contribution	(1,419)	(1,384)	(1,425)	(1,484)	(1,480)	(1,479)
Sensitivity: +/- 10% Commercial Property Income	183	190	195	201	201	202
Indicator: Investment Income as a percentage of total Council income	15.7%	16.0%	16.1%	16.5%	16.3%	16.0%
Total Income	12,105	12,313	12,478	12,584	12,709	13,013

b) Risk exposure indicators

71. The Council can minimise its exposure to risk by spreading investments across sectors and by avoiding single large-scale investments. Generally, there is a spread of investment across sectors in the Council’s portfolio. The Council’s commitment to economic regeneration (not purely financial return) has meant that many of its investments have been in industrial
units, which have been very successful.

Income spread by sector:

Offices - 42%
Industrial sites - 40%
Retail - 8%
Other - 6%
Commercial loans - 3%

c) Security and liquidity

Split by Asset Value (number of investments)

Under £500k - 19
£500k to £1m - 4
£1m to £2m - 6
£2m to £3m - 2
£3m to £4m - 1
Over £7m - 1

72. Commercial investments are held for longer term asset appreciation as well as yield. Investments or sales decisions will normally be planned as part of the consideration of the 5-year capital strategy to maximise the potential return. Nevertheless, the local and national markets are monitored to ensure any gains are maximised or losses minimised.

73. To help ensure asset values are maintained the assets are given quarterly inspections, together with a condition survey every 3 years. Any works required to maintain the value of the property will then form part of Council’s spending plans.

74. The liquidity of the assets is also dependent on the condition of the property, the strength of the tenants and the remaining lease lengths. The Council keeps these items under review with a view to maximising the potential liquidity and value of the property wherever possible.

75. The liquidity considerations for commercial investments are intrinsically linked to the level of cash and short-term investments, which help manage and mitigate the Council’s liquidity risk. A review of the Council’s commercial assets was undertaken and reported to Governance Scrutiny Group in February 2024 paragraph 69 refers.

76. The Investments are subject to ongoing review with regards to their financial viability or indeed whether they are surplus to requirement. At the February 2024 Governance Group Meeting, details on the risks surrounding the Council’s commercial properties were reported, as well as providing a pathway to potential commercial asset disposal, if required.

Member and Officer Training

77. The updated TM Code requires Local Authorities to document a formal and comprehensive knowledge and skills schedule reflecting the need to ensure that both members and officers responsible for treasury management are suitably trained and kept up to date (TMP 10). There will be specific training for members training involved in scrutiny and broader training for members who sit on full Council. Previously these needs have been reported through the Member Development Group, with the Council specifically addressing this important issue by:

Periodically facilitating workshops for members on finance issues, next scheduled for January 2024.
Interim reporting and advising members of Treasury issues via Governance Scrutiny Group.

With regards to officers:

Attendance at training events, seminars, and workshops; and
Support from the Council’s treasury management advisors
Identifying officer training needs on treasury management related issues through the Performance Development and Review appraisal process

CIPFA have developed a self-assessment tool which will need to be completed by the Governance Scrutiny Group to ensure that training provided achieves the desired outcomes. Attendance at training is recorded and members are encouraged to attend all Treasury training.

78. The Council will continue to have its Annual Treasury Management training session with Councillors provided by its Treasury advisers.

Appendix (i)

Counterparty Registrations under MIFID II

The Council is registered with the following regulated financial services organisations who may arrange investments with other counterparties with whom they have themselves registered:

BGC Brokers LP
Royal London Asset Management
Tradition UK Ltd
King & Shaxson
Aberdeen Asset Management
Aviva
Institutional Cash Distributors Ltd
Federated Investors (UK) LLP
Invesco Asset Management Ltd
CCLA
Goldman Sachs Asset Management
Black Rock
Aegon Asset Management
Ninety One
HSBC Asset Management
Imperial Treasury Services

Appendix (ii)

Pooled Funds - Changes in Fair Value Since Acquisition
Fund	31.03.23	30.04.23	31.12.23	Amount Invested	Difference	Difference in Valuation from Initial Investment
Aegon - previously Kames	£4,364,956	£4,364,956	£4,364,956	£5,000,000	£165,249	(£469,794)
Ninety One - previously Investec	£4,559,707	£4,560,198	£4,558,231	£5,000,000	(£1,475)	(£441,769)
RLAM	£983,676	£988,835	£1,003,107	£1,000,000	£19,431	£3,107
CLLA Property	£2,018,374	£2,018,374	£2,005,610	£2,000,000	(£12,764)	£5,610
CLLA Diversified	£1,839,164	£1,856,626	£1,918,266	£2,000,000	£79,102	(£81,734)
Total	£13,765,876	£13,835,552	£14,015,420	£15,000,000	£249,544	(£984,580)

Appendix (iii)

Current Book Value of Non-Treasury Investments

Asset Valuations
Asset	Current Book Value £'000	Previous Book Value £'000
The Point Office Accommodation	3.429	3.395
Hollygate Lane, Cotgrave Industrial Units	2.918	2.716
Unit 3 Edwalton Business Park	2.432	2.433
Unit 1 Edwalton Business Park	1.954	1.955
Bardon, Single Industrial Unit	2.078	1.820
Trent Boulevard	1.559	1.415
Cotgrave Phase 2	1.266	1.385
Colliers Business Park Phase 2	1.422	1.323
Bridgford Hall Apart Hotel and Registry Office	1.150	1.121
Finch Close	0.978	0.931
Boundary Court	0.838	0.809
Colliers Business Park Phase 1	0.787	0.720
Mobile Home Park	0.400	0.480
Cotgrave Precinct Shops	0.478	0.482
New Offices Cotgrave	0.484	0.422
Total Investment Property - Values are at 31 March 2023 and 2022	22.173	21.407
Notts County Cricket Club Loan	1.499	1.570
Total	23.672	22.977

Glossary of Terms

Minimum credit rating: Treasury investments in the sectors marked with an asterisk will only be made with entities whose lowest published long-term credit rating is no lower than [AA-]. Where available, the credit rating relevant to the specific investment or class of investment is used, otherwise the counterparty credit rating is used. However, investment decisions are never made solely based on credit ratings, and all other relevant factors including external advice will be taken into account. For entities without published credit ratings, investments may be made either (a) where external advice indicates the entity to be of similar credit quality; or (b) to a
maximum of £10 million per counterparty as part of a diversified pool e.g. via a peer-to-peer platform.

Government: Loans to, and bonds and bills issued or guaranteed by, national governments, regional and local authorities and multilateral development banks. These investments are not subject to bail-in, and there is generally a lower risk of insolvency, although they are not zero risk. Investments with the UK Government are deemed to be zero credit risk due to its ability to create additional currency and therefore may be made in unlimited amounts for up to 50 years.

Secured investments: Investments secured on the borrower’s assets, which limits the potential losses in the event of insolvency. The amount and quality of the security will be a key factor in the investment decision. Covered bonds and reverse repurchase agreements with banks and building societies are exempt from bail-in. Where there is no investment specific credit rating, but the collateral upon which the investment is secured has a credit rating, the higher of the collateral credit rating and the counterparty credit rating will be used. The combined secured and unsecured investments with any one counterparty will not exceed the cash limit for secured investments.

Banks and building societies (unsecured): Accounts, deposits, certificates of deposit and senior unsecured bonds with banks and building societies, other than multilateral development banks. These investments are subject to the risk of credit loss via a bail-in should the regulator determine that the bank is failing or likely to fail. See below for arrangements relating to operational bank accounts.

Registered providers (unsecured): Loans to, and bonds issued or guaranteed by, registered providers of social housing or registered social landlords, formerly known as housing associations. These bodies are regulated by the Regulator of Social Housing (in England), the Scottish Housing Regulator, the Welsh Government and the Department for Communities (in Northern Ireland). As providers of public services, they retain the likelihood of receiving government support if needed.

Money market funds: Pooled funds that offer same-day or short notice liquidity and very low or no price volatility by investing in short-term money markets. They have the advantage over bank accounts of providing wide diversification of investment risks,
coupled with the services of a professional fund manager in return for a small fee. Although no sector limit applies to money market funds, the Council will take care to diversify its liquid investments over a variety of providers to ensure access to cash at all times.

Strategic pooled funds: Bond, equity and property funds that offer enhanced returns over the longer term but are more volatile in the short term. These allow the Council to diversify into asset classes other than cash without the need to own and manage the underlying investments. Because these funds have no defined maturity date, but are available for withdrawal after a notice period, their performance and continued suitability in meeting the Council’s investment objectives will be monitored regularly.

Real estate investment trusts: Shares in companies that invest mainly in real estate and pay the majority of their rental income to investors in a similar manner to pooled property funds. As with property funds, REITs offer enhanced returns over the longer term, but are more volatile especially as the share price reflects changing demand for the shares as well as changes in the value of the underlying properties.

Other investments: This category covers treasury investments not listed above, for example unsecured corporate bonds and company loans. Non-bank companies cannot be bailed-in but can become insolvent placing the Council’s investment at risk.

Operational bank accounts: The Council may incur operational exposures, for example though current accounts, collection accounts and merchant acquiring services, to any UK bank. These are not classed as investments but are still subject to the risk of a bank bail-in and balances will therefore be kept below £10 million per bank. The Bank of England has stated that in the event of failure, banks with assets greater than £25 billion are more likely to be bailed-in than made insolvent, increasing the chance of the Council maintaining operational continuity.

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