For a small subsection of local authority accountants (the ones that work in treasury management) now is usually the time of year when minds turn to preparing the annual treasury management and related strategies for their organisation. All major UK authorities are required to prepare these documents every year. They are forward looking and talk about what the authority will and won’t do over the next 12 months. Prepared by officers and approved by members these documents form the main mechanism by which members with an electoral mandate make the big decisions and set the authority’s treasury risk appetite. This article discusses some approaches to take and some common pitfalls to avoid.
As our clients will know Arlingclose produces templates for the Capital Strategy, Treasury Management Strategy and in England the Non-Treasury Investment Strategy. These have now been published for the 2024/25 year ahead. These templates are written to make sure they include all the requirements of the CIPFA Treasury Management and Prudential Codes, regional government investment guidance, our advice and best practice. We continue to stress that these are templates only and must be adapted to your authority to suit your circumstances and attitude to risk and return. If there’s a part of our template that doesn’t fit your authority, you should change it. If there’s something in our template which you flat out don’t want to include it is worth checking if this is something that is compulsory (which will be outlined in the CIPFA Codes or regional investment guidance) or only advisory or optional.
Some authorities take the approach of starting with the Arlingclose template and adapting it as needed, whereas others may start with the strategy in their own format and then check it against the template to make sure things are included and correct. Either approach is fine. Arlingclose also highlights changes from our previous year’s template which can enable you to use last year’s template as a starting point and then identify the key things that need changing.
Setting the prudential indicators can be the most challenging part of the strategy. It can often be less than straight forward to work out which bits should and shouldn’t be included in these calculations (what counts as ‘financing costs’?). Indicators also need to be set at the right level for your authority. Setting them too low will land you with the embarrassment of having to report that you’ve breached them and is best avoided (especially for the authorised limit where breaking this is illegal). Bear in mind that your authority’s investment and borrowing needs will change during the year, so a snapshot at year end may not encompass the situation when you report on it quarterly. There are often practical limitations to these indicators. For example, to limit the revenue impact of a 1% rate rise you can probably lock in some long term fixed rate debt, however you may not be able to limit the revenue impact of a 1% rate fall by locking in long term investments because this would involve too much credit risk. Limits that are too high however will not do their job of making sure the authority does not take too much risk. I often get asked what the authorised limit and operational boundary should be. If the authority borrows too much it will not be able to afford the loan and interest repayments, at the extreme it could be at risk of financial failure. Limits should be set at a level that avoids these things happening.
Investment counterparty limits should be set with regards to the need to diversify but also with reference to your authority’s reserves and ability to bear credit losses. For authorities whose reserves are small (which we generally regard as when reserves to absorb credit losses are less than a third of investment balances) should set more stringent requirements. Practicality may be needed however: if you know certain institutions will not accept balances less than £1m setting a limit below this may not be that productive. Restrictions on investments and investment products should not be so stringent that they prevent you being able to do anything, or that they prevent you using new products that have become available and that you might want to use.
Whilst using last year’s template as a starting point will probably be the approach most authorities take, a sense check is required in this instance to make sure your strategies remain current and encompass any new developments. If your strategy is still saying that you’ve lost money in Icelandic banks recently this needs updating! Likewise, if your strategy is alluding to low interest rates this is now not the case. If the Council have announced new plans to regenerate the town centre this is likely to impact on the tone of your strategies regarding expected capital expenditure and borrowing.
Finally, the documents should aim to paint a coherent picture of the authority’s situation, future plans and how these will be managed.
If you require assistance with completing your strategies, please contact the Arlingclose team at treasury@arlingclose.com or on 08448 808 200.
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