AGENDA ITEM No.. .......9− −−−−−−−−NORTH LANARKSHIRE COUNCIL

REPORT

To: POLICY & RESOURCES (FINANCE & Subject: TREASURY MANAGEMENTCUSTOMER SERVICES) STRATEGY 2016/17SUB−COMMITTEE TREASURY AND PRUDENTIAL

From: EXECUTIVE DIRECTOR OF FINANCE INDICATORS 2016/2017 TO& CUSTOMER SERVICES 2018/2019

Date: 3 February 2016 Ref: PH/JQ

Introduction1.1 This report fulfils the key requirements of the Local Government Act 2003 in that it:

• Outlines the Treasury Management Strategy for 2016/2017 in accordance with the CIPFACode of Practice on Treasury Management

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

2. Treasury Management Strategy2.1 Each year, in line with the Code of Practice, the Council produces a Treasury Management

Strategy. The Treasury Strategy Statement 2015/2016 approved by Committee on 25February 2015, set out the Treasury Management policies, practices and activities undertakenby the Finance & Customer Services in compliance with the Code. In addition, the TreasuryStrategy describes the Prudential and Treasury Indicators introduced and monitored on aregular basis to demonstrate that the Council's investment plans are managed within a soundfinancial environment. This report now updates the Strategy for year 2016/2017.

2.2 This Strategy continues to emphasise, under the revised Code of Practice, an enhanced rolefor members in terms of accountability and awareness. The Policy & Resources (Finance andCustomer Services) Sub−Committee is responsible for the development of the Strategy, itsimplementation and monitoring while the Audit and Governance Panel has a specified role inthe effective scrutiny of the Treasury Management Strategy and policies as part of its work onreviewing the internal financial controls of the Council. The report also reflects The LocalGovernment Investments (Scotland) Regulations 2010 which were enacted from 1 April 2010containing a requirement for the annual investment strategy and annual investment report tobe approved by the full Council and not delegated to a committee or sub−committee. As aresult, this Strategy, if endorsed by committee, should be remitted to the Council for approval.

3. Treasury and Prudential Indicators3.1 The Prudential Code for Capital Finance in Local Authorities was introduced in April 2004 and

brought about a change to capital spending controls from 1 April 2004. From that date,councils have had freedom to invest in capital projects without the limitation of legislativecontrols, provided their programmes can be shown to be affordable, prudent and sustainable.

3.2 This report builds on this framework outlining the Council's prudential and treasury indicatorsfor 2016/2017 to 2018/2019. The key mandatory indicators required by both the TreasuryManagement Code and the Prudential Code are illustrated for these years and, with a view tomore fully informing the decision making process; local indicators are also included.

4. Conclusion4.1 The indicators illustrated in the appendix provide members with assurance that the key

objectives of the Prudential Framework (i.e. prudence and affordability) will be satisfied. Whentaken together, the indicators illustrate that the proposed capital investment plans for2016/2017 onwards are prudent and affordable. Healthy prudential margins from 2016/2017onwards justify the investment levels, the cost or affordability of which is contained within theexisting financial strategies, resulting in no impact on council tax and housing rent levels.

5.. Recommendations5.1 It is recommended that:

a) Committee endorses the Treasury Management Strategy 2016/2017 and adopts theTreasury and Prudential Indicators and limits for 2016/2017 to 2018/2019 set out withinAppendix A to this report.

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

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

Appendix A

Treasury ManagementStrategy 2016/2017

&

Treasury ManagementIndicators & Prudential

Indicators2016/2017 to 2018/2019

Appendix A

Index

1. Introduction

2. Annual Borrowing Requirement 2016/2017

3. Outlook for Interest Rates

4. Annual Borrowing Strategy 2016/2017

5. Annual Investment Strategy 2016/2017

6. Performance Measurement Indicators andBenchmarking

7. Treasury Management Indicators 2016/2017 to2018/2019

8. Prudential Indicators 2016/2017 to 2018/2019

Annex A: Treasury Management Policy Statement andClauses adopted

Annex B: Explanation of Long−term Rating Definitions

Annex C: Permitted Investments, Associated ControlsCredit Rating, Money and Time Limits

Annex D: Interest Rate Forecast March 2016 untilDecember 2018

Appendix A

Treasury Management Strategy 2016/2017, Treasury Management Indicators andPrudential Indicators 2016/2017 to 2018/2019

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

is an integral part of the financial management of the Council's affairs. It seeks to ensure thatboth capital borrowing requirements and day to day revenue cash transactions are fullyfunded. Its importance has increased as a result of the additional freedoms provided by thePrudential Code, and there are specific treasury management and prudential indicatorsincluded in this Strategy that require approval.

1.2 The treasury management indicators and prudential indicators outlined within section 7 and8 of this appendix consider the affordability and impact of capital expenditure decisions,whilst the treasury service considers the effective funding of these decisions. Together theseform part of a process to ensure the Council meets its balanced budget requirement.

1.3 The Council's treasury activities are strictly regulated by statutory requirements and aprofessional code of practice. In accordance with the Council's financial regulations theCouncil adopts the CIPFA "Treasury Management in the Public Services" Code of Practice(the Code) including the Treasury Management Policy statement and the adoption of the keyclauses outlined within Annex A.

1.4 The Prudential Code requires the Council to adopt the CIPFA Code of Practice therefore byadhering to the Code the Council meets the requirements of the first of the prudentialindicators.

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

1.6 The Code emphasises members' responsibility in this area, requiring increased memberawareness to enable greater member scrutiny of treasury management activity. TheTreasury Management team provide in house awareness sessions, with members alsoprovided with the opportunity to review the Councils Treasury Management Practicesmanual and attend the office to observe the daily Treasury Management activity.

1.7 In accordance with the CIPFA TM Code recommendations the Council has a TreasuryManagement advisory contract in place with the current providers being Arlingclose Limited.This contract being subject to tender per the Council's standing orders with the currentproviders recently re−appointed for a three period from the beginning of January 2016. Theyprovide specific advice on investment, debt and capital finance issues.

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

1.9 Treasury Management staff regularly attend training courses, seminars and workshopsprovided by the Council's advisors, the CIPFA Treasury Management Forum and other adhoc providers including brokers and financial institutions. Staff also receive regular treasuryrelated updates/information and newsletters on a daily/weekly basis via email from banksand other financial institutions and regularly access treasury related websites to maintainawareness of treasury management issues.

10 The requirements of the Code have been incorporated within the 2016/2017 TreasuryManagement Strategy and in the preparation of the Treasury Management Indicators &Prudential Indicators for 2016/2017 to 2018/2019.

11 The Code of Practice requires the Council to produce reports on its Treasury Managementpolicies, practices and activities on a regular and ongoing basis. This encompasses thepreparation and approval of an Annual Strategic Plan, which defines the arrangements formanaging the Treasury Management function in the incoming year. This report details theproposed Strategy for 2016/2017.

Appendix A

Treasury Management Strategy 2016/2017, Treasury Management Indicators andPrudential Indicators 2016/2017 to 2018/2019

1.12 This Strategy covers:

• The Council's debt and investment projections;

• The expected movement in interest rates;

• The Council's borrowing and investment strategies;

• Treasury performance indicators;

• Specific limits on treasury activities.

1.13 The requirements of the Local Government Investments (Scotland) Regulations 2010 havebeen incorporated within the 2016/2017 Strategy, including the preparation of aninvestment strategy which must be approved by the full Council.

2. Annual Borrowing Requirement 2016/2017

2.1 At the beginning of 2016/2017, it is anticipated that the Council's total debt outstandingincluding long term liabilities will amount to £802.8m. Based on the proposed 2016/2017Composite Capital Programme for General Services and the HRA 30 year financial plan,updated to reflect the latest data available, indications are that there will be an approvedCapital Programme of £11 8.7m for 2016/2017.

2.2 This will be resourced by capital grants, capital receipts and capital funded from currentrevenue (CFCR) with the balance of £55.4m representing an in year financing need, whichwill contribute towards the net increase in the Capital Financing Requirement (CFR). Table 8within Section 8 below sets out the revised Capital Expenditure plans for 2015/2016 andforecast for the period 2016/2017 to 2018/2019 for both the General Services and HRACapital programmes.

2.3 As reported to Committee within the regular quarterly monitoring reports, in 2015/2016 therehas been £5.Om of replacement long term borrowing undertaken with internal cash balances,short term borrowing, plus credits due to the scheduled principal repayments to the loansfund from service departments (annuity based), being used in lieu of further long termborrowing. This strategy adopted in the light of interest rate expectations, the managementof carrying costs and the availability of short term borrowing up to 364 days at attractiverates.

2.4 To meet the capital financing requirement, the replacement of maturing long term debt andthe maintenance of cash balances necessary to meet on going daily liquidity requirements, itis estimated (hat the Council will source long term borrowing of £53.5m in 2016/2017,£100.Om in 2017/2018 and £71.0m in 2018/2019.

2.5 These borrowing projections exclude temporary borrowing undertaken, with average levelsexpected to be approximately £100.0m over the three year period, with a further £45.0m ofmunicipal bank balances anticipated to be available to the Council on a short term basis.This level of short term borrowing proving attractive to the Council, due to the low ratescurrently available, with these rates anticipated to remain at these levels for the foreseeablefuture.

2.6 The Council's borrowing requirement is set firmly within the framework of wider Councilactivity and will be driven by the corporate plan, capital investment plan and medium tolong−term

financial strategies.3. Outlook for Interest Rates

3.1 The global economy is facing a period of slower growth as China reorients slowly towardsdomestic demand. Lower demand for raw materials will depress growth in mainly developingcountries where extraction is the primary industry. Countries particularly reliant on exportswill also face more challenging conditions.

Appendix A

Treasury Management Strategy 2016/2017, Treasury Management Indicators andPrudential Indicators 2016/2017 to 2018/2019

3.2 Countries with stronger domestic demand, such as the UK and US, will be able to weather atemporary global slowdown, helped by lower commodity prices. However, persistently slowergrowth will have economic repercussions for these countries.

3.3 Additional US monetary policy tightening will be gradual and not pre−planned. The USeconomy will absorb the rise in interest rates without choking off growth.

3.4 UK economic growth will be softer in the short term but remain close to the long term trendrange. Economic growth softened in 2015, with an estimated annual growth rate of 2.2%compared to 2.9% in 2014.

3.5 Inflation is currently very low and will likely remain so over at least the next 12 months, onthe back of low commodity prices and expectations of tighter UK monetary policy relative tothe Euro−area. Further recent falls in the price of oil will mean the CPI rate will start to rise in2017 rather than 2016.

3.6 Domestic demand is key for UK growth. Household spending has been and will remain thekey driver of GDP growth through 2016. Consumption will continue to be supported by realwage and disposable income growth.

3.7 On the back of strong consumption, business investment has strengthened, which shoulddrive some productivity growth. However the outlook for business investment may betempered by the looming EU referendum, increasing uncertainties surrounding global growthand recent financial market shocks.

3.8 Annual average earnings growth was 2% (including bonuses) in the three months toNovember, weaker than previous months. Lower earnings growth means that wage−ledinflation is less likely in the short term. Improving productivity growth should support paygrowth in the medium term and may alleviate the wage pressure on companies. Thedevelopment of wage growth is one of the factors being closely monitored by the MPC.

3.9 Longer term rates will be tempered by international uncertainties and weaker global inflationpressures.

3.10 The uncertainties surrounding UK and US monetary policy, and global growth weakness,including China, are likely to continue to prompt short term volatility in gilt yields.

3.11 Annex D provides details of the forecast official bank rate, 1 year London Inter−bank BidRate (LIBID) and PWLB rates over the next three years which are underpinned by theeconomic risks and uncertainties outlined in the preceding paragraphs above.

3.12 The Council's main source of borrowing is the Public Works Loan Board (PWLB), with theboard per PWLB Circular 147, maintaining a +0.90% margin above the equivalent gilt yieldwith any forecast movements in PWLB interest rates closely correlated to gilt movements.

3.13 Table I below includes forecast average PWLB rates anticipated for a range of maturityperiods over the next 3 years based on the forecast per Annex D.

Annual Bank LIBIDAveracie Rate Rate

1 year 5 year2016 0.63% 1.39% 2.32%2017 1.13% 1.86% 2.62%2018 1.50% 2.14% 2.92%

Table 1— Medium Term Interest Rate Estimates

PWLB Rates

10 year 20 year 50 yea2.88% 3.44% 3.47%3.08% 3.54% 3.59%3.28% 3.64% 3.69%

3.14 These projections underpin the borrowing and investment strategies outlined in thefollowing paragraphs.

Appendix A

Treasury Management Strategy 201612017, Treasury Management Indicators andPrudential Indicators 2016/2017 to 2018/2019

4.0 Annual Borrowing Strategy 2016/2017

4.1 The Council uses a combination of internally accumulated cash funds, temporary borrowing(up to 364 days) and external borrowing from both the markets and PWLB to source itscapital financing requirement (CFR). In recent years the Council has used its revenuereserves/balances plus working capital to support its capital programme in lieu of borrowing.This minimises the amount of investment balances held managing credit and counterpartyrisk and the impact of low investment returns, resulting in the Council currently being in anunder borrowed position which is in line with the strategic approach adopted.

4.2 In lieu of future long term borrowing, the borrowing strategy to meet the 2015/2016 capitalfinancing requirement of £39.5m, has been primarily to use internal cash balances,undertake short term borrowing where available at attractive rates plus credits due to thescheduled principal repayments. This strategy supported by efficient cashflow management,balance sheet analysis of reserves and provisions and effective treasury risk management.

4.3 It is estimated that the Council will source long term borrowing of £53.5m in 2016/2017,£100.0m in 2017/2018 and £71.0m in 2018/2019 to meet the on−going capital financingrequirements, the replacement of maturing long term debt and the maintenance of cashbalances necessary to meet on going daily liquidity requirements

4.4 These borrowing projections exclude monies borrowed and repayable over a shorter period,with average levels held expected to be approximately £100.0m over the three year period,with a further £45.Om of municipal bank balances projected to be available to the Council ona short term basis, based on current depositor levels. This level of short term borrowingproving attractive to the Council due to the low rates currently available with these ratesanticipated to remain at these levels for the foreseeable future.

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

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

4.7 The Councils borrowing strategy will be underpinned not only by the absolute borrowingrates but also the relationship between short and long term interest rates. This differencecreating a 'cost of carry' for any new longer term borrowing where the proceeds of borrowingare temporarily held as investments because of the difference between what is paid on theborrowing and what is earned on the investment. The cost of carry is likely to be an issueuntil 2018 or beyond.

4.8 The Council will closely monitor movements in long and short term interest rates to manageits interest rate risk.

4.9 The repayment terms of new borrowing will take account of the debt maturity profile toensure that an acceptable amount matures in any one year, managing the refinancing risk,whilst being undertaken at the most advantageous rate.

Appendix A

−. Treasury Management Strategy 2016/2017, Treasury Management Indicators andPrudential Indicators 2016/2017 to 2018/2019

35

30

25

20Cl)Z0−J 15−J

10

5

FORECAST LONG TERM DEBT MATURITY PROFILE 31 MARCH, 2016

FINANCIAL YEAR

0 PWLB 0 MARKET LOANS

4.10 The forecast debt maturity profile at the 31 March 2016 per the graph above highlights thatthere are a number of points in the maturity spectrum at which the Council has little or nodebt due for repayment. In general the current maturity profile provides the Council withflexibility in determining the maturity period for new borrowing whilst ensuring the strategyadopted minimizes the debt interest costs.

4.11 It should be noted that the debt maturity profile per the above graph is based on thematurity date of LOBO (Lender's Option Borrower's Option) loans whilst noting the revisedCode requires the Council to classify LOBO type loans as having a potential maturity in theyear where options or calls exist. A LOBO option is called when the lender exercises its rightto amend the interest rate on the loan at which point the Council can accept the revisedterms or reject them and repay the loan.

4.12 The Council currently has a £93.0m exposure to LOBO loans which can be called within2016/2017. The interest rates on the LOBO loans held range from 4.65% to 11.625%,averaging 5.75%.

4.13 Based on the current and the forecast interest rates the likelihood of these loans beingcalled has been assessed as minimal. In the event that the call option were to be exercised,the default position will be the repayment of the LOBO without penalty with the associatedtreasury risks (refinancing/interest rate/liquidity) managed in line with the borrowing strategyfor other maturing debt.

P0

Appendix A

Treasury Management Strategy 201612017, Treasury Management Indicators andPrudential Indicators 2016/2017 to 2018/2019

4.14 A comparison of the LOBO loan option 2016/2017 call dates to the maturity date isprovided within Table 2 below:

2016/2017 Year of CurrentLoan Value Call Dates Maturity Interest Rate

£4,000,000 l7 August & 17 February 2017/2018 5.90%£1,000,000 8 April & 8 October 2018/2019 7.25%£5,000,000 15 June & 15 December 2018/2019 5.95%£1,000,000 27 July & 27 January 2019/2020 11.625%£1,000,000 l3 July & 13 January 2019/2020 9.40%£2,000,000 l5 August & 15 February 2019/2020 11.375%£2,000,000 13 September& 13 March 2019/2020 11.125%£10,000,000 15 June & 15 December 2021/2022 5.89%£2,000,000 1 June & 1 December 2025/2026 10.625%£1,000,000 3 April & 3 October 2026/2027 10.937%£5,000,000 11 August & 11 February 2055/2056 4.65%£23,200,000 12 August & 12 February 2054/2055 5.05%£10,000,000 25 February 2059/2060 5.50%£25,800,000 5 June & 5 December 2066/2067 4.75%

Table 2 −L o b o Loans Summary

4.15 The Council's Treasury advisors provide forecasts of interest rates for different maturitydates in future years. Using these forecasts, it is projected over the years 2016/2017,2017/2018 and 2018/2019 respectively, the borrowing rates will average between 2.32%and 2.92% (up to 5 years) and between 3.47% and 3.69% (up to 50 years)

4.16 Uncertainty over future interest rate movements increases the risks associated withtreasury borrowing activity therefore it should be noted that the period over which any newborrowing is taken will be guided by movements and fluctuations in the interest rate yieldcurve and capital financing requirement.

4.17 No more than 25% of the total debt outstanding shall be taken from any one lender at anyone time, except for borrowing from Public Works Loan Board (or its successor body),unless expressly approved by the Head of Business for Financial Solutions in line withcurrent policy.

4.18 The Council's borrowing options should be considered taking account of PWLB Circular147, which increased the average interest rate on all new PWLB loans to an average0.90% above the Government's cost of borrowing. This applies to all fixed and variable ratePWLB loans across the maturity spectrum.

4.19 To partially alleviate this, the Government in 2012−13 introduced a 20 basis point (bps)discount on loans from the Public Works Loan Board (PWLB) under the prudentialborrowing regime with this rate being offered to Councils that can demonstratetransparency in its long−term borrowing and associated capital spending plans.

4.20 The Council must apply annually to be eligible for this discount and in October 2015 theCouncil was successful in its application to the PWLB, meeting the criteria and obtainingeligibility for the certainty rate discount on PWLB loans, accessible from 1 November 2015.Note within Table 1 above the medium term interest rate average forecasts for the PWLBinterest rates do not include the 20 basis point (bps) discount.

Appendix A

Treasury Management Strategy 201612017, Treasury Management indicators andPrudential Indicators 2016/2017 to 201812019

4.21 The Council will consider a number of borrowing structures in 2016/2017 which will include

• Short−term Borrowing

The Council may borrow on a temporary basis (up to 364 days) which would significantlyreduce the carrying costs whilst managing the refinancing and interest rate risk. Forexample for loans up to 364 days, other local authorities are currently offering betterterms than those of the PWLB for a 1 year loan, with this option therefore being moreattractive. This may also be used to meet cashflow demands to cater for temporaryfluctuations in cash balances held on a daily basis.

• PWLB Variable Rate Loans

These loans are available for periods of up to 10 years with the interest payablegenerally linked to movements in short term rates, with increases in interest ratesexpected to be limited over the next three years and costs expected to remain cheaperthan long term rates.

• PWLB Fixed Rate Maturity Loans (<20 years)

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

• PWLB Equal Instalment Payment and Annuity Loans (< 20years)These loans are different from fixed rate maturity loans as the repayments are made upof both interest and principal with the principal outstanding reducing at 6 monthlyintervals throughout the life of the loan, with corresponding reduction in interestpayments on the balance outstanding. The interest rates payable are lower than thefixed rate maturity loans for short and medium dated maturities with an additional benefitbeing a smoother debt maturity profile on the debt e.g. £2.5m every year for 10 years asopposed to £25m payable in 10 years. This also spreads the refinancing risk and mayalso present beneficial opportunities dependant upon the interest yield curve at the timerepayments are due.

• Medium/Long Term Fixed PWLB Loans (>20 years)These loans will be considered in conjunction with managing the current debt maturityprofile, the higher interest rate profile and the additional cost of carry. These loanscurrently offer less flexibility in terms of debt restructuring as a result of PWLB Circular147, which left the premature repayment rates unaltered. As a result these are the leastattractive option at present but circumstances will be monitored to identify beneficialopportunities to source PWLB loans within this maturity spectrum.

• Market Loans/Local Authority BondsAt present availability is limited, but in the future these loans may become moreattractive given the 0.90% margin on PWLB loan rates, as these loans could be cheaperthan similar long term PWLB loans despite this being partially offset by the certaintyrate. In addition to the possibility of advantageous interest rates, there is also the abilityto fix the rate for receipt at a date in the future, avoiding the cost of carry for example tocover future maturities in 2017/2018 and 2018/2019.

• Leasing

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

Appendix A

Treasury Management Strategy 2016/2017, Treasury Management Indicators andPrudential Indicators 2016/2017 to 2018/2019

4.22 As part of its borrowing strategy, the Council will seek to identify and evaluate opportunitiesfor debt rescheduling to accrue potential benefits including:

• achievement of cash interest savings, without exposing the Council to additional risk;

• ensuring a better balanced maturity profile and volatility ratio; and

• achieving the desired borrowing strategy.

4.23 The Council will continue to monitor its debt portfolio and movements in interest ratesacross PWLB interest rate structures, to identify opportunities to generate interest savings,whilst strategically managing any premiums or discounts incurred as a result of therescheduling/restructuring.

4.24 The legislative provisions of paragraphs 1−20 of Schedule 3 of the Local Government(Scotland) Act 1975 and associated statutory instruments are currently the subject ofconsultation by the Scottish Government. These paragraphs include the purposes for whichCouncils may borrow, types of borrowing permitted and also treatment of loans fundadvances. The impact of any changes to current legislative provisions on the Council'sborrowing strategy will be reported as part of the quarterly treasury managementmonitoring arrangements during the 2016/2017.

5.0 Annual Investment Strategy 2016/20175.1 Investment Regulations

5.1.1 The Investment Regulations became statutory instruments by force of the ScottishParliament on the 1 April 2010 in conjunction with the associated Code on the Investmentof Money by Local Authorities. This requires the Council to approve all the types ofinvestments to be used and set appropriate time and money limits for the amount that canbe held in each investment type. These types of investments are termed permittedinvestments and any investments used which have not been approved as a permittedinvestment will be considered as ultra vires.

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

management and the effective management of all the associated treasury risksencountered in working with the approved permitted list of investments. The Treasuryrisks and tools put in place to manage these risks include:

Credit and counterparty risk: this is the risk of failure by a counterparty to meetits contractual obligations to the Council, particularly as a result of thecounterparty's diminished creditworthiness and the resulting detrimental effect onthe Council's capital or revenue resources. There are no counterparties where therisk is zero although AAA rated organisations have a very high level ofcreditworthiness. The Council has in place minimum credit criteria to determinewhich counterparties and countries are of high creditworthiness to enableinvestments to be made safely.

Liquidity risk: this is the risk that cash will not be available when it is needed.While it could be said that all counterparties are subject to at least a very smalllevel of liquidity risk, the Council measures this risk on the basis as to whether ornot instant access to cash can be obtained from each form of investment. TheCouncil has developed a detailed cashflow model to record known and forecastincome and payment events arising in the short, medium to long term.

Appendix A

Treasury Management Strategy 2016/2017, Treasury Management Indicators andPrudential Indicators 2016/2017 to 2018/2019

Interest Rate Risk: This is the risk that fluctuations in the levels of interest ratescreate an unexpected or unbudgeted burden on the Council's finances againstwhich the Council has failed to protect itself adequately. The Council sets limits forits fixed and variable rate exposure in the Treasury Management indicators withinthis report. To manage this risk, the Council takes a view of the future course ofinterest rates and formulates a Treasury Management Strategy accordingly, aimingto maximise investment earnings and minimise borrowing costs, whilst giving fullregard to other treasury risk factors including security and liquidity.

Market Risk: This risk primarily relates to financial instruments that are regularlytraded in the various financial market exchanges. This is the risk that the Council isrequired to redeem this type of investment prematurely at prices above and belowthe price on which the financial instrument was originally purchased (par value)and thus be subjected to the market conditions prevailing at that time. If theinvestment is held to maturity the principal sum is guaranteed with it beingredeemed at par value. The Council will only use those which appear on itspermitted investment list, if their redemption price is not expected to vary muchduring its short life or for example in the case of treasury bills they offer a higherrate of return than depositing in the Debt Management Account Deposit Facility fora similar level of security.

Legal and Regulatory Risk: This is the risk that the Council itself or anorganisation with which it is dealing in its treasury management activities fails toact in accordance with its legal powers or regulatory requirements and the Councilsuffers losses accordingly. In the event of any doubt as to the legal and regulatoryissues the Council has recourse to its own in−house legal services team and alsothe Council's appointed treasury advisors Arlingclose Limited. The Council alsocurrently has in place a highly experienced and qualified Treasury Managementteam.

5.3 Permitted Investments5.3.1 The permitted investments which may be used in the forthcoming year are:

a. Deposits with the Debt Management Account Facility (UK Government);

b. Deposits with other local authorities or public bodies;

c. Instant Access Accounts;

d. Call Accounts;

e. Term Deposits;

f. Money Market Funds;

g. Instant Access Funds held with Council's own bankers;

h. UK Government Guts and Treasury Bills;i. Supranational Bonds (e.g. World Bank);

j. Certificates of deposits with financial institutions (banks and building societies);k. Covered Bonds;

I. Reverse repurchase agreements and other collateralised arrangements;

m. Investment properties;

n. Loans to third parties, including soft loans;

o. Loans to a local authority company;

p. Shareholdings in a local authority company;

q. Non−local authority shareholdings;

r. Subordinated debt in projects delivered via 'Hubco' model

Appendix A

Treasury Management Strategy 2016/2017, Treasury Management Indicators andPrudential Indicators 2016/2017 to 2018/2019

5.3.2 In respect of Money Market funds listed per f) above, these funds invest in high−qualityshort−term fixed income instruments and adhere to very strict credit quality,diversification and maturity guidelines with preservation of capital constituting theprimary objective. To date all money market funds approved must demonstrate astability of the invested capital (Constant NAy), meaning for every £1 of principalinvested the fund will return £1 of principal on withdrawal by the investor, plus interest.However it is worth noting that significant reforms have been proposed to the MMFindustry including the conversion from a Constant NAV to a Variable NAy.

5.3.3 In the event that this proposal is implemented, the use of Money Market Funds will besuspended, subject to further investigation and evidence that Variable NAV MMFs canprove that they can hold their NAV at £1 over a sustained period thus providing thesame level of security and stability.

5.3.4 Bail−in legislation which ensures that large investors including local authorities willrescue failing banks instead of taxpayers in the future, has now been fully implementedin the UK, USA and the European Union with Australia and Switzerland well advanced intheir own plans. Meanwhile changes to the UK Financial Services CompensationScheme and similar European Schemes in July 2015 mean that most private sectorinvestors are now partially or fully exempt from contributing to a bail−in. The credit riskassociated with making unsecured bank deposits has therefore increased relative to therisk of other investment options.

5.3.5 To manage the bail−in risk, covered bonds, reverse repurchase arrangements and othercollateral arrangements with financial institutions are included within the permittedinvestment list. These investments are secured on the assets of the borrower, whichlimits the potential losses in the unlikely event of insolvency and would be exempt frombail−in.

5.3.6 Whilst there is no investment specific credit rating for these types of arrangements, thecollateral upon which the investment is secured has a credit rating, with the highest ofthe collateral credit rating and the counterparty credit rating being used to determinecash and time limits. Note the combined secure and unsecured investments in any onebank should not exceed the cash limit for that counterparty.

5.3.7 Investments in subordinated debt in projects delivered via the 'Hubco' model includedwithin the permitted investments list will be only be undertaken, following a fullrisk/benefit analysis, subject to a maximum investment amount of £1 .5m per project andfor a maximum term of 30 years.

5.3.8 For cash investments, there is a risk of capital loss arising from selling ahead of maturityif combined with an adverse movement in interest rates and for term deposits and loansif they are redeemed early. Therefore the Council will undertake these investments inconjunction with its cashflow/Iiquidity projections and medium term financial plans tomanage this risk.

5.3.9 Within the TM code, it suggests the use of financial derivatives but given that the legalpower to use derivative instruments remains unclear, the Council does not intend to usederivatives. Should the legal position change, the Council may seek to develop adetailed and robust risk management framework, governing the use of derivatives, butprior to adoption, full Council approval will be sought.

Appendix A

Treasury Management Strategy 2016/2017, Treasury Management Indicators andPrudential Indicators 2016/2017 to 2018/2019

5.4 Investment Security

5.4.1 Although the yield on investment is a key consideration, the primary principle governing theCouncil's investment criteria is the security of its investments.

5.4.2 After this main principle the Council will ensure:> It has sufficient liquidity in its investments, carefully selecting the maximum periods for

which funds may prudently be committed also applying the Council's prudential andtreasury management indicators covering the maximum principal sums invested.

> It maintains a policy covering the categories of investment types it will invest in, thecriteria for choosing investment counterparties with adequate security, and to continuallymonitor security.

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

5.4.4 The Council utilises the research of the world's foremost providers of independent creditratings (Fitch, Moody's and Standard & Poors).The ratings provided by these bodies definethe likelihood of an investor such as the Council receiving their money back on the terms inwhich it was invested. (Long term Rating types and definitions are shown in Annex B).

5.4.5 The Council defines 'high credit quality' organisations and securities as those having acredit rating of A− or higher that are domiciled in the UK or a foreign country with asovereign rating of AA+ or higher. For money market funds and other pooled funds theCouncil defines a high credit rating as those having a credit of A− or higher. Investmentswith organisations with long term ratings in the BBB long term category will therefore berestricted by cash and maturity limits.

5.4.6 The Council also supplements its creditadditional operational market informationfrom the agreed pool of counterparties.

rating information by accessing and applyingbefore making any specific investment decision

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

• Credit Default swap prices;

• Quality financial press;• Share prices;

• Government support status I Bank Resolution and Recovery Directive;

• Annual Reports;

• Statements to the market; and

• Financial Regulations;

5.4.8 Should this additional market information raise concerns regarding the security of afinancial institution, then subject to further investigation this may also result in removal fromthe list.

5.4.9 The creditworthiness of counterparties will be monitored regularly. The Council receivescredit rating information from Arlingclose (the Council's advisors) as and when ratingschange and counterparties are checked promptly. If a ratings change results in thecounterparty failing to meet the Council's strict criteria then they are removed immediatelyfrom the list. Similarly if a counterparty rating is updated and they meet the Council's strictcriteria then they will be added to the list.

Appendix A

Treasury Management Strategy 2016/2017, Treasury Management Indicators andPrudential Indicators 201612017 to 2018/2019

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

5.4.11 The Council will give due care when considering the country, group and sector exposureof the Council's investments and will endeavour to have no more than 25% placed withany non−UK country at any time. A group of banks under the same ownership will betreated as a single organisation for limit purposes with industry /sector activity monitoredregularly for appropriateness.

5.5 Investment Strategy5.5.1 The Council, by efficient cashf low management and balance sheet analysis, will identify its

liquidity requirements and the core funds within its cash balances that could be locked inover a longer period up to the maximum limits as defined within Annex C. This will achievethe optimum performance, spreading investment periods and security of return, subject toover−riding credit counterparty security.

5.5.2 The 2016/2017 Treasury Management Strategy has been developed assuming that theannual borrowing requirement and debt repayments, net of credits due to the scheduledprincipal repayments to the loans fund, will be fully funded by undertaking externalborrowing. Therefore it is anticipated that the Council cash balances available for shortterm investment will be average approximately £30.0m throughout the period 2016/2017 to2018/2019.

5.5.3 This projected balance being subject to variation dependant upon actual level and timing ofexternal borrowing undertaken, which will reflect positive and negative movements inworking capital and level of revenue reserves/balances held during the 3 year period.

5.5.4 Other non cash type investments, including loans to third parties, equity investment andinvestment properties held for investment return must be subject to scrutiny and approvalby the Head of Business for Financial Solutions. With full detail of the service rationalebehind this type of investment provided and the likelihood of partial or full default assessedand other mitigating controls considered.

5.5.5 All investment activity will be governed by the principles laid out within sections 5.1 to 5.5above and 5.7 below.

5.6 Borrowing and the Investment of Money5.6.1 The Council will not borrow more than or earlier than required with the prime intention to

profit from the investment return of the extra sums borrowed.

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

5.6.3 The Council will appraise all risk associated with advance borrowing activity and it will besubject to prior appraisal with subsequent reporting either within the mid year or annualreporting mechanism. This report will comply with the minimum data and analyticalrequirements outlined within The Local Government Investments (Scotland) Regulations2010.

Appendix A

Treasury Management Strategy 2016/2017, Treasury Management Indicators andPrudential Indicators 201612017 to 2018/2019

5.7 Financial Guarantee5.7.1 Given the increase in Councils creating ALEO's and increasing partnership working, the

Council may be asked to provide a financial guarantee to enable other parties to accessfunds which may not otherwise be available due to their size/ lack of credit history. Thismay also result in external funds being accessed at more favourable terms than they arelikely to receive which will accrue both an operational and financial benefit to the Council.

5.7.2 In general, a financial guarantee is a promise to take responsibility for another company'sfinancial obligation if that company cannot meet its obligation. Prior to agreeing to theprovision of a financial guarantee , due financial diligence of the terms of the financialguarantee must be carried out, including an assessment as to the likelihood of theguarantee being called and potential financial liability to the Council. The responsibility forproper scrutiny and final approval is the Council's Head of Business for Financial Solutions.

5.7.3 In 2013/14, the Council provided North Lanarkshire Properties LLP (NLP LLP) with afinancial guarantee, underwriting the debt service costs of the NLP LLP loan of £45.Om tothe lender, up to a limit of 80% of the total debt service costs. The Council considers thelikelihood of the guarantee being called as minimal with a provision of £0.93m in place at31 March 2015 matched by a premium receivable from the NLP LLP for providing theguarantee, resulting in a nil financial impact to the Council.

6.0 Performance Measurement Indicators & Benchmarking6.1 The Code of Practice on Treasury Management requires the Council to use performance

indicators to assess the adequacy of the treasury function over the year and incorporatebenchmarking to assess performance which is reported within the Annual Treasury Activityreport. These are distinct historic indicators, which are additional to the predominantlyforward−looking prudential indicators outlined in later sections of this report.

6.2 In respect of liquidity which is defined as the Council "having adequate, though notexcessive cash resources, borrowing arrangements, overdrafts or standby facilities toenable it at all times to have the level of funds available to it which are necessary for theachievement of its business/service objectives" (CIPFA Treasury Management Code ofPractice) the Council will seek to maintain:

Liquid short term deposits of at least £3m available on an overnight basis.6.3 This Council generally uses the following historic indicators to monitor its loan portfolio

performance and benchmarking:

•• Borrowing: Average rate of borrowing for the year compared to average in previous year.+ Investments: Local measures of yield benchmarks are the Council's average return on

short term investment activity in comparison to:

− the 7 day/1 Month London Interbank Bid Rate (LIBID)

− the Council's own bank: Instant Access Account

− the Council's Advisors benchmarking club6.4 In the context of benchmarking security, this is a much more subjective area to assess. The

Council currently evidences this by the application of minimum quality criteria to investmentcounterparties, through the use of credit ratings, supplied by the three main credit ratingagencies, together with additional market information available as described earlier withinthis report and outlined within Annex C.

Appendix A

Treasury Management Strategy 2016/2017, Treasury Management Indicators andPrudential Indicators 2016/2017 to 2018/2019

7.0 Treasury Management Indicators 2016/2017 to 2018120197.1 Treasury Management Indicators: Interest Rate Exposures

7.1.1 The Treasury Management Code requires the Council to set limits regarding itsmaximum exposure to both fixed and variable interest rates. It also requires thecontainment of the activity of its Treasury Management function within theseself−determined

upper limits.

7.1.2 The Council's current loan portfolio consists of both fixed and variable rate debt, plus avariety of investments where the rates attained are subject to variability. The Coderequires authorities to set limits that manage risk and reduce the impact of an adversemovement in interest rates, primarily on variable rate loans. Table 3 highlights thelimits for approval.

Limits on Interest Rate Exposures: − 2016/17 2017/18 2018/19

Fixed interest payable/receivable % of net debt 110% 110% 110%

Variable interest payable/receivable % of net debt 30% 30% 30%Table 3− In terest Rate Exposu re Upper L imi ts 2016117 to iU1W19

7.1.3 In addition to the mandatory indicator regarding fixed and variable interest rateexposure, members are also asked to consider and to approve the following localindicator, to illustrate the impact on the Council's external interest payments andreceipts per the Council's investment and borrowing strategy.

Content of loan portfolio 2016/17 2017/18 2018/19Em I % E r n % £m

External Interest Council is due to pay:Fixed rate loan debt 21.4 77.0% 22.5 78.4% 24.8 81.3%Variable rate loan debt 6.4 23.0% 6.2 21.6% 5.7 18.7%

27.8 100.0% 28.7 100.0% 30.5 100.0%External Interest Council is due to receive:lnvestments − variableterms 0.2 100.0% 0.2 100.0% 0.2 100.0%Net Loan Interest Payments 27.6 2 8 . 5 30.3Table 4 − Loca l Ind ica tors In terest Rate Exposures 2016117 to 2018119

7.1.4 Table 4 above relates only to external interest payments, excluding interest onrevenue balances and includes a number of assumptions regarding the timing andnature of the new borrowing anticipated. As mentioned previously the Council capitalplanning process and investment/borrowing analysis enables it to take advantage ofopportunities that may arise to achieve beneficial borrowing rates over the sameperiod.

7.1.5 Table 4 highlights that the Council anticipates net loan external interest payments ofapproximately £27.8 million for 2016/2017. Of this total, £21 .4million relates to interestpayable on fixed rate debt, and for which interest payments are guaranteed until theloans mature, £6.4million relates to interest payable on variable rate debt, and almost£0.2million relates to interest receivable on funds invested. Variable rate loans andfunds deposited are subject to changes in interest rates, and will be monitored as partof the Council's Treasury Management Strategy on an ongoing basis.

Appendix A

Treasury Management Strategy 2016/2017, Treasury Management Indicators andPrudential Indicators 2016/2017 to 2018/2019

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

I I IFinancial Year : 2016/17

Estimate +1%−1%£m£m

Net impact on Council £6.2 +F−1.3 −f1 .3Fable −Sensitivity to Interest Rate Movements 2016177

7.2 Treasury Management Indicator: Maturity Structure of Borrowing7.2.1 The Treasury Management Code requires the Council to specify upper and lower limits

regarding the maturity structure of its fixed rate borrowing in order to minimise the riskassociated with the Council having to replace large sums of fixed rate debt at a timewhen there may be uncertainty over interest rate exposure.

7.2.2 Table 4 illustrated that the Council has high levels of fixed rate debt however thecurrent maturity profile of this debt is unlikely to be a major risk factor for the Council.Table 6 below, sets out the limits of fixed rate maturity which members are requestedto approve. These limits have been amended to reflect the anticipated impact ofsourcing new borrowing across the debt maturity spectrum.

7.2.3 These limits allow for any fixed debt falling due for repayment as part of a debtrestructuring exercise. For comparison and decision−making purposes, a local indicatorof the projected maturity profile of fixed rate debt as anticipated at the start of2016/2017 is shown.

Maturity Structure ofborrowing <12m

Upper limit fixed rate debt 20.0%

12m to 2 t2yrs 5yrs

15.0% 20.0%

5 t 10 to 20 tolOyrs 20yrs 40yrs 40yrs

30.0% 30.0% 140.0% 130.0%

Lower limit fixed rate debt I 0.0% I 0.0% I 5.0% I 5.0% I 5.0% 110.0% I 5.0%Table 6− Maturity Structure o f Fixed Rate Borrowing

7.2.4 The upper limit for fixed rate debt, maturing in less than 12 months, is set at 20% toaccommodate the requirement within CIPFA TM Code to recognise the possibility ofthe Council loans classified as LOBO type loans having their option or call exercisedwithin the next 12 months, under the terms of the loans as described within paragraph4.11 above.

7.3 Treasury Management Indicator: Credit Risk7.3.1 The Council will manage its credit risk by implementing the investment strategy per

Section 5 and remaining within the guidelines outlined within Annex C.7.3.2 The Council has also adopted a voluntary measure of its exposure to credit risk by

monitoring the value weighted average credit rating of its investment portfolio. This iscalculated by applying a score to each investment and taking the arithmetic averageweighted by the size of each investment.

Target

I Portfolio Average Credit RatingA−Table7− Credit Risk Indicator 2016117

Appendix A

Treasury Management Strategy 2016/2017, Treasury Management Indicators andPrudential Indicators 2016/2017 to 2018/2019

8.0 Prudential Indicators 2016/2017 to 2018/20198.1 Prudential Indicator: The Capital Expenditure Plans

8.1.1 The Prudential Code requires the Council to outline its capital expenditure plans takinginto account the sources of funding available and also the cost to the council insupporting any additional borrowing burden which will require to be paid for from theCouncil's own resources. The Government has power to control the level of prudentialborrowing although no control has yet been implemented.

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

8.1.3 Table 8 sets out the revised Capital Expenditure plans for 2015/2016 (Revised) andforecast for the period 2016/2017 to 2018/2019 for both the General Services and HRACapital programmes.

2015/16 2016/17 2017/18 2018/19Capital Expenditure Revised Forecast Forecast Forecast

Em Em Em EmGeneral Services 66.6 1 52.9 85.9 60.4HRA 56.5 65.8 71.9 76.1Total Spend 123.1 118.7 f 157.8 136.5Financed by:CapitalReceipts 6.2 4.0 1.0 1.0CapitalGrants 46.0 33.4 33.9 36.0CapitalfromCurrentRevenue 31.4 25.9 26.4 25.7In−yearCapitalFinancingNeed 39.5 55.4 96.5 73.8

tame a − i.apiras t=xpenairure mans U 1 3 f 10 10 ZU76I1&

8.2 Prudential Indicator: Capital Financing Requirement8.2.1 The CFR is essentially a measure of Council's underlying borrowing need i.e. capital

expenditure which is not resourced by capital grants, receipts or CFCR and any newborrowing will increase the CFR. The CFR includes long term liabilities representingoutstanding obligations under the education PPP and the finance leasingarrangements for buildings and overciadding.

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

2015/16 2016/17 2017/18 2018/19Revised Forecast Forecast Forecast

Em Em Em EmCapitalFinancingRequirementGeneralServices 652.8 645.8 674.5 679.3HRA 221.9 249.6 283.4 317.5TotalCFR 874.7 895.4 957.9 996.8MovementinCFR +5.5 +20.7 +62.5 +38.9Table 9− CFR Projections 2015116 to 2018119

Appendix A

Treasury Management Strategy 2016/2017, Treasury Management Indicators andPrudential Indicators 2016/2017 to 2018/2019

8.2.3 The year on year movement in CFR is shown in Table 10 below.

2015/16 2016/17 2017/18 2018/19Revised Forecast Forecast Forecast

Em Em Em EmIn−year Capital Financing Need 39.5 55.4 96.5 73.8Scheduled Debt Amortisation −27.5 −29.1 −29.6 −30.2Leasing Amortisation −1.6 −0.6 −0.1 −0.2Education PPP Amortisation −4.9 1 −5.0 −4.3 1 −4.5Movement in CFR +5.5 1 +20.7 +62.5 1 +38.9Table 10− Movements in C111 2015/16 to 2018/19

8.3 Prudential Indicator: Limits to Borrowing Activity8.3.1 Within the prudential indicators there are a number of key indicators to ensure the

Council operates its activities within well−defined limits. For the first of these theCouncil needs to ensure that its total borrowing , does not, except in the short−term,exceed the total of the CFR in the preceding year plus the estimates of any additionalCFR for 2016/2017 and the next two financial years.

2015/16 2016/17 2017/18 2018/19Revised Forecast Forecast Forecast

(em) £m £mGross

Borrowing: Loan Debt 673.0 710.5 781.8 825.2Long term Liabilities 129.8 124.2 119.8 115.1External Debt 802.8 834.7 901.6 940.3Capital Financing Requirement 874.7 895.4 957.9 996.8Prudential Margin 71.9 60.7 56.3 56.5Gross Borrowing =< year 3 CFR Yes Yes Yes Yes:ao:e l i − i−'ruaenuai margins 1U14113 10 lUlIllö

8.3.2 The above table demonstrates that healthy prudential margins will continue to existfrom 2016/2017 onwards and that the Council complies with this prudential indicator inthe current year and does not envisage difficulties in the future. This view takes intoaccount current commitments, existing plans and the proposals in respect of thecapital investment levels proposed.

8.4 Prudential Indicator: The Authorised Limit for External Debt.8.4.1 This represents the maximum limit beyond which borrowing is prohibited. Although this

limit is deemed to be affordable in the short−term, it is not desirable or a sustainablelevel of borrowing for the council and is therefore being set at a level as the maximumallowable in each of the years 2016/2017 through to 2018/2019. The level set for2015/2016 is shown for comparison. The proposed new SSI 'The Local Authority(Capital Finance and Accounting) (Scotland) Regulations 2016 provide a statutorybacking to the Prudential Code requirement for an authority to set an authorised limitfor external debt.

2015/16 2016/17 2017/18 2018/19Authorised Limit Initial Limit Estimated Estimated Estimated

Em Em Em EmGross Borrowing :Loan Debt 750 850 890 900Other Long−Term Liabilities 135 160 160 155Total External Debt 885 1,010 1,050 1,055Table 12− Authorised Limit 2015116 to 2018119

Appendix A

Treasury Management Strategy 2016/2017, Treasury Management Indicators andPrudential Indicators 2016/2017 to 2018/2019

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

the year; it is not a limit. This operational boundary allows flexibility to borrow, re−investand undertake debt restructuring during the course of the year. It is therefore possibleand acceptable, for actual borrowing to vary around this boundary for short periodsduring the year.

2015/16 2016/17 2017/18 2018119Operational Boundary Initial Limit Estimated Estimated Estimated

£m £mGross

Borrowing :Loan Debt 740 840 18 8 0

1 890Other Long−Term Liabilities 135 160 160 155Total 875 1,000 1,040 1,045:aoie i s − uperanonai bounaaryzuial7o 10 zuieiii

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

of borrowing prudential indicators, but within this framework, prudential indicators arerequired to assess the affordability of the capital investment plans. These provide anindication of the impact of the capital investment plans on the overall Council finances,namely the impact the increased programme has on council tax and housing rentlevels. The Council is asked to approve the following affordability indicators.

8.7 Prudential Indicator: The Ratio of Financing Costs to Net Revenue Stream.8.7.1 Since capital expenditure impacts on the revenue budget through financing charges,

the Council needs to ensure that financing costs not only remain affordable, but alsodo not constitute an excessive proportion of the revenue resources available. The ratioof borrowing costs to revenue forecasts for the next 3 years are illustrated in Table 14below showing that the General Services loan charges represent up to 8.09% of thetotal revenue budget available. The increase in the ratio still remains within prudentlevels demonstrating that the capital programme investment appears to be affordableand sustainable.

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

General Services

2016/17Estimated

8.06%14.25%

osts to Net Revenue

2017/18Estimated

8.04%

2018/19Estimated

8.09%HRA 14.93% 1 16.07%

(reams 2016117 to 2018119

8.8 Prudential Indicator: Estimates of Impact on Council Tax Levels8.8.1 This indicator identifies the revenue cost impact associated with new schemes

introduced to the three year capital programme per capital investment proposalsabove.

Proposed Forward ForwardBudget Projection Projection2016/17 2017/18 2018/19

Annual Council Tax Band D 1 £13.49 I £30.39 I £53.92Table 15− Estimate o f Cumulative Impact on Band 0 Annual Council Tax Bill 2016/17(0 2018119

Appendix A

Treasury Management Strategy 2016/2017, Treasury Management Indicators andPrudential Indicators 2016/2017 to 2018/2019

8.8.2 The above table illustrates that the proposed three year capital investment programmefrom 2016/17 would result in a cumulative annual increase in council tax of £13.49 in2016/2017, £30.39 in 2017/2018 and £53.92 in 2018/2019.

8.8.3 Although a potential increase in each of the years is indicated, the Council's robustfinancial strategy has enabled the additional loan charges required to fund theincreased investment programme to be managed within the framework of the Council'splanned budget resources. Therefore, there will be no impact on council tax levels andthe above figures are for indicative purposes only.

8.9 Prudential Indicator: Estimates of Impact on Housing Rent Level8.9.1 Similar to the Council tax calculation above, this indicator identifies the financing costs

of the proposed Housing Capital programme recommended in the 30−year Housingstrategy, expressed as a discrete impact on weekly rent levels.

ProposedBudget2016/17

Weekly Housing Rent Levels 1 £0.69Table 16− Estimate o f Cumulative Impact on Weekly How

Forward ForwardProjection Projection

2017/18 2018/19£1.71 £2.82

nts 2016117 to 2018119

8.9.2 The above table illustrates that the proposed three year capital investmentprogramme from 2016/2017would result in a cumulative increase in house rents of£0.69 per week in 2016/2017, £1.71 per week in 2017/2018 and £2.82 per week in2018/201 9.This reflects the anticipated net financing need in each of these years.

8.9.3 The Council's thirty−year housing programme reflects the Housing Stock ConditionSurvey and option appraisal exercise, therefore house rents will remain within thetargets set to meet other cost pressures including contract inflation and managementof the Council's housing portfolio.

Annex ATreasury Management Policy Statement & Clauses adopted

The Treasury Management Policy Statement adopted by North Lanarkshire Council:The Council defines its Treasury Management activities as:"The management of the organisation's investments and cash flows, its banking, moneymarket and capital market transactions; the effective control of the risks associated withthose activities; and the pursuit of optimum performance consistent with those risks."

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

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

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

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

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

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

2. The Council will receive reports on its treasury management policies, practices andactivities, including as a minimum, an annual strategy and plan in advance of the year, amid year review and an annual report after its close, in the form prescribed in its TMPs.

3. The Council delegates responsibility for the development of the Treasury ManagementStrategy and implementation and monitoring of its treasury management policies andpractices to the Policy and Resources (Finance & Customer Services) Sub−Committee andfor the execution and administration of treasury management decisions to the Head ofBusiness for Financial Solutions , who will act in accordance with the Council's TreasuryPolicy statement and TMPs and CIPFA's Standard of Professional Practice on TreasuryManagement.

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

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

Annex BExplanation of Long−Term Rating Definitions

Type of Rating Rating Explanation

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

adversely affected by foreseeable events.Indicates very strong capacity for timely payment of financialcommitments and this capacity is not significantly vulnerable toforeseeable events.

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

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

more likely to impair this capacity.

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

strong position.

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

protective elements.

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

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

Standard & Poor's Indicates extremely strong capacity for timely payment oflong−term financial commitments

Indicates strong capacity for timely payment of financialAA commitments

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

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

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

more likely to impair this capacity.

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