Commerce and Customers when assessing borrowing and investment decisions. 5. RISK ASSESSMENT Risks Risk Assessment Risk Level Risk Management Interest rate exposures Security of investments Impact of legislation Risk of fraud/error, covering authorisation, approval and processing of transaction; Dealing arrangements Cash flow implications Both the Treasury Management and the Investment strategies have been produced on the basis of estimates and assumptions regarding interest rates and financial market conditions. However, as the Council has no control over these there is an inherent risk that the strategies do not provide the optimum benefit to the authority Medium The Treasury Management Practices are designed to mitigate risks from this function. This is managed by regular contact, briefing documents and information with the Council’s Treasury Management consultants, strict control over the security of investments, regular monitoring and approval control procedures Insufficient MRP provided for in the Council’s budget Any new borrowing that the Council takes out will incur an MRP charge in the revenue budget (in accordance with the MRP Policy) which will specifically relate to the asset acquired or enhanced. This ‘charge’ will need to be built into the revenue budget to ensure the Council has sufficient resources available to meet the liability. Low All new capital schemes require a report being submitted to Council for approval. By including an assessment of MRP (as per the recommendation within this report) there will be an early indication as to any future MRP liability which can be built into the budget accordingly.
Specified and Non-Specified Investments SPECIFIED INVESTMENTS: (All such investments will be sterling denominated, with maturities up to maximum of 1 year, meeting the minimum ‘high’ rating criteria where applicable) Minimum ‘High’ Credit Criteria Use Debt Management Agency Deposit Facility -- In-house Term deposits – banks and building societies Green Short-term F1, Individual C In-house Nationalised banks in the UK have credit ratings which do not conform to the credit criteria usually used by local authorities to identify banks which are of high creditworthiness. In particular, as they no longer are separate institutions in their own right, it is impossible for Fitch to assign them an individual rating for their stand alone financial strength. Accordingly, Fitch have assigned an F rating which means that at a historical point of time, this bank failed and is now owned by the Government. However, these institutions are now recipients of an F1+ short term rating as they effectively take on the creditworthiness of the Government itself i.e. deposits made with them are effectively being made to the Government. They also have a support rating of 1; in other words, on both counts, they have the highest ratings possible. Minimum Credit Criteria Use Max £ of total investments Max. maturity period UK nationalised banks Blue In-house £7million per banking group 12 months 2. Maturities in excess of 1 year Minimum Credit Criteria Use Max £ of total investments Max. maturity period Term deposits – Purple In-house £10million 2 years
Supported borrowing, excluding HRA borrowing for capital expenditure. 3.3 Option 3 (“Asset Life Method”) and Option 4 (“Depreciation Method”) – can only be used to calculate the MRP for new schemes that require the Council to take on unsupported borrowing, excluding HRA borrowing for capital expenditure. 3.4 The preferred option for the Council is option 1 and option 4. MRP Calculation Examples 4.1 The following shows how the MRP figure is calculated under each of the options discussed above: Future supported Borrowing and any Previous Borrowings Option 1 (“Regulatory Method”) – This is the method currently used by the Council, as set out in the 2003 Regulations. Option 1 is calculated as 4% of the total Capital Financing Requirement for all borrowing, excluding HRA borrowing less Adjustment A: 4% (CFR – HRA – AA) Where: CFR = Capital Financing Requirement HRA = HRA borrowing AA = Adjustment A Option 2 (“Capital Financing Requirement (CFR) Method”) – this uses the same formula as Option 1 but does not take account of Adjustment A. 4% (CFR – HRA) Where: CFR = Capital Financing Requirement HRA = HRA borrowing Once calculated Adjustment A remains a fixed variable within the calculation; in the case of Mansfield District Council Adjustment A is £491,000 meaning that the MRP calculated under Option 1 will always be £19,640 (4% of £491,000) less compared to Option 2. The following demonstrates the different MRP calculated under Option 1 and Option 2 based on the Council’s Capital Financing Requirement for 2016/2017:
Prudential Indicators – In order to asses the Council’s ability to afford borrowing when making capital financing decisions and to ensure that prudent levels are set. These indicators show the projected and actual position together with limits which can only be exceeded with approval and in exceptional circumstances Supported Borrowing – Borrowing for which the Government will provide support through the Revenue Support Grant to meet the cost of borrowing for capital projects Unsupported Borrowing – Borrowing for which the Government will not provide support through the Revenue Support Grant to meet the cost of borrowing for capital projects