Revenue Budget and Capital Programme 2013/14...budget for 2013/14. Local Authority Finance...

Revenue

Budget and

Capital Programme

2013/14

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POLICE AND CRIME COMMISSIONER FOR THAMES VALLEY

BUDGET BOOK 2013/14

CONTENTS

PAGE

KEY FIGURES AND FINANCIAL SUMMARY

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PREPARATION OF THE REVENUE BUDGET

4

PRECEPTS AND COUNCIL TAX

13

REVENUE BUDGET SUMMARY

14

DETAILED REVENUE ESTIMATES

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BUDGET RISK AND SENSITIVITY ANALYSIS

24

POLICE OFFICER AND STAFF ESTABLISHMENT 2013/14

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MEDIUM TERM FINANCIAL PLAN (REVENUE FORECAST)

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ANALYSIS OF GROWTH ITEMS

32

PRODUCTIVITY STRATEGY SAVINGS

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4 YEAR CAPITAL PROGRAMME

42

TREASURY STRATEGY STATEMENT

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Key Figures

2011/12

2012/13 2013/14

£154.30 Council tax for police purposes (at band D)

£154.30 £157.38

874,250 Council tax base (band D equivalent properties)

880,806 810,556

4,179 2,723

530 7,432

Planned year-end staffing establishments Police officers Police staff

Police community support officers (PCSOs) Total

4,202 2,745

507 7,454

4,212 2,712

5,07 7,431

2,258,576 Population estimate as at June

2,277,436

2,321,453

572,680 Area - Hectares

572,680 572,680

1 April 2011 1 April 2012 1 April 2013 3,601 Number of police pensioners

3,699 3,812

£39.124m External debt £35.310m £31.527m

Financial Summary

2011/12

Estimate

2012/13

Estimate

2013/14

Estimate £m £m £m

1.872 PCC controlled expenditure 1.818 1.664 0 PCC commissioning budget 0 3.483

405.015 TVP operational budget 397.872 386.301 3.421 Net capital financing costs 3.376 2.921

- 2.815 Transfer to /from (-) reserves - 4.107 - 0.388 407.493 Cost of services 398.959 393.981

Financed by

158.155 Police grant 146.980 155.869 89.397 Formula grant 87.352 80.450 24.347 Specific grants 27.797 28.797

134.897 Council tax 135.908 127.565 0.697 Surplus on collection funds 0.921 1.300

407.493 398.959 393.981

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PREPARATION OF THE REVENUE BUDGET This report provides information on the Police and Crime Commissioner’s (PCC) revenue budget for 2013/14. Local Authority Finance Settlement The provisional local government finance settlement for 2013/14 was announced on 19th December 2012. The Home Office decided to defer publication of 2014/15 revenue funding allocations due to the announcement of a further reduction to the Home Office’s budget in that year, made in the December 2012 Autumn Statement. We have not tried to pre-empt the Home Secretary’s decision on 2014/15 allocations and the potential additional cuts. However the Force will advance the work on the Future Productivity Strategy to identify savings which could potentially be brought forward to 2014/15 and further develop the plans to achieve future savings, in order to deliver a balanced budget and medium term financial plan (MTFP) at this stage next year. DCLG Formula Funding For the two year period 2013/15 DCLG formula funding allocations will continue to be calculated using the four-block model system. There have been a limited number of updates by DCLG to the data and formulae used. The formula used to calculate 2013/14 allocations will be frozen for 2014/15, with only the total to be distributed through the model differing between the two years. From April 2013 councils and fire and rescue authorities will receive their formula funding through the business rates retention scheme, in a complex system of payments, based on business rates income. Policing bodies will receive formula funding allocations (formerly redistributed business rates and Revenue Support Grant) directly from DCLG and therefore police allocations will not be dependent on business rates income, unlike councils and fire and rescue authorities. Home Office Police Grant As previously announced the Neighbourhood Policing Fund has been rolled into the Home Office Police Grant. The 2012/13 baseline for Police Grant has been adjusted to include 2012/13 Neighbourhood Policing Fund (NPF) allocations, before damping was applied. This reflects the fact that NPF allocations were made on a different basis to Police Grant. Damping Damping has been applied to allocations to ensure all policing bodies receive a 1.6% cash reduction in overall formula funding in 2013/14, compared to 2012/13. Council Tax Freeze 2013/14 A PCC will be eligible for the council tax freeze grant providing he/she does not increase the basic amount of council tax in 2013/14, compared to 2012/13. The grant will be equivalent to a 1% increase in the PCCs 2012/13 Band D amount multiplied by the council tax base for 2013/14, which will not be reduced for the element of the tax base receiving council tax support. This will mean the grant will be calculated in the same way as in previous years. Providing the 2013/14 council tax is frozen or reduced, the grant will be paid in each of the financial years 2013/14 and 2014/15.

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Council Tax Referendums The Communities Secretary set a threshold of a 2% increase in the relevant basic amount of council tax for the majority of policing bodies and other authorities, including Thames Valley. Other grants Total funding for counter terrorism remains as set out in Spending Review 2010. PFI grants will be made available for those PFI projects currently operational. The police settlement for 2013/14 includes funding for a new National Police Coordination Centre (NPoCC), which is being set up in response to the August 2011 riots. Funding from the police settlement total £1m in 2013/14. Beyond 2014/15 The Home Secretary will commission a fundamental review of the Police Funding Formula once PCCs are established in their roles and able to engage fully in the review process. This is expected to begin in early 2013. In the Autumn Statement 2012 the Chancellor announced that a spending review would take place in the first half of 2013 to set detailed spending plans for 2015/16 only. A further spending review for the years beyond 2015/16 is therefore expected in late 2015, following the general election. THAMES VALLEY’S ALLOCATION The PCC for Thames Valley will receive the following grants in 2013/14. All local policing bodies have suffered a reduction in formula grant of 1.6%

2012/13

£m 2013/14

£m Variation

£m Home Office Police Grant 146.980 155.869 8.889 DCLG Formula Funding (previously RSG and NNDR)

83.9801 80.450 - 3.530

Neighbourhood Policing Fund2 9.124 0.000 - 9.124 Total Formula Funding 240.084 236.319 - 3.765 Specific grants 20.905 12.866 - 8.039 Community safety fund 0.000 3.083 3.083 Council tax support funding3 0.000 11.869 11.869 2011/12 council tax freeze grant 3.372 3.372 0.000 Council tax transitional grant (estimate) 0.000 0.200 0.200 Total specific grants 24.277 31.390 7.113 Total Government grants 264.361 267.709 3.348

1 Excluding the Council Tax freeze grant 2011/12. Issued as a specific grant in 2013/14 2 Previously allocated as a specific grant but rolled into main police grant in 2013/14 3 This grant helps to offset the loss of council tax income due to the reduced taxbase in 2013/14

The Community Safety Fund replaces nine grants that were previously paid to local authorities or voluntary sector bodies. The following table attempts to quantify the grant monies paid to local authority and voluntary sector bodies in the Thames Valley Police area in 2012/13. It appears that Government funding in the TVP area has been reduced by around £0.570m or 16%

Funding stream £m Drug Interventions Programme (DIP) 1.154

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DIP Drug Testing Grant 0.615 Community Safety Partnership Funding 1.206 Youth crime and substance misuse prevention activities 0.184 Positive Futures 0.099 Communities Against Guns, Gangs and Knives Programme N/A Community Action Against Crime: Innovation Fund 0.389 Safer Future Communities 0.006 Ending gang and youth violence funding N/A Total 3.653

The PCC aims to maintain expenditure in this area at close to 2012/13 levels despite the 16% reduction in government funding outlined above. However, this is a one year only commitment and the budget will almost certainly have to be reduced in later years due to reduced government funding for the police service.

APPROVED REVENUE ESTIMATES 2012/13 The review and development of the medium term financial plan, the four year capital programme and the annual budget are carried out with reference to and in conjunction with a number of key documents and processes which inform their development. This approach is designed to ensure that resources are targeted towards priority business areas. The PCC will be the recipient of all funding and sources of income into Thames Valley Police, and therefore the setting of the MTFP needs to align to the PCC’s Police and Crime Strategic Objectives to ensure allocation of those funds is appropriate and proportional to meeting and attaining the strategic objectives. In addition the annual budget is specifically aligned with the Chief Constable’s annual delivery plan objectives, which underpins the PCC’s Strategic Objectives for the specific financial year. Throughout the budget preparation process the following key principles have also been adopted:

• To protect frontline services • To protect our ability to manage risk • To maintain our capability in protective services and back office functions through

collaboration • To maintain and improve performance in key areas • To reduce “discretionary spending” • To streamline business processes and to eliminate unnecessary bureaucracy and

waste • All change to be risk assessed

The budget will ensure that resources are targeted towards priority business areas. There will be no reduction in local visible policing and those areas that support the delivery of key strategic objectives, or are necessary for the effective management of policing risk, will receive the greatest protection. It has been known for some time that significant cuts in budget would need to be made due to the state of UK public finances. As such, work on developing and implementing the Productivity Strategy has been ongoing from 2010, with this work being imperative to achieving a balanced budget position for the next four years. Planning assumptions In developing and refining the budget and the MTFP the following underlying assumptions have been made:

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• General inflation set at 2.1% for 2013/14 and 2014/15, with 2.0% per annum thereafter.

• Specific inflation rates are set at industry and sector led rates, e.g. premises, fuel and utilities.

• Pay inflation capped at 1.0% for September 2013 and 2014, with 2.0% per September thereafter.

• The 2011/12 council tax freeze grant (£3.372m) will continue to be paid as a special grant into the next CSR period (starting from 2015/16)

• The productivity strategy will continue to deliver the identified savings, together with additional savings for future years.

• The use of reserves for supporting specific initiatives within the budget is still a legitimate and viable option.

• Council Tax precept to rise by 2.0% in 2013/14 and 2.5% per annum thereafter.

• The Council Tax billing base to increase by 0.8% per annum with effect from 2014/15.

• Police grants to remain as previously estimated (i.e. before the 2012 Autumn Statement) for the remainder of the current CSR period (i.e. –3.28% in 2014/15 and –2.43% in 2015/16). As previously stated we have not adjusted our forecast in light of the additional grant reductions announced in the Chancellor’s Autumn Statement.

• The overall MTFP is built around a stable position in the level of policing and policing requirements within the Thames Valley. The plan does not take into account the economic and social growth that we have within our area, and no provision has been made to increase the base budget to reflect this growth. Current estimates of population growth in England are running at 0.8% (excluding SE weighting), so based on an officer establishment of 4,200 this would equate to an increase of 34 officers (£1.5m) in growth to maintain the current officer to population ratio. No provision for this is made in the current budget plans.

Preparation of the 2013/14 Revenue Budget

Base Budget

The starting point for the preparation of the 2013/14 estimates is the 2012/13 budget approved by the Police Authority in February 2012. This year we have changed the presentation of the budget to show a split between those budgets that the PCC is directly responsible for and those under the direction and control of the Chief Constable. All government funding, including all special grants, are shown as external funding, illustrating the full cost and funding of the PCC and Chief Constable. The following table provides a reconciliation between the Net Budget Requirement from the 2012/13 budget book and the new restated opening balance for 2012/13.

£m £m Net budget requirement 2012/13 (as per published budget book) 371.162 Add back special grant income

Loan charges 0.338 Other government grants 3.844 PFI 1.032 Neighbourhood policing (PCSOs) 9.180 Security grant 7.103

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Olympics security grant 2.221 Council tax freeze grant 2012/13 4.079

Total special grants 27.797 Adjusted net budget 2012/13 398.959

Inflation This additional cost does not relate to any increase in service but is required just to maintain the existing base level of service. Inflation for 2013/14 adds £3.578m (average rate of 0.96%) to the annual budget, a further £4.572m in 2014/15 (average rate of 1.16%), £6.623m in 2015/16 (average rate of 1.62%) and £7.734m in 2016/17 (average rate of 1.99%). These increases are based on a realistic assessment of the impact of inflationary pressures over the next four years and, in particular, reflect the end of the public sector pay freeze in March 2013, and the introduction of pay capping in the following two years thereafter. Committed expenditure This section deals with those items in the budget which the PCC is committed to by means of a previous policy decision, national agreement or statutory requirement. Further details are provided on pages 32 to 33.

£m Police officer pay allowances 0.444 Police staff performance reward 1.350 Total 1.794

Current service This element of the budget contains growth for those items which are deemed to be necessary to maintain the current levels of service within Thames Valley. Full details of all current service items are provided on pages 33 to 34.

£m Property maintenance - 0.110 Support services 0.994 Income 0.171 Total 1.055

Improved service These items of growth are required to improve performance and meet the growing demands on the service by means of legislative changes and/or adherence to codes of practice or to comply with regulations. Full details are provided on pages 34 to 37.

£m Specific Revenue Funded Projects - 1.491 Total - 1.491

Appropriations The financial strategy includes the utilisation of general reserves and/or the Improvement and Performance Reserve to fund one-off expenditure items to improve performance, achieve future efficiency savings or to address timing issues where expenditure falls in a different year to the budget provision. The following table shows how reserves are being applied in the revenue budget.

£m £m

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Appropriations from general balances - Property fees 0.045 - Levelling of fluctuations in Bank Holidays 0.249 - Funding for Slippage of Winsor review implementation 0.550 0.844 Appropriations from the Improvement & Performance Reserve - Funding for one-off projects 3.870 Total 4.714

Productivity Strategy Savings The PCC (previously Police Authority) and Force have a long history of delivering productivity savings and using these to balance annual budgets or reinvesting them in frontline policing; a strategy that has been widely scrutinised and praised by HMIC during various inspections and reports. The savings relating to the first two years of the productivity strategy (2013/14 and 2014/15) are all related to specific initiatives that have been scrutinised by the Force to ensure that the risks of implementation are acceptable and appropriate equality impact assessments are being completed prior to implementation. These savings should all be attainable subject to the current demands and profile of policing. Savings linked to the later years of the strategy are generally linked to high level plans which still require further scoping work and assessment of the impacts and risks, which will be carried out over the next financial year. The direction of this work will partly be determined by the financial impact of the 2014/15 allocations and the outcome of the spending review; both due later this year (2013). In 2013/14 we will implement productivity savings of £13.079m; these productivity streams will facilitate the redeployment of 34 police posts to critical policing functions. Overall police officer posts will grow by 17 but there will be a loss of 35 staff posts. In the following three years (i.e. 2014/15 - 2016/17) current assumptions indicate that additional savings of £26.802m will be required to balance the budget over that period. A summary of the savings identified for 2013/14 is set out below with further detail provided on pages 39 to 41.

£m Committed full year effect savings - 1.593 Collaboration - 1.597 Structure and process reviews - 0.974 Value for Money (VFM) reviews - 2.201 Review of remuneration and conditions - 6.714 Total - 13.079

2013/14 Budget Summary The following table summarises the net revenue budget for 2013/14. £m Adjusted base budget 2013/14 398.959 In-year funding virement1 - 1.548 Inflation 3.578 Committed expenditure 1.794 Current service 1.055 Improved service - 1.491

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Productivity Strategy savings -13.079 Appropriation from reserves 4.714 Net budget 2013/14 393.982

1 An offsetting virement is shown under ‘Funding Changes’ in the Medium Term Financial Plan on page 31 Budget Risk and Sensitivity Analysis There are a number of risks to the 2013/14 revenue budget, as shown on pages 33 and 34. This analysis follows the Force Risk Assessment Model. The first main column explains the risk to the PCC’s budget. The level of risk is then assessed in terms of both likelihood and impact (each factor scored out of 5, with 1 being low likelihood / impact) on the PCC’s budget. The final column provides a sensitivity analysis, where appropriate. These identified risks are mitigated, to a certain extent, because the PCC:

• maintains an appropriate level of reserves and balances; • takes a prudent approach to achievability of income and the recovery of debts due,

making appropriate provisions for bad debts; • will proactively manage and monitor all aspects of budget performance during the

year; • the PCC Chief Finance Officer is a member of the Force Risk Management Group,

which proactively assesses and manages operational and resource management risks within the Force.

Accordingly, the assessment of budget risks on page 24 takes into account the mitigating factors identified above. The risks to the medium term financial plan (2014/15 to 2016/17) are shown on page 25. RESERVES AND BALANCES The PCC’s current policy is to maintain general revenue balances, required as a working balance for ongoing operational cash-flow purposes and to act as a general financial contingency to meet the cost of any ad-hoc, unforeseen events or emergencies, at close to 3% of the annual net revenue budget, with an absolute minimum level of 2.5%. The current and forecast level of general revenue balances is set out below.

£m

% of 2013/14 Net Budget

Balance as at 31 March 2012 14.298 3.63% Fund overtime on bank holidays 2012/13 - 0 day equivalent - 0.249 Planning and asset management fees - 0.194 Fund shortfall in Winsor review savings - 0.550 Transfer from CASU reserve 0.062 Transfer from CTC reserve 0.087 Predicted revenue underspend 2012/13 0.810 Forecast balance as at 31 March 2013 14.264 3.62%

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Planning and asset management fees - 0.149 Fund capital programme rather than borrowing - 0.210 Forecast balance as at 31 March 2014 13.905 3.53% Planning and asset management fees - 0.139 Fund capital programme rather than borrowing - 2.110 Forecast balance as at 31 March 2015 11.656 2.96% Planning and asset management fees - 0.116 Forecast balance as at 31 March 2016 11.540 2.93% Planning and asset management fees - 0.091 Forecast balance as at 31 March 2017 11.449 2.91%

The estimated level of general balances at 31st March 2017 is £11.449m, which equates to 2.91% of the net revenue budget in 2013/14. Whilst this is slightly below the agreed guideline level of 3%, it remains above the minimum 2.5% level. This represents an adequate level of reserves over the four year planning period to provide sufficient financial contingency cover whilst the Force continues to implement the significant level of service changes and associated budget cuts required to balance the budget over the next 3-4 years. It must be borne in mind that the successful implementation and delivery of these service and budget plans may, in turn, be affected by external decisions and events outside of our direct control that could impact on our local planned savings and/or spending commitments e.g. level of future grant allocations. The predicted year-end position for each earmarked revenue reserve is shown below.

Reserve

Balance at 1 April

2012 £m

Forecast Balance 31.3.13

£m


£m


£m


£m


£m Air support reserve 0.062 0.000 0.000 0.000 0.000 0.000 Risk management reserve 1.258 1.000 0.000 0.000 0.000 0.000 Transport reserve 0.207 0.120 0.120 0.120 0.120 0.120 National ICT funding 2.909 0.000 0.000 0.000 0.000 0.000 Improvement & Performance 21.924 20.743 20.482 20.327 18.482 17.623 Insurance fund 1.541 1.541 1.541 1.541 1.541 1.541 Merge TSU bases 0.150 0.000 0.000 0.000 0.000 0.000 Sub-total 28.051 23.404 22.143 21.988 20.143 19.284 Conditional funding reserve 5.844 5.844 5.344 4.844 4.344 3.844 Total earmarked reserves 33.895 29.248 27.487 26.832

24.487

23.128

IMPLICATIONS FOR COUNCIL TAX The following table shows how the 2013/14 net revenue budget will be financed.

£m £m % Police grant 155.869 39.6 Formula grant 80.450 20.4 Special grants 28.797 7.3 Council tax - Precept - Surplus on collection funds

127.565

1.300

128.865

32.7

Total Financing 393.981 100.00

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Council Taxbase The council taxbase is the number of number of band D equivalents in the Force area, after allowing for non-collection of tax. The total taxbase for 2012/13 is 810,556 as page 13 illustrates. Band D Council Tax The band D council tax for 2013/14 is £157.38, an increase of £3.08 or 2% over the 2012/13 figure. BUDGET APPROVALS At its meeting on 1st February the Police and Crime Panel for Thames Valley unanimously approved the 2% increase in the council tax precept for 2013/14. The PCC subsequently approved his annual revenue budget and council tax precept on 8 February 2013. PRECEPTS AND COUNCIL TAX

Precepts on each billing authority in the Force area for 2013/14

Taxbase Band D

equivalents

PCC’s share of Surplus / Deficit (-) on

collection funds £

Precept

£ Aylesbury Vale 62,606.42 131,092.00 9,852,998 Bracknell Forest 41,120.00 35.765.00 6,471,466 Cherwell 46,672.00 162,438.15 7,345,239 Chiltern 41,646.72 50,000.00 6,554,361 Milton Keynes 74,879.22 282,000.00 11,784,492 Oxford City 41,291.00 42,499.00 6,498,378 Reading 47,610.00 169,769.00 7,492,862 Slough 36,042.44 0.00 5,672,359

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South Bucks 31,157.00 - 31,084.96 4,903,489 South Oxfordshire 52,607.00 175,309.13 8,279,290 Vale of White Horse 45,964.90 130,655.73 7,233,956 West Berkshire 59,884.24 - 92,742.00 9,424,582 West Oxfordshire 40,037.02 121,763.00 6,301,026 Windsor & Maidenhead 61,834.71 26,466.00 9,731,547 Wokingham 63,436.40 3,066.00 9,983,621 Wycombe 63,766.45 93,234.00 10,035,564 Totals 810,555.52 1,300,230.05 127,565,228

Council tax for police purposes for each property band in 2013/14

Property Band

Relevant Proportion

PCC Element of the Council Tax

£ A 6/9 104.92 B 7/9 122.41 C 8/9 139.89 D 9/9 157.38 E 11/9 192.35 F 13/9 227.33 G 15/9 262.30 H 18/9 314.76

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POLICE OFFICER AND STAFF ESTABLISHMENTS 2013/14

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MEDIUM TERM FINANCIAL PLAN (2013/14 to 2016/17) One of the key requirements of the Prudential Code for Capital Finance is that the PCC takes a longer-term view of the spending pressures facing the organisation, in setting and approving the budget and council tax for the ensuing financial year. Given the potential funding issues which we are likely to face in future years this forward planning is more important than ever. Full details are provided in pages 28 to 41.

2013/14

£m 2014/15

£m 2015/16

£m 2016/17

£m B/Fwd Opening Balance * 398.959 393.981 389.968 388.665 In-year funding virement -1.548 Inflation 3.578 4.572 6.323 7.734 Productivity savings - 13.079 - 9.853 - 3.957 - 1.868 Future productivity strategy savings - 4.954 - 6.170 Committed expenditure 1.794 2.896 2.518 2.581 Current services 1.055 - 0.114 - 0.401 - 0.074 Improved service - 1.491 - 1.530 0.835 - 1.745 Appropriations from reserves 4.714 0.016 - 1.667 1.770 Net Budget Requirement 393.981 389.968 388.665 390.893 Annual change in budget - 4.978 - 4.013 - 1.303 2.228 Annual % change in budget - 1.25% - 1.02% - 0.33% 0.57% Increase in Band D council tax 157.38 161.31 165.34 169.47 +2.0% +2.5% +2.5% +2.5%

The majority of inflationary and growth items are determined by external factors, e.g. national pay awards. The medium term financial plan is also balanced in the years 2014/15 to 2016/17 but we do recognise that that the Government is likely to reduce grants by more than we have currently provided for. The Force will therefore advance work on the Future Productivity Strategy to identify savings which could potentially be brought forward to 2014/15 and further develop the plans to achieve future savings, that may be required to balance the medium term financial plan at this stage next year The current medium term financial plan includes revenue savings of £39.075m over the four year period 2013/14 to 2016/17 with £13.05m next year. This is over and above the £33m of cash savings removed from the base budget in 2011/12 and 2012/13 meaning that over £72m of cash savings will be required over the six year period 2011/12 to 2016/17. This equates to 19% of the net revenue budget in 2013/14.

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ANALYSIS OF GROWTH ITEMS

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FOUR YEAR CAPITAL PROGRAMME 2013/14 to 2016/17 Introduction In addition to spending on day to day activities the PCC incurs expenditure on buildings, information technology and other major items of plant and equipment which have a longer term life. Overview of the Capital Programme

The capital programme has been compiled and assessed with full appreciation of the current economic climate and the likelihood of continued service wide cuts. The focus of the plan is therefore to improve service delivery in support of the long term strategy but with an overriding remit of maximising the utilisation of our assets and improving long term core efficiency in order to achieve the savings set out in the Productivity Strategy. To accomplish this, the plan has three main focuses: Firstly, the plan provides for the maintenance and replacement of current assets where necessary, for example vehicles and radios. The second is the financial aspect of the approved Asset Management Plan, which aims to reduce the overall cost and improve the efficiency of our estate whilst providing appropriate, suitable accommodation. Some of these schemes also have the advantage of not only reducing the long term revenue costs but also delivering a net capital receipt. The third stream of work is starting to implement the Business Change Strategy, managing our information through three key systems; Contact Management, Records Management and, in the longer term, an Enterprise Resource Planning system. This approach is designed to deliver lean and efficient end to end business processes, removing duplication and administration costs, whilst meeting the needs of the whole service and providing improved public access. The intention is to deliver the new systems via the joint ICT department across the two forces (Thames Valley Police and Hampshire Constabulary), sharing the costs and therefore reducing the level of individual investment required. The costings and funding estimates within this draft capital programme are based on the best information available at the time. This can be standard building costs, desktop estimates or an estimate based on the experience of another force. Future inflation is included where appropriate. The Capital Programme: Ø Is considered each year as part of the annual budget process. Ø Reflects PCC and Force priorities and operational requirements. Ø Takes account of current financial resources and the challenge to optimise the utilisation

and efficiency of assets. Ø Reflects current working practices such as collaboration and partnership working. Ø Improves the alignment and provision of estate facilities with operational requirements

whilst ensuring compliance with relevant legislative requirements and in accordance with the asset management strategy.

Ø Maintains and develops the existing ICT infrastructure to provide a secure, efficient

working environment which supports the priorities of Thames Valley.

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Ø Addresses the provision of core policing systems to facilitate the collation, application and storage of our key information to support the delivery of an efficient, effective and responsive service.

Summary Capital Programme A summary of the approved four year capital programme is set out below, with full details shown in pages 46 to 50.

2013/14 2014/15 2015/16 2016/17 Total £m £m £m £m £m Property 10.576 6.599 2.625 0 19.800 ICT 7.600 5.340 3.741 2.025 18.706 Vehicles 2.863 2.949 3.037 3.129 11.978 SECTU 1.046 0.939 0.875 0 2.860 Equipment 1.417 0.706 0.346 0.271 2.738 Totals 23.501 16.532 10.623 5.425 56.082

Property schemes These schemes are necessary to meet a combination of key priorities, including maintaining operational performance and capacity as well as strategic asset management. The main new property projects include:

Ø HQ South – Further consolidation and development of the HQ South site encompassing

C, E and G blocks, ensuring that buildings remain fit for purpose and utilisation of available space is maximised.

Ø Asset Management Plan (AMP) – A programme to initially replace 7 premises identified as low efficiency or unsuitable operational freehold sites with smaller more appropriate lease or freehold premises, releasing £11.085m in capital receipts to support the capital spending programme at a total cost of £7.024m.

Ø Carbon Management Plan works – These are ‘invest to save’ initiatives which are reserve funded, with £0.9m earmarked for this type of project. As projects are progressed through the feasibility stage the question of reducing our carbon footprint is considered and if an “invest to save” opportunity exists, this fund [risk management reserve] will be utilised with £0.440m initially drawn down in 2013/14.

ICT schemes These schemes are required to both maintain existing systems and support implementation of the Business Change Strategy which aims to provide the Force with lean, efficient and reliable, end to end business processes. IT projects include: Ø ICT Core Schemes – Investment to bring core platforms up to a more effective and

efficient standard, reducing our carbon footprint, ensuring the ICT infrastructure remains fully supported, improving service interoperability and allowing smarter ways of working. Specifically: ongoing data centre server replacements, storage infrastructure investment, an accelerated desktop hardware upgrade and rationalisation program, core operating system upgrades and an update of the voice and data network infrastructure.

Ø Contact Management Strategy (CMS) - Will manage all public initiated contact within the Force, including our continued interaction with them. The strategy will therefore include, amongst other things, the replacement for the Command and Control system.

Ø Records Management System (RMS (including MODE - Below) - Brings together all the core structured data into one central repository, reducing support costs, eliminating replication, increasing accessibility and providing reliable interfaces with partner and

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national agencies. This includes all the information pertaining to Intelligence, Crime, Warrants, Vulnerability, Missing Persons, Domestic Violence and Repeat Victims.

Ø Management of Digital Evidence (MODE) – Part of RMS and linked to ODIMS (Overt Digital Information Management System), MODE brings together all the un-structured data such as CCTV footage, body worn video, etc., together in one place for evidential storage and management. It provides similar benefits to RMS above and will allow, amongst other things, future secure electronic case file transfer to CPS and courts.

Ø Enterprise Resource Planning (ERP) – A number of options continue to be considered for the Force’s future strategic approach to ERP, the work will follow on from RMS and will seek to provide similar benefits to the back office functionality such as; Finance, Human Resources and the procurement process. Financial evaluation will be conducted as the strategy develops and will be influenced by collaborative, partnership or outsourcing opportunities.

Vehicles The vehicle replacement provision is used to maintain the capacity and efficiency of the Force’s vehicle fleet. The programme is based on a dynamic replacement model created by the Chiltern Transport Consortium which recognises the impact of both age and usage on the vehicle lifecycle to identify the most economical replacement point for each vehicle. South East Counter Terrorism unit (SECTU Annual capital investment will be restricted to the grant allocation.

Equipment The equipment scheme now includes radio replacements as well as Automatic Number Plate Recognition (ANPR) and the basic equipment bid. The annual provision for Equipment is set at a nominal £0.1m pa and its usage is reviewed by the Director of Finance.

Funding Schedule 6 shows the estimated level of financial resources assumed to be available to finance capital expenditure over this period. Government grant allocations have been received for 2013/14 and 2014/15. In producing this schedule, the following assumptions and adjustments have been made: Ø A prudent assessment has been made of the likely level of future (2015/16 + 2016/17)

capital grant funding receivable from the Home Office.

Ø A prudent assessment has been made of the likely level of AMP capital receipts to be generated from the sale of operational assets over the period.

Ø A prudent assessment has been made of the level and timing of receipts from the sale of houses or shared equity loan repayments over the period.

Ø We will continue to purchase some vehicles from revenue each year. A sum of £0.630m is currently assumed.

Ø The funding includes the whole capital receipt for the transfer of the helicopters to the National Police Air Service (NPAS) at £1.243m (net present value) although, in practice, it will be received in annual payments with £0.535m being received outside of the current planning period.

Ø In the current economic climate the preference for the use of reserves rather than additional borrowing is continued.

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Financing of the Capital Programme

£m Capital grant 15.574 Capital receipts 5.601 TVP reserves 0.650 Revenue contributions 0.630 SECTU Grant 1.046 Total Financing 23.501

Conclusion The capital programme is an essential and integral part of the Force’s strategy to continue to improve service delivery by maximising the efficient use of assets. It achieves this by establishing the core infrastructure from which the Policing Strategy and the savings required through the Productivity Strategy can and will be met. The four year spending programme, which amounts to £56.082m, is fully funded.

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Treasury Management Strategy Statement 2013/14 Minimum Revenue Provision Policy Statement and Annual Investment Strategy 2013/14

INDEX

1.1 Background ............................................................................................................................................... 52 1.2 Reporting requirements ............................................................................................................................ 52 1.3 Treasury Management Strategy for 2013/14 .......................................................................................... 53 1.4 Training ...................................................................................................................................................... 53 1.5 Treasury management consultants ......................................................................................................... 53 2.1 Capital expenditure and financing ............................................................................................................ 54 2.2 The PCC’s borrowing need (the Capital Financing Requirement) ......................................................... 54 2.3 Minimum revenue provision (MRP) policy statement ............................................................................. 55 2.4 Core funds and expected investment balances ...................................................................................... 55 2.5 Affordability prudential indicators .............................................................................................................. 55 2.6 Ratio of financing costs to net revenue stream. ...................................................................................... 56 2.7 Incremental impact of capital investment decisions on PCC tax. ........................................................... 56

3 BORROWING .............................................................................................................................. 56 3.1 Current portfolio position ........................................................................................................................... 56 3.2 Treasury Indicators: limits to borrowing activity ....................................................................................... 57 3.3 Prospects for interest rates ....................................................................................................................... 58 3.4 Borrowing strategy .................................................................................................................................... 59 3.5 Policy on borrowing in advance of need .................................................................................................. 60 3.6 Debt rescheduling ..................................................................................................................................... 60

4 ANNUAL INVESTMENT STRATEGY ....................................................................................... 61 4.1 Investment policy ...................................................................................................................................... 61 4.2 Creditworthiness policy ............................................................................................................................. 61 4.3 Country limits ............................................................................................................................................. 62 4.4 Investment strategy ................................................................................................................................... 63 4.5 Icelandic bank investments ...................................................................................................................... 63 4.6 Investment risk benchmarking ................................................................................................................. 63 4.7 End of year investment report .................................................................................................................. 64

5 Appendices ................................................................................................................................. 65

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1 INTRODUCTION

1.1 Background

The Police and Crime Commissioner (PCC) is required to operate a balanced budget, which broadly means that cash raised during the year will meet cash expenditure. Part of the treasury management operation is to ensure that this cash flow is adequately planned, with cash being available when it is needed. Surplus monies are invested in low risk counterparties or instruments commensurate with the PCC’s low risk appetite, providing adequate liquidity initially before considering investment return. The second main function of the treasury management service is the funding of the PCC’s capital plans. These capital plans provide a guide to the PCC’s borrowing need, essentially the longer term cash flow planning to ensure that the PCC can meet his capital spending obligations. This management of longer term cash may involve arranging long or short term loans, or using longer term cash flow surpluses. On occasion any debt previously drawn may be restructured to meet the PCC’s risk or cost objectives. CIPFA defines treasury management 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.”

1.2 Reporting requirements

The PCC is required to receive and approve, as a minimum, three main reports each year, which incorporate a variety of polices, estimates and actuals.

Prudential and treasury indicators and treasury strategy (this report) - The first, and most important report covers:

• the capital plans (including prudential indicators); • a minimum revenue provision (MRP) policy (how residual capital expenditure is charged

to revenue over time); • the treasury management strategy (how the investments and borrowings are to be

organised) including treasury indicators; and • an investment strategy (the parameters on how investments are to be managed).

A mid year treasury management report – This will update the PCC with progress on the capital position, amending prudential indicators as necessary, and will indicate whether the treasury operation is meeting the strategy or whether any policies require revision. In addition, this PCC will receive quarterly update reports.

An annual treasury report – This provides details of a selection of actual prudential and treasury indicators and actual treasury operations compared to the estimates within the strategy.

Scrutiny In normal circumstances the above reports should be adequately scrutinised before being recommended to the PCC. In future years this role could be undertaken by the Independent Audit Committee.

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1.3 Treasury Management Strategy for 2013/14

The strategy for 2013/14 covers two main areas:

Capital issues • the capital plans and the prudential indicators; • the minimum revenue provision (MRP) strategy.

Treasury management issues

• the current treasury position; • treasury indicators which limit the treasury risk and activities of the PCC; • prospects for interest rates; • the borrowing strategy; • policy on borrowing in advance of need; • debt rescheduling; • the investment strategy; • creditworthiness policy; and • policy on use of external service providers.

These elements cover the requirements of the Local Government Act 2003, the CIPFA Prudential Code, CLG MRP Guidance, the CIPFA Treasury Management Code and CLG Investment Guidance. 1.4 Training

The CIPFA Code requires the responsible officer to ensure that members with responsibility for treasury management receive adequate training in treasury management. This especially applies to members responsibe for scrutiny.

The PCC and members of the Independent Audit Committee will be provided with appropriate training if required.

The training needs of treasury management staff are reviewed periodically.

1.5 Treasury management consultants

The Office of the PCC uses Sector as its external treasury management advisors. The PCC recognises that responsibility for treasury management decisions remains with the organisation at all times and will ensure that undue reliance is not placed upon our external service providers. The PCC also recognises that there is value in employing external providers of treasury management services in order to acquire access to specialist skills and resources. The PCC will ensure that the terms of their appointment and the methods by which their value will be assessed are properly agreed and documented, and subjected to regular review.

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2 THE CAPITAL PRUDENTIAL INDICATORS 2013/14 – 2015/16 The PCC’s capital expenditure plans are the key driver of treasury management activity. The output from the capital expenditure plans are reflected in prudential indicators.

2.1 Capital expenditure and financing The PCC is asked to approve the summary capital expenditure and financing projections. Any shortfall in resources results in a funding borrowing need. This forms the first prudential indicator.

Table 1 2011/12

Actual £m

2012/13 Revised

£m

2013/14 Estimate

£m

2014/15 Estimate

£m

2015/16 Estimate

£m Capital Expenditure 12.765 25.097 23.502 16.533 10.624 Financed by: Capital receipts 7.071 8.673 5.601 6.234 5.995 Capital grants 1.767 12.117 16.621 7.559 3.999 Capital reserves Revenue Reserves 2.841 3.677 0.650 2.110 0.000 Revenue contributions 0.700 0.630 0.630 0.630 0.630 3rd party contributions 0.386 Net financing need for the year

0.000 0.000 0.000 0.000 0.000

2.2 The PCC’s borrowing need (the Capital Financing Requirement) The second prudential indicator is the PCC’s Capital Financing Requirement (CFR). The CFR is simply the total historic outstanding capital expenditure which has not yet been paid for from either revenue or capital resources. It is essentially a measure of the PCC’s underlying borrowing need. Any capital expenditure above, which has not immediately been paid for, will increase the CFR. The CFR does not increase indefinitely, as the minimum revenue provision (MRP) is a statutory annual revenue charge which broadly reduces the borrowing need in line with each assets life. The CFR includes other long term liabilities such as PFI schemes and finance leases. Whilst these increase the CFR, and therefore the borrowing requirement, these types of scheme include a borrowing facility and so the PCC is not required to separately borrow for these schemes. The PCC currently has £6.36m of such schemes within the CFR. The PCC has approved the following CFR projections.

Table 2 2011/12 Actual

£m

2012/13 Revised

£m

2013/14 Estimate

£m

2014/15 Estimate

£m

2015/16 Estimate

£m Total CFR 45.216 43.316 41.776 40.263 38.774 Movement in CFR - 2.257 - 1.901 - 1.540 - 1.513 - 1.489 Movement in CFR represented by Net financing need for the year (above)

0.000 0.000 0.000 0.000 0.000

Less MRP/VRP and other financing movements

2.095 1.901 1.540 1.513 1.489

Movement in CFR - 2.095 - 1.901 - 1.540 - 1.513 - 1.489

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2.3 Minimum revenue provision (MRP) policy statement The PCC is required to pay off an element of the accumulated capital spend each year (the CFR) and make a statutory charge to revenue for the repayment of debt, known as the minimum revenue provision (MRP). The MRP policy sets out how the PCC will pay for capital assets through revenue each year. The PCC is also allowed to make additional voluntary payments, known as a voluntary revenue provision (VRP). CLG regulations have been issued which require the PCC to approve an MRP Statement in advance of each year. A variety of options are provided, so long as there is a prudent provision. The PCC is recommended to approve the following MRP Statement:

• For capital expenditure incurred before 1 April 2008, MRP will be based on the CFR. • For capital expenditure incurred from 1 April 2008, the MRP will be based on the ‘Asset

Life Method’, whereby MRP will be based on the estimated life of the assets in accordance with the regulations.

• For finance leases, an ‘MRP equivalent’ sum will be paid off each year. 2.4 Core funds and expected investment balances Investments will be made with reference to the core balances, future cash flow requirements and the outlook for short-term interest rates (i.e. rates for investments up to 12 months). Table 3 below provides an estimate of the year end balances for each resource and anticipated day to day cash flow balances. Table 3 - Year End Resources

2011/12 Actual

£m

2012/13 Estimate

£m

2013/14 Estimate

£m

2014/15 Estimate

£m

2015/16 Estimate

£m General balances 14.298 13.941 13.582 11.333 11.217 Earmarked revenue reserves

33.895 29.248 26.733 25.757 23.412

Capital grants and reserves

23.377 15.652 3.490 0.370 0.046

Insurance provision 6.285 7.000 7.000 7.000 7.000 Total core funds 77.855 65.841 50.805 44.460 41.675 Working capital* 36.051 36.051 36.051 36.051 36.051 Less outstanding Icelandic Investment

- 3.459 - 2.496 - 2.126 - 1.756 - 1.386

Expected investments 110.447 99.396 84.730 78.755 76.340 * The working capital balance is the average difference between cash investments and core cash balances from the last 3 financial years. The actual figure will obviously vary from day to day according to circumstances. 2.5 Affordability prudential indicators The previous sections cover the overall capital expenditure and control of borrowing prudential indicators but, within this framework, prudential indicators are required to assess the affordability of the capital investment plans. These provide an indication of the impact of the capital investment plans on the PCC’s overall finances. The PCC is asked to approve the following indicators:

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2.6 Ratio of financing costs to net revenue stream. This indicator identifies the trend in the cost of capital (borrowing and other long term obligation costs net of investment income) against the net revenue stream. The estimates of financing costs include current commitments and the proposals in this budget report.

Table 4 2011/12

Actual %

2012/13 Estimate

%

2013/14 Estimate

%

2014/15 Estimate

%

2015/16 Estimate

% Ratio 0.71 0.68 0.61 0.64 0.57

2.7 Incremental impact of capital investment decisions on PCC tax. This mandatory indicator identifies the revenue costs associated with proposed changes to the four year capital programme recommended in this budget report compared to the PCC’s existing approved commitments and current plans.

Table 5 2012/13 Estimate

£

2013/14 Estimate

£

2014/15 Estimate

£

2015/16 Estimate

£ Band D council tax 4.27 10.90 6.65 6.11

This local indicator is calculated by identifying those revenue costs which appear separately in the four year revenue forecast (e.g. changes in DRF, capital financing costs and revenue consequences of investment in ICT, etc.) and then expressing the cash changes in terms of Band D council tax.

Table 6 2012/13 Estimate

£

2013/14 Estimate

£

2014/15 Estimate

£

2015/16 Estimate

£ Band D council tax 0.07 - 0.55 0.41 0.36

3 BORROWING The capital expenditure plans set out in Section 2 provide details of the service activities of the PCC. The treasury management function ensures that the PCC’s cash is organised in accordance with the the relevant professional codes so that sufficient cash is available to meet this service activity. This will involve both the organisation of the cash flow and, where capital plans require, the organisation of approporiate borrowing facilities. The strategy covers the relevant treasury / prudential indicators, the current and projected debt positions and the annual investment strategy. 3.1 Current portfolio position The PCC’s treasury portfolio position at 31 March 2012, with forward projections, is summarised below. The table shows the actual external debt (the treasury management operations), against the underlying capital borrowing need (the Capital Financing Requirement - CFR), highlighting any over or under borrowing.

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Table 7 2011/12 Actual

£m

2012/13 Estimate

£m

2013/14 Estimate

£m

2014/15 Estimate

£m

2015/16 Estimate

£m External Debt Debt at 1 April 28.568 28.568 28.568 28.568 28.568 Expected change in Debt

0 0 0 0 0

Other long-term liabilities (OLTL) at 1st April

6.912 6.742 6.559 6.360 6.145

Expected change in OLTL 0.170 0.183 0.199 0.215 0.233 Actual gross debt at 31 March

35.310 35.127 34.928 34.713 34.480

The Capital Financing Requirement

45.216 43.316 41.776 40.263 38.774

Under / (over) borrowing 9.906 8.189 6.848 5.550 4.294

Within the prudential indicators there are a number of key indicators to ensure that the PCC operates its activities within well defined limits. One of these is that the PCC needs to ensure that its gross debt does not, except in the short term, exceed the total of the CFR in the preceding year plus the estimates of any additional CFR for 2013/14 and the following two financial years. This allows some flexibility for limited early borrowing for future years, but ensures that borrowing is not undertaken for revenue purposes. The Acting Chief Finance Officer reports that the PCC has complied with this prudential indicator in the current year and does not envisage difficulties for the future. This view takes into account current commitments, existing plans, and the proposals in this budget report. 3.2 Treasury Indicators: limits to borrowing activity The operational boundary for external debt is based on ‘probable’ debt during the year and is a benchmark guide, not a limit. Actual debt could vary around this boundary for short periods during the year. It should act as a monitoring indicator to initiate timely action to ensure the statutory mandatory indicator is not breached inadvertently.

Table 8 - Operational boundary 2012/13

Estimate £m

2013/14 Estimate

£m

2014/15 Estimate

£m

2015/16 Estimate

£m Debt 28.568 28.568 28.568 28.568 Other long term liabilities 6.559 6.360 6.145 5.912 Total 35.127 34.928 34.713 34.480

The authorised limit for external debt is a key prudential indicator which provides control on the overall level of affordable borrowing. It represents a limit beyond which external debt is prohibited and needs to be set and/or revised by the PCC. It reflects the level of external debt which, whilst not necessarily desired, could be afforded in the short term, but is not sustainable in the longer term. This is the statutory limit determined under section 3 (1) of the Local Government Act 2003. The Government retains an option to control either the total of all local authority plans, or those of a specific authority (or PCC) although this power has not yet been exercised.

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The PCC has approved the following authorised limit:

Table 9 - Authorised limit 2012/13 Estimate

£m

2013/14 Estimate

£m

2014/15 Estimate

£m

2015/16 Estimate

£m Debt 38.568 38.568 38.568 38.568 Other long term liabilities 6.559 6.360 6.145 5.912 Total 45.127 44.928 44.713 44.480

3.3 Prospects for interest rates The PCC has appointed Sector as its treasury advisor and part of their service is to assist the PCC to formulate a view on interest rates. The following table gives the Sector central view.

Table 10 Bank Rate PWLB Borrowing Rates

(including certainty rate adjustment) 5 year 25 year 50 year Dec 2012 0.50 1.50 3.70 3.90 March 2013 0.50 1.50 3.80 4.00 June 2013 0.50 1.50 3.80 4.00 Sept 2013 0.50 1.60 3.80 4.00 Dec 2013 0.50 1.60 3.80 4.00 March 2014 0.50 1.70 3.90 4.10 June 2014 0.50 1.70 3.90 4.10 Sept 2014 0.50 1.80 4.00 4.20 Dec 2014 0.50 2.00 4.10 4.30 March 2015 0.75 2.20 4.30 4.50 June 2015 1.00 2.30 4.40 4.60 Sept 2015 1.25 2.50 4.60 4.80 Dec 2015 1.50 2.70 4.80 5.00 March 2016 1.75 2.90 5.00 5.20 The economic recovery in the UK since 2008 has been the worst and slowest in recent history, although the economy returned to positive growth in the third quarter of 2012. Growth prospects are weak and consumer spending, the usual driving force of recovery, is likely to remain under pressure due to consumers focusing on repayment of personal debt, inflation eroding disposable income, general malaise about the economy and employment fears. The primary drivers of the UK economy are likely to remain external. 40% of UK exports go to the Euozone so the difficulties in this area are likely to continue to hinder UK growth. The US, the main world economy, faces similar debt problems to the UK, but urgently needs to resolve the fiscal cliff now that the the Presidential elections are out of the way. The resulting US fiscal tightening and continuing Eurozone problems will depress UK growth and is likely to see the UK deficit reduction plans slip. This challenging and uncertain economic outlook has several key treasury mangement implications: • The Eurozone sovereign debt difficulties provide a clear indication of high counterparty

risk. This continues to suggest the use of higher quality counterparties for shorter time periods;

• Investment returns are likely to remain relatively low during 2013/14 and beyond; • Borrowing interest rates continue to be attractive and may remain relatively low for

some time. The timing of any borrowing will need to be monitored carefully; • There will remain a cost of carry – any borrowing undertaken that results in an increase

in investments will incur a revenue loss between borrowing costs and investment returns.

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3.4 Borrowing strategy The PCC is currently maintaining an under-borrowed position. This means that the capital borrowing need (the Capital Financing Requirement) has not been fully funded with loan debt as cash supporting the PCC’s reserves, balances and cash flow has been used as a temporary measure. This strategy is prudent as investment returns are low and counterparty risk is relatively high. Against this background and the risks within the economic forecast, caution will be adopted with the 2013/14 treasury operations. The Acting Chief Finance Officer will monitor interest rates in financial markets and adopt a pragmatic approach to changing circumstances:

• if it was felt that there was a significant risk of a sharp FALL in long and short term

rates (e.g. due to a marked increase of risks around relapse into recession or of risks of deflation), then long term borrowings will be postponed, and potential rescheduling from fixed rate funding into short term borrowing will be considered.

• if it was felt that there was a significant risk of a much sharper RISE in long and short term rates than that currently forecast, perhaps arising from a greater than expected increase in world economic activity or a sudden increase in inflation risks, then the portfolio position will be re-appraised with the likely action that fixed rate funding will be drawn whilst interest rates were still relatively cheap.

Any decisions will be reported to the PCC at the next available opportunity. For budget planning purposes we have assumed that external borrowing will equal the CFR by the end of 2017/18. Given that we are currently under-borrowed and are not planning on using external borrowing to finance the capital programme over the next four years, this planning assumption reflects and recognises the fact that the CFR will reduce naturally over the next few years, as shown in Table 2. This is due to the planned receipt and application of the annual transfers of monies from the revenue account (i.e. the Minimum Revenue Provision) that will reduce the CFR, all other things remaining equal. Treasury management limits on activity There are three debt related treasury activity limits. The purpose of these are to restrain the activity of the treasury function within certain limits, thereby managing risk and reducing the impact of any adverse movement in interest rates. However, if these are set to be too restrictive they will impair the opportunities to reduce costs / improve performance. The indicators are:

• Upper limits on variable interest rate exposure. This identifies the maximum limit for

variable interest rates for both borrowing and investments. • Upper limits on fixed interest rate exposure. This is similar to the previous indicator

and covers a maximum limit on fixed interest rates; • Maturity structure of borrowing. These gross limits are set to reduce the PCC’s

exposure to large fixed rate sums falling due for refinancing, and are required for upper and lower limits.

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The PCC has approved the following treasury indicators and limits:

Table 11 2013/14 £m

2014/15 £m

2015/16 £m

Interest rate exposures Upper Upper Upper Limits on fixed interest rates:

• Debt only • Investments only

100% 100%

100% 100%

100% 100%

Limits on variable interest rates • Debt only • Investments only

50% 100%

50% 100%

50% 100%

Maturity structure of fixed interest rate borrowing 2013/14 Lower Upper Under 12 months 0% 50% 12 months to 2 years 0% 50% 2 years to 5 years 0% 50% 5 years to 10 years 0% 50% 10 years and above 0% 100% Maturity structure of variable interest rate borrowing 2013/14 Lower Upper Under 12 months 0% 100%

12 months to 2 years 0% 100% 2 years to 5 years 0% 100% 5 years to 10 years 0% 100% 10 years and above 0% 100%

3.5 Policy on borrowing in advance of need

Since the PCC is not planning to borrow to finance its capital programme over the next four years there is no requirement currently to borrow in advance of need.

3.6 Debt rescheduling As short term borrowing rates will be considerably cheaper than longer term fixed interest rates, there may be potential opportunities to generate savings by switching from long term debt to short term debt. However, these savings will need to be considered in the light of the current treasury position and the size of the cost of debt repayment (premiums incurred). The reasons for any rescheduling to take place will include:

• the generation of cash savings and / or discounted cash flow savings; • helping to fulfil the treasury strategy; • enhance the balance of the portfolio (amend the maturity profile and/or the balance of

volatility). Any rescheduling undertaken will be reported to the PCC in the next quarterly performance update

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4 ANNUAL INVESTMENT STRATEGY 4.1 Investment policy The PCC’s investment policy has regard to the CLG’s Guidance on Local Government Investments (“the Guidance”) and the 2011 revised CIPFA Treasury Management in Public Services Code of Practice and Cross Sectoral Guidance Notes (“the CIPFA TM Code”). The PCC’s investment priorities will be security first, liquidity second and then return. In accordance with the above and in order to minimise the risk to investments, the PCC clearly stipulates the minimum acceptable credit quality of counterparties for inclusion on the lending list. The creditworthiness methodology used to create the counterparty list fully accounts for the credit ratings, watches and outlooks published by all three ratings agencies with a full understanding of what these reflect in the eyes of each agency. Using the Sector ratings service, potential counterparty ratings are monitored on a real time basis with knowledge of any changes notified electronically as the agencies notify modifications. Furthermore, the PCC’s officers recognise that ratings should not be the sole determinant of the quality of an institution and that it is important to continually assess and monitor the financial sector on both a micro and macro basis and in relation to the economic and political environments in which institutions operate. The assessment will also take account of information that reflects the opinion of the markets. To this end the PCC will engage with its advisors to maintain a monitor on market pricing such as “credit default swaps” and overlay that information on top of the credit ratings. This is fully integrated into the credit methodology provided by the advisors, Sector in producing its colour codings which show the varying degrees of suggested creditworthiness. Other information sources used will include the financial press, share price and other such information pertaining to the banking sector in order to establish the most robust scrutiny process on the suitability of potential investment counterparties. The aim of the strategy is to generate a list of highly creditworthy counterparties which will also enable diversification and thus avoidance of concentration risk. The intention of the strategy is to provide security of investment and minimisation of risk. Investment instruments identified for use in the financial year are listed in appendix 5.3 under the ‘specified’ and ‘non-specified’ investments categories. Counterparty limits will be as set through the PCC’s treasury management practices – schedules. 4.2 Creditworthiness policy The PCC applies the creditworthiness service provided by Sector. This service employs a sophisticated modelling approach utilising credit ratings from the three main credit rating agencies - Fitch, Moody’s and Standard and Poor’s. The credit ratings of counterparties are supplemented with the following overlays:

• credit watches and credit outlooks from credit rating agencies; • CDS spreads to give early warning of likely changes in credit ratings; • sovereign ratings to select counterparties from only the most creditworthy countries.

This modelling approach combines credit ratings, credit watches and credit outlooks in a weighted scoring system which is then combined with an overlay of CDS spreads for which the end product is a series of colour coded bands which indicate the relative creditworthiness of counterparties. These colour codes are used by the PCC to determine the suggested duration for investments. The PCC may therefore use counterparties within the following durational bands

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• Yellow 5 years (this will include the use of local authorities and MMF) • Purple 2 years • Blue 1 year (only applies to nationalised or semi nationalised UK Banks) • Orange 1 year • Red 6 months • Green 3 months • No colour not to be used

The Sector creditworthiness service uses a wider array of information than just primary ratings and by using a risk weighted scoring system, does not give undue preponderance to just one agency’s ratings. Typically the minimum credit ratings criteria the PCC use will be a short term rating (Fitch or equivalents) of short term rating F1, long term rating A-, viability rating of A-, and a support rating of 1 There may be occasions when the counterparty ratings from one rating agency are marginally lower than these ratings but may still be used. In these instances consideration will be given to the whole range of ratings available, or other topical market information, to support their use. All credit ratings will be monitored daily. The PCC is alerted to changes to ratings of all three agencies through its use of the Sector creditworthiness service.

• if a downgrade results in the counterparty / investment scheme no longer meeting the PCC’s minimum criteria, its further use as a new investment will be withdrawn immediately.

• in addition to the use of credit ratings the PCC will be advised of information in movements in credit default swap spreads against the iTraxx benchmark and other market data on a weekly basis. Extreme market movements may result in downgrade of an institution or removal from the PCC’s lending list.

Sole reliance will not be placed on the use of this external service. In addition this PCC will also use market data and market information, information on government support for banks and the credit ratings of that supporting government. 4.3 Country limits The Sector Colour Coded methodology provides a detailed analysis of all global banks and sovereign ratings. The use of banks from countries that have been awarded an ‘AAA sovereign rating’ provides the potential opportunity to invest in countries such as Australia and Canada, whose banks have very little exposure to the current Eurozone problems. Where and when appropriate, this will enable the PCC to diversify its investment portfolio and, therefore, improve the options and ability of the PCC to ensure the security of its assets and improve investment returns. Attached at Section 5.3 is a list of countries that currently qualify for an ‘AAA’ rating. The UK is excluded from any stipulated minimum sovereign rating requirement.

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4.4 Investment strategy Investments will be made with reference to the core balance and cash flow requirements and the outlook for short-term interest rates (i.e. rates for investments up to 12 months). Bank Rate is forecast to remain unchanged at 0.5% before starting to rise from quarter 4 of 2014. Bank Rate forecasts for financial year ends (31 March) are:

• 2012/13 0.50% • 2013/14 0.50% • 2014/15 0.75% • 2015/16 1.75%

There are downside risks to these forecasts (i.e. start of increases in Bank Rate is delayed even further) if economic growth remains weaker for longer than expected. However, should the pace of growth pick up more sharply than expected there could be upside risk, particularly if Bank of England inflation forecasts for two years ahead exceed the Bank of England’s 2% target rate. The suggested budgeted investment earnings rates for returns on investments placed for periods up to three months during each financial year for the next five years are as follows:

• 2012/13 0.50% • 2013/14 0.50% • 2014/15 0.60% • 2015/16 1.50%

Investment treasury indicator and limit - total principal funds invested for greater than 364 days. These limits are set with regard to the PCC’s liquidity requirements and to reduce the need for early sale of an investment, and are based on the availability of funds after each year-end. A limit of £10m is recommended in order to provide officers with flexibility to take advantage of time and cash limited offers from the Bank of Scotland which sometimes exceed 364 days when initially offered. The PCC is asked to approve the treasury indicator and limit: Table 12 - Maximum principal sums invested > 364 days

2013/14 2014/15 2015/16 Principal sums invested £10m £10m £10m 4.5 Icelandic bank investments In May 2008 TVP invested £5m in the Icelandic bank, Landsbanki, which subsequently went into administration in October 2008. Following a lengthy legal process the Icelandic Supreme Court has determined that local authority deposits in Lansdbanki should be treated as priority creditors. As such, the Winding up Board of Landsbanki will return our full £5m deposit, plus interest up till April 2009, albeit on a phased basis until December 2019. To date, £2.5m has been repaid. 4.6 Investment risk benchmarking The PCC has approved benchmarks for investment Security, Liquidity and Yield. These benchmarks are simple guideline targets (not limits) and so may be breached from time to time, depending on movements in interest rates and counterparty criteria. The purpose of the benchmark is that officers will monitor the current and trend position, and amend the operational strategy depending on any changes.

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The benchmarking targets for 2013/14 are set out below:

a) Security - the Authority’s maximum security risk benchmark for the current portfolio, when compared to historic default tables, is: § 0.03% historic risk of default when compared to the whole portfolio.

b) Liquidity – in respect of this area the Authority seeks to maintain:

§ Bank overdraft limit - £0.25m § Liquid short term deposits - at least £30m available with less than 1 months

notice. § ‘Weighted Average Life’ benchmark - 6 months, with a maximum of 1 year.

c) Yield – performance target is to achieve an average return:

§ above the weighted average 7 day and 12 month LIBID rates

Any breach of the indicators or limits will be reported to the Authority, with supporting reasons, in the quarterly performance monitoring reports 4.7 End of year investment report At the end of the financial year the Chief Finance Officer will report on the investment activity as part of his Annual Treasury Report.

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5 Appendices 5.1 Credit and Counterparty Risk Management

Specified and Non-Specified Investments and Limits Specified Investments

‘Specified’ investments are sterling investments of not more than one year maturity made with any institution meeting the minimum ‘high’ quality criteria where applicable Non-Specified Investments ‘Non-specified’ investments are any other type of investments. In the normal course of the PCC’s cash flow operations it is recognised that both ‘Specified’ and ‘Non-Specified’ investments may be utilised for the control of liquidity, as both categories allow for short term investments. However, the use of longer term instruments (greater than one year from inception to repayment) would fall into the non-specified investment category. Current PCC policy does not permit investments for a period greater than 12 months. Accordingly, for the foreseeable future, the PCC will aim to maintain 100% of investments in specified investments, with an absolute minimum level of 50% (to facilitate the PCC’s objective of ensuring sufficient liquidity in its investments and allowing for the possibility that the PCC’s own banker may fail to meet its basic credit criteria, in which case balances will be minimised immediately as far as is possible). The proposed criteria for (a) Specified and (b) Non-Specified investments are presented below for approval. a) Specified Investments

These investments are sterling investments of not more than one-year maturity, or those which could be for a longer period but where the PCC has the right to be repaid within 12 months if it wishes. Minimum credit

criteria / colour band

Maximum investment per institution

Maximum maturity period

DMADF – UK Government

N/A No limit 6 months

Money Market Funds AAA by at least 2 rating agencies and minimum asset base of £500m

£25m or 1% of total asset base whichever is the lower figure

Liquid (instant access)

Local authorities N/A £10m 5 years

Term deposits with banks and building societies

Yellow Purple Blue Orange Red Green

See above for MMF and LAs £30m £40m £30m £20m £15m

Up to 5 years Up to 2 years Up to 1 year Up to 1 year Up to 6 months Up to 3 months

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b) Non-Specified Investments Non-specified investments are any other type of investment (i.e. not defined as ‘specified’ above). The identification and rationale supporting the selection of these other investments, and the maximum limits to be applied, are set out below. Non-specified investments would include any sterling investments with:

Minimum credit

criteria / colour band

Maximum investment per institution

Maximum maturity period

The PCC’s own banker if it fails to meet the basic credit criteria. In this instance balances will be minimised as far as is possible.

Minimal

Local authorities N/A £10m 5 years

Term deposits with banks and building societies

Yellow Purple

See above for LAs £30m

Up to 5 years Up to 2 years

Counterparty Selection Criteria

The Chief Finance Officer will maintain a counterparty list in compliance with the PCC’s approved criteria and will revise the criteria and submit them to the PCC for approval as and when necessary. These criteria are separate to those which govern ‘Specified’ and ‘Non-Specified’ investments, as they determine which individual counterparties the PCC will use, rather than defining what permissible type, or category, of investment the counterparty and investment falls within. There is a clear operational difficulty arising from the recent banking crisis. Investment returns are historically low and it could be several years before they return to ‘normal’ levels. In addition, there is still significant turmoil and uncertainty in the financial markets which means that further bank defaults cannot be ruled out entirely. This makes the selection of appropriate counterparties even more important. The Chief Finance officer will therefore retain flexibility to temporarily restrict the counterparties to which money may be lent depending upon the economic situation at the time, e.g. when banks are on negative rating watch

Monitoring of Investment Counterparties

The credit rating of counterparties will be monitored regularly. Credit rating information is supplied by our treasury consultants, Sector, on all active counterparties that comply with the Authority’s selection criteria. The Office of the PCC receives credit rating advice on a daily basis as and when ratings change, and counterparties are checked promptly.

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5.2 Approved Countries for investments AAA

• Australia • Canada • Denmark • Finland • Germany • Luxembourg • Netherlands • Norway • Singapore • Sweden • Switzerland • U.K.

Office of the Police and Crime Commissioner

The Farmhouse,

Force Headquarters

Oxford Road,

Kidlington,

Oxon,

OX5 2NX.

Tel: 01865 846780

Email: [email protected]

Web: www.thamesvalley-pcc.gov.uk

© 2013 Thames Valley PCC. (CI4600).

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