This section contains policy relating to Council's investments and liability management (borrowings and cash management) activities - generally referred to as 'treasury operations'. The policy has been prepared to:

• meet the requirements of the Local Government Act 2002

• set out best practice procedures for Council's treasury operations

1 Objectives

The main objectives of the Treasury Policies are as follows:

• Prudence: Ensuring decisions are made by people with appropriate skills and levels of responsibility and with full consideration of all information

• Flexibility: To take advantage of the full flexibility offered by the legislation and provide principles and limits giving those responsible the opportunity to select the most appropriate options

• Minimisation of Risk: To minimise exposure to wide market variations and credit risk

• Liquidity Management: Council must be able to meet its obligations as they fall due

• Intergenerational Equity: Matches the costs of a project against the benefits

• Cost Minimisation: To minimise the cost to Council

In meeting these objectives, Council has adopted certain positions which will apply to all treasury management. They reflect Council's prudent and cautious stance in relation to these practices. The 'axioms' for treasury management are:

• Council is not a commercial entity, it seeks to avoid risk

• it will not involve itself in speculative activities

• treasury operations are service based with no motivation for trading or profit generally

• all Council activities should bear the cost and share the rewards of treasury operations in an equitable manner

2 Operating Policies

As required by legislation, treasury policies are set to separately cover borrowing and investment.

2.1 Liability Management Policy

2.1.1 Interest Rate Exposure on Borrowings

(a) The total amount of debt should, insofar as possible and practical, be spread evenly across the range of possible maturities. The relevant financial parameter set for this is that no more than 30 percent of total term debt should be scheduled for repayment in any one financial year.

(b) Council will seek to minimise the costs of borrowing in respect of any particular transaction by making appropriate inquiries about currently available cost structures and selecting the option with the lowest total costs.

With existing borrowing, Council will review currently available total costs of borrowing to see if significant savings are possible. Any refinancing of debt must comply with all borrowing management policies.

(c) A passive approach will be taken to borrowing.

Attempts to identify advantageous interest rate trends and committing the borrowing programme to forecasted rates will be avoided. Trading and or speculative operations will be avoided, reliance being placed on risk management within available market strategies.

(d) When it is appropriate to do so, borrowing exposures may be hedged. Before resolving to hedge an exposure, or to delegate the authority to hedge a transaction or a specific series of linked transactions, Council must:

- obtain specific advice from expert advisers independent from those who are recommending the transaction

- be satisfied that the risk to the Council of not proceeding with the hedge is greater than the existing transaction without the hedge

- be satisfied that the reduction in risk is sufficient to justify the cost of the hedging instrument

2.1.2 Liquidity Policy

Council will ensure that it has at all times, sufficient liquid funds available to meet all of its obligations as they fall due. Sources of such funds are to include cash deposits, committed but undrawn lines of credit (provided these are used as required where they are subject to any restriction of use) and short-term lending of an appropriate and properly approved nature.

Pursuant to Part 6, Subpart 3 of the Local Government Act 2002, Council may borrow funds on a short-term basis to provide for efficient and effective cash management. Such borrowing shall be used only for the purpose of meeting temporary shortfalls in available liquid funds and will not be used as a permanent source of funds.

Council may delegate responsibility for establishing short-term debt and/or overdraft facilities and the day to day management of these facilities to the Chief Executive. The levels of exposure that may be established in any year must be set within the Long Term Council Community Plan or Annual Plan process for that period having regard to the financing plans and requirements of the planning period.

The specific (liquidity) ratios set for compliance with this policy is a current asset to current liabilities ratio (the quick asset ratio) of 1.5:1.

2.1.3 Credit Exposure Policy

Council will, by appropriate investigation, satisfy itself in all borrowing transaction, that counter-parties:

• are financially adequate

• have appropriate industry experience and standing

• have an appropriate track record in the transactions to be undertaken

• will provide, in sufficient degree, reasonable certainty that obligations under proposed contracts will be performed

2.1.4 Debt Repayment Policy

Loan terms for any borrowing transactions shall be established to ensure that the overall borrowings are consistent with an even spread of debt maturities.

Costs of refinancing will be considered along with the benefits arising from the setting of debt maturities.

In considering debt maturity terms, the use of sinking funds or loan repayment reserves may be used and, if so, must provide sufficient funds to enable repayment of the borrowings at the projected completion of the loan.

2.1.5 Borrowing Limits Policy

Net debt⁸ must not exceed more than half the total of normal annual operating income on a recurrent and sustainable basis (ie. Income to Debt Ratio of 2:1).

Total Council debt, excluding third party funded Council-sponsored schemes, should be maintained so that a minimum of 65 percent of all such debt is fully-performing⁹.

2.1.6 Policy on Provision of Security

Council will, in general, secure its borrowings against its rates revenue.

There must, however, be recognition of existing charges against specific assets. These may be retained during the life of the investments to which they relate. Further charges against specific assets, may, subject to the provisions of the Local Government Act, be considered by Council if such would provide more advantageous borrowing terms. Such charges must be subject to Council resolution. The Council will carefully assess its future plans before giving security or any priority to lenders over any of the specific or general securities available to it.

Borrowing by way of hire purchase is not approved.

2.1.7 Policy of Giving Loan Guarantees

Council may act as guarantor to bank loans for an incorporated organisation, which will provide, improve or develop assets or amenities for the benefit of the District or communities within the District.

The organisation for which the loan guarantee is to be provided shall be a properly registered incorporated society.

The total combined amount Council may guarantee at any one time shall not exceed ten percent of the total rates levied in any year.

Each organisation for which Council has provided a loan guarantee shall provide:

• a six monthly unaudited financial report within three months of the first six months of the financial year

• an annual audited financial report within four months of the balance date of the organisation

• the bank lending the money to the organisation shall be required to provide to the Council a financial statement each year showing the payments made during the year and the principal balance outstanding at the end of that year together with details of any accrued or outstanding charges

It is hereby noted that, as is required by law, Council is not permitted to provide security by way of guarantee for any Local Authority Trading Enterprise, which it controls.

2.1.8 Internal Borrowing

Council may advance reserve funds between different activities as an alternative to seeking external funding where such funds have been created by Council operations. Full records shall be maintained of the amounts so advanced and the finance charges to be made between the borrowing and lending sections of Council's operations.

Determination of an appropriate rate of interest for these transactions shall be based on a review of the ruling market rates for borrowing and deposit at six monthly intervals. The rate to be adopted shall be at the mid-point between such rates to achieve an equitable position for both the borrowing and the lending activity.

3 Investment Policy

3.1 Default on Credit Risks

(a) The risk of default in respect of any individual investment will be minimised by the selection of quality investments. For the purposes of this policy, this means that investments will generally only be made in the senior debt of issuers that are rated 'A' or better by Standard and Poors or Moodys. An approved officer of Council, having regard to the risk of default in determining whether to make any investment, may make other investments with the delegated authority of Council. In considering such investment, consideration shall also be given to the security that may be offered for the investment by the counter-party and the availability of recovery from that security.

(b) Council may, in its discretion, depart from this policy where it considers that the departure would advance its broader social or other policy objectives. Such departure must be by resolution of the Council, noting that the proposed advance departs from Council's Investment Policy and the reasons justifying that departure.

3.2 Expected Return

Within the constraints of the different types of investment risk scheduled later in this policy, the expected return on all funds invested should be commensurate with the risk involved, according to the following rules:

• If a potential investment carried a greater risk than is consistent with Council's risk then an investment will not be made, irrespective of the expected returns

• Where there are two investments of equivalent risk, within the Council's risk constraints, the investment with the higher expected return shall be accepted

• If there are two investments of different risks, but both are within the Council's risk constraints, an assessment will be made of the trade-off between the risks and expected returns of the two options. The investment that is considered to be the most attractive for Council, having regard to prudence, the risks and the expected returns, will be selected

3.3 Liquidity

Council's portfolio shall be arranged to provide sufficient funds for planned expenditures and to otherwise allow the payment of obligations as they fall due. Individual investments shall be chosen with regard to:

• the period of time for which the funds will be surplus to requirements

• maturity term of the investment

• ability and the cost to liquidate the investment before its maturity

• extent to which the portfolio already provides funds as required

• market conditions

• the use of fund accounting and the nomination of separate reserve funds will only be approved if the reasons given are sufficient to warrant the additional costs of such separate accounting

• the current ratio will be maintained at or about the 1.5:1 level

3.4 Portfolio Diversification

(a) Classes of Investment

The following will be classes of investments for the purpose of this investment policy:

- Risk-free and near risk-free investment: securities issued or guaranteed by the New Zealand Government and local authority stock secured by rates

- Low-risk investments: the senior debt of issuers with ratings equivalent to a Standard and Poors rating of 'A' or better

(b) Investment by Class

Limits on investment in any of the above classes of investment shall be as follows.

- Near risk-free to risk-free investments: in any one class, up to 100 percent of the total assets available for investment.

- Low-risk investments: up to 40 percent of the total assets available for investment.

- Medium to high-risk investments: nil exposure, subject to specific Council authorisation.

(c) Limits on any one investment shall be as follows.

- Risk-free investments: up to 100 percent of the total assets available for investment.

- Near-risk-free investments: no more than 75 percent of the total assets available for investment.

- Low-risk investments: no more than 40 percent of the total assets available for investment. Provided that the amount invested with Council's banker, may from time to time, exceed this ratio for up to 60 days.

- Medium to high-risk investments: nil exposure, subject to Council's direction.

3.5 Disposition of Revenue and Proceeds

Returns from investments, after deduction of relevant expenses, will be applied according to the following priority:

1 in accordance with the terms of the disposition that originally provided the funds for the investment, or which established the fund from which the funds came, if any

2 in accordance with any resolution of Council

3 to Council's general operating revenues.

3.6 Management and Reporting

The Chief Executive shall have delegated authority to negotiate and authorise any investment transaction within the approved policy, except for any advances made under Investment Policy 3.1(b) which requires specific Council approval.

The Chief Executive shall have delegated authority to manage all Council investments. With regard to reporting to Council, all quarterly and annual financial reports are to disclose the total of investments separately within the statement of financial position, and also separate out within that total any investments which are in arrears.

3.7 Application of Policies to New and Existing Investments

Council's existing investments will be reviewed to determine whether, as a whole, they comply with this investment policy. As far as is possible, existing investments will be altered to ensure that:

• they comply with this investment policy, or

• where adjustment to comply with the policy is not possible, Council has by resolution entered into the investment with clear knowledge of the reasons for the investment, and having due consideration of the divergence of the form and substance of the investment from the policy.

Any future investment will be made only if, after adoption of this policy, they comply with this investment policy.

3.8 Internal Advances

Council may advance reserve funds between different activities as an alternative to seeking external funding where such funds have been created by Council operations. Full records shall be maintained of the amounts advanced and the finance charges to be made between the borrowing and lending sections of the Council's operations.

Determination of an appropriate rate of interest for these transactions shall be based on a review of the ruling market rates for borrowing and deposit at six monthly intervals. The rate to be adopted shall be at the mid-point between such rates to achieve an equitable position for both the borrowing and the lending activity.

4 Other Statements of Policy

4.1 Foreign Exchange Dealing

Foreign exchange dealing will be confined to minor transactions not involving borrowing and/or incidental trading arrangements.