HuttCity_TeAwaKairangi_BLACK_AGENDA_COVER

 

 

Audit and Risk Subcommittee

 

 

9 June 2020

 

 

 

Order Paper for the meeting to be held in the

Council Chambers, 2nd Floor, 30 Laings Road, Lower Hutt,

on:

 

 

 

 

 

Tuesday 16 June 2020 commencing at 2.00pm

 

 

 

 

Membership

 

 

(Vacant) (Chair)

Mayor C Barry (Deputy Chair)

Cr D Bassett

Cr J Briggs

Cr C Milne

Cr A Mitchell

Cr N Shaw

 

 

 

 

 

For the dates and times of Council Meetings please visit www.huttcity.govt.nz

 

 

Have your say

You can speak under public comment to items on the agenda to the Mayor and Councillors at this meeting. Please let us know by noon the working day before the meeting. You can do this by emailing DemocraticServicesTeam@huttcity.govt.nz or calling the Democratic Services Team on 04 570 6666 | 0800 HUTT CITY


HuttCity_TeAwaKairangi_SCREEN_MEDRES

AUDIT AND RISK SUBCOMMITTEE
Membership:	Independent Chair and 6 Members
	Audit and Risk Subcommittee members should be appointed so that the subcommittee has a diversity of governance skills, experiences and personal qualities. Between them, the members should bring a mix of the following attributes:
1.	Broad governance experience;
2.	Familiarity with risk management disciplines;
3.	Understanding of internal control and assurance frameworks;
4.	 An understanding of financial and non-financial performance reporting;
5.	A good understanding of the roles of internal and external audit; and
6.	A sound understanding of the local government sector.
Use of the matrix below has assisted other councils to consider the best fit for membership of an Audit and Risk Committee.
Quorum:	Half of the members
Meeting Cycle:	Quarterly or as required
Reports to:	Council

 

 

PURPOSE

To provide objective advice and recommendations around the sufficiency, quality and results of assurance over the Council Group’s financial management practices, risk management, internal control systems and governance frameworks.

 

Consider and make recommendations to Council:

The effectiveness and robustness of the internal audit, risk management and internal control systems, processes and practices of the Council for each financial year:

        Review and approve the internal audit coverage and annual work plans, ensuring these plans are based on the Council’s risk profile

        Review the adequacy of management’s implementation of internal audit recommendations

        Review the internal audit charter to ensure appropriate organisational structures, authority, access, independence, resourcing and reporting arrangements are in place

        Review whether management has in place a current, comprehensive and effective risk management framework and associated procedures for identifying, assessing and responding to the Council’s significant risks, potential opportunities and adverse effects in accordance with its risk approach

        Monitor whether appropriate action is being taken by management to respond to the Council’s significant risks, potential opportunities and adverse effects

        Review whether management has taken steps to embed a culture that is committed to probity and ethical behaviour

        Review whether management has established and maintains a sound internal control system, policies and procedures so that activities are effectively controlled and carried out as planned towards the achievement of the Council’s objectives and safeguard the Council’s financial and non-financial assets

        Review whether there are appropriate systems, processes and controls in place to prevent, detect and effectively respond to fraud

The integrity and appropriateness of internal and external reporting and accountability requirements:

        Consider the processes for ensuring the completeness, reliability and quality of financial and operational information being provided to the Council, including information provided by Council Controlled Organisations and Council Controlled Trading Organisations 

        Seek advice periodically from internal and external auditors regarding the completeness and quality of financial and operational information that is provided to the Council

        Review the appropriateness of the Council’s existing accounting policies, judgements, treatments and principles and any proposed change

        Enquire of internal and external auditors any information that affects the quality and clarity of the Council’s financial statements and statements of service performance, and assess whether appropriate action has been taken by management in response

        Satisfy itself that the financial statements and statements of service performance are supported by appropriate management signoff on the statements and on the adequacy of the systems of internal control

        Confirm that processes are in place to ensure that financial and non-financial information included in the Council’s Annual Report and Long Term Plan is consistent with the audited financial statements

Oversight of external auditor engagement and outputs:

        At the start of each audit, confirm the terms of engagement, including the nature and scope of the audit, timetable and fees, with the external auditor

        Receive the external auditor’s management letters and monitor action to be taken by management on audit recommendations raised

        Conduct a members’ only session (ie, without any management present) with external auditors to discuss any matters that the auditors wish to bring to the Subcommittee’s attention and/or any issues of independence

Review the effectiveness of systems for monitoring the Council’s compliance with laws, regulations, standards, Council policies, plans, code of conduct and good practice guidelines as appropriate.

 

Matrix of Experience, Skills and Personal Qualities

Experience, Skills and Personal Qualities

Member A

Member B

Member C

Member D

Independent Chairperson

The recommended combination of experience is:

·           financial reporting

 

 

 

 

 

·           broad governance experience

 

 

 

 

 

·           familiarity with risk management disciplines

 

 

 

 

 

·           understanding of internal control and assurance frameworks

 

 

 

 

 

·           good understanding of the roles of internal and external audit

 

 

 

 

 

·           local government expertise

 

 

 

 

 

For an “advisory-oriented” audit committee, particular emphasis should be placed on:

·           Strategy

 

 

 

 

 

·           Performance management

 

 

 

 

 

·           Risk management disciplines

 

 

 

 

 

In determining the composition of the audit committee, the combined experience, skills, and personal qualities of audit committee members is critical. Members should bring:

·           the ability to act independently and objectively

 

 

 

 

 

·           the ability to ask relevant and pertinent questions, and evaluate the answers

 

 

 

 

 

·           the ability to work constructively with management to achieve improvements

 

 

 

 

 

·           an appreciation of the public entity’s culture and values, and a determination to uphold these

 

 

 

 

 

·           a proactive approach to advising the governing body and chief executive of matters that require further attention

 

 

 

 

 

·           business acumen

 

 

 

 

 

·           appropriate diligence, time, effort, and commitment

 

 

 

 

 

·           the ability to explain technical matters in their field to other members of the audit committee

 

 

 

 

 

 

 

    


HUTT CITY COUNCIL

 

Audit and Risk Subcommittee

 

Meeting to be held in the Council Chambers, 2nd Floor, 30 Laings Road, Lower Hutt on

 Tuesday 16 June 2020 commencing at 2.00pm.

 

ORDER PAPER

 

Public Business

 

1.       APOLOGIES 

2.       PUBLIC COMMENT

Generally up to 30 minutes is set aside for public comment (three minutes per speaker on items appearing on the agenda). Speakers may be asked questions on the matters they raise.       

3.       CONFLICT OF INTEREST DECLARATIONS

Members are reminded of the need to be vigilant to stand aside from decision making when a conflict arises between their role as a member and any private or other external interest they might have.

4.       Minutes

Meeting minutes Audit and Risk Subcommittee, 12 March 2020                       11

5.       Recommendations to Council

a)      28 July 2020

i)       Treasury Risk Management Policy review and update (20/9)

Report No. ARSC2020/4/114 by the Treasury Officer                             16

Chair’s Recommendation:

That the recommendation contained within the report be endorsed.

 

b)      30 June 2020

i)       Review of Agreement to Lease Events Centre and Develop a Hotel (20/427)

Report No. ARSC2020/4/115 by the Head of City Growth                     83

Chair’s Recommendation:

That the recommendations contained within the report be endorsed.

  6.       Tax Risk Governance Framework Update (19/492)

Report No. FPC2019/2/51 by the Financial Accounting Manager                 122

Chair’s Recommendation:

That the recommendations contained within the report be endorsed.

7.       Seismic Performance Register (20/175)

Report No. ARSC2020/2/69 by the Senior Advisor to the Chief Executive   145

Chair’s Recommendation:

That the recommendation contained within the report be endorsed.

8.       Information Item

Audit and Risk Subcommittee Work Programme 2020 (20/198)

Report No. ARSC2020/2/33 by the Committee Advisor                                 154

Chair’s Recommendation:

That the work programme be noted and received.

9.       QUESTIONS

With reference to section 32 of Standing Orders, before putting a question a member shall endeavour to obtain the information. Questions shall be concise and in writing and handed to the Chair prior to the commencement of the meeting.   

10.     EXCLUSION OF THE PUBLIC

CHAIR'S RECOMMENDATION:

 

“That the public be excluded from the following parts of the proceedings of this meeting, namely:

11.     Further Information on Agreement to Lease Events Centre and Develop a Hotel (20/432)

The general subject of each matter to be considered while the public is excluded, the reason for passing this resolution in relation to each matter, and the specific grounds under section 48(1) of the Local Government Official Information and Meetings Act 1987 for the passing of this resolution are as follows:

 

(A)

(B)

(C)

 

 

 

General subject of the matter to be considered.

Reason for passing this resolution in relation to each matter.

Ground under section 48(1) for the passing of this resolution.

 

 

 

 

 

 

Further Information on Agreement to Lease Events Centre and Develop a Hotel.

The withholding of the information is necessary to enable the local authority to carry out, without prejudice or disadvantage, commercial activities (s7(2)(h)).

The withholding of the information is necessary to enable the local authority to carry on, without prejudice or disadvantage, negotiations (including commercial and industrial negotiations) (s7(2)(i)).

That the public conduct of the relevant part of the proceedings of the meeting would be likely to result in the disclosure of information for which good reason for withholding exist.

 

This resolution is made in reliance on section 48(1) of the Local Government Official Information and Meetings Act 1987 and the particular interest or interests protected by section 6 or 7 of that Act which would be prejudiced by the holding of the whole or the relevant part of the proceedings of the meeting in public are as specified in Column (B) above.”

 

Toi Lealofi

COMMITTEE ADVISOR

 

            


                                                                      15                                              12 March 2020

HUTT CITY COUNCIL

 

Audit and Risk Subcommittee

 

Minutes of a meeting held in the Council Chambers, 2nd Floor, 30 Laings Road,
Lower Hutt on

 Thursday 12 March 2020 commencing at 2.00pm

 

 

PRESENT:

Mayor C Barry (Chair)

 

 

Cr D Bassett (from 2.03pm)

Cr J Briggs

 

Cr C Milne

Cr A Mitchell

 

Cr N Shaw

 

 

APOLOGIES:                  There were no apologies.

 

IN ATTENDANCE:       Mr L Allott, Chief Information Officer

Ms H Oram, Acting General Manager, City Transformation 

Ms J Livschitz, Chief Financial Officer

Ms E Davids, Risk and Assurance Manager (part meeting)

Ms C Ellis, Senior Advisor to the Chief Executive (part meeting)

Mr M Sherwood, Head of Parks and Recreation (part meeting)

Ms K Stannard, Head of Democratic Services

Ms T Lealofi, Committee Advisor 

 

 

PUBLIC BUSINESS

 

         

1.       APOLOGIES

          There were no apologies.

2.       PUBLIC COMMENT

There was no public comment.    

3.       CONFLICT OF INTEREST DECLARATIONS

There were no conflict of interest declarations.         

          Cr Bassett joined the meeting at 2.03pm.

4.

Insurance Renewal Update (19/1425)

Report No. ARSC2020/2/64 by the Financial Accounting Manager

 

Mr Tony Owen and Mr Brett O’Malley from AON New Zealand elaborated on insurance programme for policies and the remaining policies due for renewal on 1 May 2020.

 

In response to questions from members, Mr O’Malley and Mr Owen advised that they were confident that the AON team in London had an excellent relationship with the insurers.   They would ensure the team would get the best message across to them.  They acknowledged there would be an increase in premiums.  They expressed concern with the underground assets that had received a lot of media attention later.  They assured members would make it clear that the renewals and upgrades for Lower Hutt city were separate networks from Wellington city.

 

Resolved: (Mayor Barry/Cr Milne)                                     Minute No. ARSC 20201                                

“That the Subcommittee:

(i)    notes that Council has successfully renewed its insurance programme for policies commencing 1 October 2019 and 1 November 2019 for a 12 month term; and

(ii)   notes the remaining policies, due for renewal on 1 May 2020, will be negotiated post March 2020 visit to London by Council’s insurance advisors Aon and Mark de Haast (from Kapiti Coast District Council) representing the Outer Wellington Shared Service Insurance Group and the Wellington Councils Insurance Group.”   

 

5.

Audit New Zealand Final Management Report for the Year ended 30 June 2019 (19/1399)

Report No. ARSC2020/2/65 by the Financial Accounting Manager

 

The Chief Financial Officer elaborated on the report.  She highlighted the recent audits currently underway.  She noted that the Auditors had not picked up any new issues with the interim audit.  She also noted that the audit of the Long Term Plan amendment was on track to receive clearance from the Auditors.

The Chief Financial Officer elaborated on the Rating Information Database as well as processes relating to data maintenance.

In response to questions from members, the Chief Financial Officer advised the Auditors were auditing the Consultation Document to ensure it was fit for purpose.  She also advised that the targeted rates such as water supply, wastewater and recycling fixed charges of $1,000 per property had not been charged against 280 properties. She noted that this had impacted on other ratepayers who had to cover the cost.  She highlighted that officers were working on improving the system to ensure it would not occur again.  She stated that the review of the Procurement Policy was underway.

In response to a question from a member, the Chief Financial Officer advised that the Statements of Intent for Seaview Marina Ltd (SML), Urban Plus Ltd (UPL) and Hutt City Community Facilities Trust (CFT) had been delivered to the Policy, Finance and Strategy Committee on time.  She highlighted that officers were working very carefully with SML, UPL and CFT to ensure they met the June deadline.   

 

Resolved: (Mayor Barry/Cr Briggs)                                    Minute No. ARSC 20202

“That the Subcommittee notes Audit New Zealand’s management report for the year ended
30 June 2019, attached as Appendix 1 to the report.”

 

6.

Risk and Assurance Update and Strategic Risk Profile (20/18)

Report No. ARSC2020/2/66 by the Risk and Assurance Manager

 

The Risk and Assurance Manager elaborated on the report.

In response to a question from a member, the Risk and Assurance Manager advised that the salary payment made to an external perpetrator was human error.  She highlighted that the relevant team received additional training and the system had been changed.

In response to a question from a member, the Risk and Assurance Manager advised that in relation to Covid-19, there was a pandemic plan in place.  She highlighted the establishment of a crisis team that was monitoring as matters as they developed.  She also highlighted that the Corporate Leadership Team had been apprised of the potential situation.

The Chair advised that the Chief Executive would be updating Council on Covid-19 at its meeting to be held on 18 March 2020.

Cr Milne suggested an additional part (iii) to the motion with the agreement of the mover and seconder.

 

Resolved: (Mayor Barry/Cr Briggs)                                    Minute No. ARSC 20203

“That the Subcommittee:

(i)    notes the information in the report;

(ii)   notes the Strategic Risk Profile 2019/20 as approved by the Corporate Leadership Team, attached as Appendix 1 to the report; and

(iii) requests that Council be briefed at the next Council meeting on all aspects of business continuity relating to a potential pandemic.”

For the reason that risk reporting provides the Subcommittee with information to support its governance role. Periodic reporting is stipulated in the internal audit charter and the internal audit functional reporting line to the Audit and Risk Subcommittee supports its authority, objectivity and independence.

 

7.

Seismic Performance Register (20/175)

Report No. ARSC2020/2/69 by the Senior Advisor to the Chief Executive

 

The Senior Advisor to the Chief Executive elaborated on the report.

In response to a question from a member, the Head of Parks and Recreation advised that the Fraser Park building had not undergone a recent engineering assessment.  He noted the previous engineering assessment had the building at a low category.  He also noted that the building was closed to the public.  Cr Shaw expressed concern that she had witnessed members of the public sitting up in the grandstand.

In response to a question from a member, the Senior Advisor to the Chief Executive advised that officers were working to an Operational Management Policy that would assist them to decide when assessments were completed.  

 

In response to a question from a member, the Senior Advisor to the Chief Executive advised that she would report back to members on the Walter Nash corridor.

 

In response to a question from a member, the Senior Advisor to the Chief Executive advised that she would attach the Operational Management Policy to her report for the members information.

 

Resolved: (Mayor Barry/Cr Briggs)                                    Minute No. ARSC 20204

“That the Subcommittee notes and receives the report.”

8.       Information Item

Audit and Risk Subcommittee Work Programme 2020 (20/198)

Report No. ARSC2020/2/33 by the Head of Democratic Services

Resolved(Mayor Barry/Cr Bassett)                        Minute No. ARSC 20205

“That the programme be noted and received.”

9.       QUESTIONS   

There were no questions.

There being no further business the Chair declared the meeting closed at 2.49 pm.

 

                                                                                                                                    `

 

C Barry

MAYOR

CONFIRMED as a true and correct record

Dated this 24th day of March 2020

  


                                                                                      22                                                            16 June 2020

Audit and Risk Subcommittee

20 May 2020

 

 

 

File: (20/9)

 

 

 

 

Report no: ARSC2020/4/114

 

Treasury Risk Management Policy review and update

 

Purpose of Report

1.    The purpose of the report is to approve changes to the Treasury Risk Management Policy (incorporating Liability Management and Investment Policies) resulting from officers triennial review of the policy.

Recommendations

That the Subcommittee recommends that Council approves the updated Treasury Risk Management Policy, attached as Appendix 2 to the report.

 

Acronyms used

AP- Annual Plan

LTP – Long Term Plan

Background

2.    The current Treasury Risk Management Policy was approved by Council in July 2017 (refer Appendix 1 attached to the report).  This followed a comprehensive rewrite and consolidation of the previous Treasury, Liability Management and Investment Policies.

3.    It is a requirement of the Treasury Risk Management Policy that the policy is formally reviewed on a triennial basis to ensure the policy continues to reflect best practice and prevailing debt capital and investment market requirements.

4.    Changes to the policy require Council approval.  The Audit and Risk Subcommittee is requested to review the policy and then make a recommendation to Council.

5.    Projected debt: At the time of adopting the draft Annual Plan 2020/21 (refer Council report 7 May 2020, HCC2020/3/98) debt was projected to increase to approximately $407M in 2030/31. This projected level of debt is significantly higher ($179M) than the peak projected in the LTP 2018-2028 (refer graph 1). The financial strategy will be reviewed as part of the development of the LTP 2021-2031. Dependent on investment decisions around priorities, it is expected that the debt to revenue ratio limit will be revised to higher level (refer Graph 2).

 

Graph 1: Projected net debt

 

Graph 2: Projected net debt to revenue ratio

Discussion

6.    PricewaterhouseCoopers (PwC) are Council’s appointed Treasury Advisors and supported the last review of the policy in 2017.  PwC has assisted with this latest triennial review of the policy.  PwC will be in attendance at the Subcommittee meeting to support the review of the policy.

7.    Whilst this triennial review is aiming to make improvements and updates to the policy, it is also aiming to future proof the policy and ensure it is fit-for-purpose for the anticipated increasing debt levels.

8.    In summary, the key changes following the review of the policy include:

a)   Additional content relating to interactions with Council Controlled Organisations (CCO’s);

b)   An update of the interest rate risk control limits to enable hedging decisions to have a greater degree of flexibility and decrease risk by avoiding a mechanical reaction to policy in an environment where interest rate range has moved structurally lower;

c)   An update to the liquidity/funding risk control limits to enable a wider time frame to be taken into consideration and enable Council the flexibility to manage the funding profile through the spreading and smoothing of debt maturities over the longer term;

d)   An increase of the loan guarantee limit from $1.2M to $2M to enable the Council to act as guarantor for organisations and clubs, such as the recent approval in principal for Hutt Valley Gym Sports $0.5M loan guarantee.

e)   Updates to reflect the new committee structure; and

f)    The removal of procedural aspects of the policy which are more suited to an operational manual that will support and sit alongside the policy.

 

9.    Table 1 that follows provides information on the key changes to the policy.  The full detailed policy is attached as Appendix 2.

Table 1: Summary of significant changes to the policy

Section

Nature of changes

Commentary

1.1: Policy purpose

Add clarity that the policy includes those activities of Council Controlled Organisations (CCO’s).

To ensure consistent application of the policy across the Council Group.

 

2: Scope and objectives

Addition of reference to the Financial Delegation Policy and inclusion of those activities of CCO’s.

To align cross references in both policies.

To capture activities of CCO’s.

3. Governance and management responsibilities

Updates to reflect new committee  structure

 Removal of individual duties and responsibilities.

To allow for new committee structures and reporting lines.

As these are procedural, better suited in the Treasury Procedures document and not Policy.

 

3.10: Delegation of authority and authority limits

Minor wording changes along with changes to Delegated Authorities and Limits.

To streamline the delegated authority once Council has approved external borrowings as part of the AP/LTP, daily transaction limits for the CEO and CFO increased to reflect higher future borrowing requirements.

4.2: Borrowing limits

Net External debt borrowing limits.

A change to this section was to be proposed, but as the LTP Amendment has been deferred due to COVID-19 it will now be included in the next LTP.

4.7: Guarantees/ contingent liabilities

Additional paragraph and a change to the $ amount for Guarantees.

Prohibiting CCO’s from providing guarantees to third parties.

Additional wording to expand upon Section 62 of the Local Government Act 2002 in relation to CCO’s. 

Add clarity for CCOs.

An increase to the Guarantee amount to reflect a recent decision by Council to approve in principle a loan guarantee of $0.5M for Hutt Valley Gym Sports (part of the Draft Annual Plan 2020/21) together with creating capacity to enable further guarantees to be provided in the future.

4.8: Internal borrowing

Simplified wording.

To reflect actual current practices given borrowing is completed on a Group basis.

4.10: On-lending to CCO’s

Additional policy section.

To allow for changes to founding documents and lending mechanisms in 2020 by LGFA, namely the ability for CCO’s to borrow directly from LGFA.

5.5.2: LGFA investment

Additional wording.

Expanded to capture all aspects of permitted investment with LGFA as a guaranteeing member.

6.1.2: Interest rate risk control limits

Wording additions, basis of calculation, and changes to “minimum fixed” policy parameters.

This policy framework will allow for more exposure to floating rates while not causing long term hedging decisions to be enforced by narrower policy parameters.

A fundamental shift in inflation and inflation driven monetary policy since the GFC has led to lower volatility and structurally lower interest rates.

Council will retain the ability to make long term hedging decisions with a greater degree of flexibility and decrease risk by avoiding a mechanical reaction to policy (more acute with a 50% minimum) in an environment where the interest rate range has moved structurally lower.

6.1.3: Approved financial instruments

Addition of committed standby facilities and deferred settlement debt contracts with LGFA.

New instruments available, or likely to be offered by LGFA prior to the next Policy review.

6.2.2: Liquidity/funding risk control limits

Adjustment to period and minimum %.

Since inception LGFA has supported the local government sector with longer term funding options, however policy frameworks have not been adjusted to allow for this longer term hedging. The 3 – 5 year time band, being shorter, naturally constrains policy framework and has had the unintended consequence of causing balancing issues between the tenors. This recommendation takes a wider time frame into consideration allowing Council the flexibility to manage the funding profile through the spreading and smoothing of debt maturities over the allowable maturity profile offered by the LGFA.

6.3: Counterparty credit risk

Removal of product columns, move to a consolidated (increased) counterparty limit.

Recommended that a single limit is now applied for each counterparty bank and product sub-limits are removed. 

This will provide Council the flexibility to vary transaction types in order to get the best outcomes from each bank counterparty while continuing to spread risk amongst the counterparties.

This also allows additional investment capacity where required for prefunding activity which has been signalled as an important factor for S&P in their updated methodology framework.

6.3: Counterparty Credit Risk

Increase in maximum counterparty exposure.

This recommended limit represents ~30% of annual revenue and will maximise flexibility for Council while maintaining a prudent level not exceeding 35% of annual revenue.

This will ensure there are no capacity constraints with prefunding activity and interest rate risk management instruments but continue to ensure there is a requirement to spread exposures over multiple counterparties.

6.5: Operational risk

Removal of “procedures” section.

As this is procedural, better suited in a Treasury Procedures document and not Policy.

8: Cash management

Removed.

As this is procedural, better suited in a Treasury Procedures document and not Policy.

9.1: Treasury reporting

Changes to report name, frequency and recipient.

To strengthen Treasury reporting.

9.2: Accounting treatment

Removed.            

As this is procedural, better suited in a Treasury Procedures document and not Policy.

Consultation

10.  This is an internal policy that does not require public consultation.

11.  Prior to the COVID-19 lockdown, Council developed an LTP amendment which included proposed changes to the Financial Strategy and debt limits. The consultation did not progress due to the lockdown and Council decided to progress a one year emergency budget for the Annual Plan 2020/21. The LTP 2021-2031 will be developed over the next year and will include changes to debt levels and debt limits. Following decisions through this LTP process, the Treasury Risk Management Policy will be reported to Council to confirm any related changes (for example changes to the debt to revenue limit).

Climate Change Impact and Considerations

12.  There are no climate change impacts arising from this report.

Legal Considerations

13.  The updated policy meets the requirement of the Local Government Act 2002.

Financial Considerations

14.  There are no further financial considerations other than those detailed in the report.

Appendices

No.

Title

Page

1

Appendix 1 Current Policy

23

2

Appendix 2 Revised Policy

55

    

 

 

 

 

 

Author: Glenn Phillips

Treasury Officer

 

 

 

Author: Darrin Newth

Financial Accounting Manager

 

 

 

 

 

 

Reviewed By: Bradley Cato

Chief Legal Officer

 

 

 

Approved By: Jenny Livschitz

Chief Financial Officer

 


Attachment 1

Appendix 1 Current Policy

 

 

treasury risk management policy

including liability management and investment policies

 

 

 

 

 

 

 

 

 

 

 

 

 

Division

Finance

Date created

October 2014

Publication date

October 2014

Review period

October 2015

July 2017

Owner

Chief Financial Officer

Approved by

Council

 

Version

Author

Date

Description

V 1.0

Paul Blacker

October 2014

Approved by Council.

V 2.0

Brent Kibblewhite

July 2017

Financial Strategy Changes and Triennial review.

 


Contents

1.     Introduction. 5

1.1       Policy purpose. 5

2.     Scope and objectives. 5

2.1       Scope. 5

2.2       Treasury management objectives. 5

2.3       Policy setting and Management 7

3.     Governance and management responsibilities. 7

3.1       Overview of management structure. 7

3.2       Council 8

3.3       Finance and PERFORMANCE Committee (FPC) 9

3.4       Chief Executive (CE) 9

3.5       Chief Financial Officer (CFO) 9

3.6       Financial AccountING Manager (FAM) 10

3.7       Treasury Officer (TO) 11

3.8       Accountant/Fleet Manager 11

3.9       Delegation of authority and authority limits. 11

4.     Liability management policy. 14

4.1       Introduction. 14

4.2       Borrowing limits. 14

4.3       Asset management plans. 15

4.4       Borrowing mechanisms. 15

4.5       Security. 15

4.6       Debt repayment 16

4.7       Guarantees/contingent liabilities and other financial arrangements. 16

4.8       Internal borrowing. 17

4.9       New Zealand Local Government Funding Agency (LGFA) Limited Investment 18

5.     Investment policy. 18

5.1       Introduction. 18

5.2       Objectives. 19

5.3       Policy. 19

5.4       Acquisition of new investments. 19

5.5       Investment mix. 20

5.6       Departures from normal Policy. 22

5.7       Investment management and reporting procedures. 22

6.     Risk recognition / identification management 22

6.1       Interest rate risk. 22

6.2       Liquidity risk/funding risk. 25

6.3       Counterparty credit risk. 26

6.4       Foreign currency. 27

6.5       Operational risk. 27

6.6       Legal risk. 30

7.     Measuring treasury performance. 30

8.     Cash management 31

9.     Reporting. 32

9.1       Treasury reporting. 32

9.2       Accounting treatment of financial instruments. 32

10.   Policy review.. 33

 


 

1.      Introduction

1.1        Policy purpose

The purpose of the Treasury Risk Management Policy (“Policy”) is to outline approved policies and procedures in respect of all treasury activity to be undertaken by Hutt City Council (“HCC”).  The formalisation of such policies and procedures will enable treasury risks within HCC to be prudently managed.

As circumstances change, the policies and procedures outlined in this Policy will be modified to ensure that treasury risks within HCC continue to be well managed.  In addition, regular reviews will be conducted to test the existing Policy against the following criteria:

§ Industry “best practices” for a Council the size and type of HCC.

§ The risk bearing ability and tolerance levels of the underlying revenue and cost drivers.

§ The effectiveness and efficiency of the Policy and treasury management function to recognise, measure, control, manage and report on HCC’s financial exposure to market interest rate risks, funding risk, liquidity, investment risks, counterparty credit risks and other associated risks.

§ The operations of a pro-active treasury function in an environment of control and compliance.

§ The robustness of the Policy’s risk control limits and risk spreading mechanisms against normal and abnormal interest rate market movements and conditions.

§ Assistance to HCC in achieving strategic objectives.

It is intended that the Policy be distributed to all personnel involved in any aspect of the HCC’s financial management. In this respect, all staff must be completely familiar with their responsibilities under the Policy at all times.

2.      Scope and objectives

2.1        Scope

§ This document identifies the policy of HCC in respect of treasury management activities.

§ The Policy has not been prepared to cover other aspects of HCC’s operations, particularly transactional banking management, systems of internal control and financial management.  Other policies and procedures of HCC cover these matters.

2.2        Treasury management objectives

The objective of this Policy is to control and manage costs, investment returns and risks associated with treasury management activities.

Statutory objectives

§ All external borrowing, investments and incidental financial arrangements (eg, use of interest rate hedging financial instruments) will meet requirements of the Local Government Act 2002 and incorporate the Liability Management Policy and Investment Policy.

§ HCC is governed by the following relevant legislation:

Local Government Act 2002, in particular Part 6 including sections 101,102, 104 and 105.

Local Government (Financial Reporting and Prudence) Regulations 2014, in particular Schedule 4.

Trustee Act 1956. When acting as a trustee or investing money on behalf of others, the Trustee Act highlights that trustees have a duty to invest prudently and that they shall exercise care, diligence and skill that a prudent person of business would exercise in managing the affairs of others. Details of relevant sections can be found in the Trustee Act 1956 Part ll Investments.

§ All projected external borrowings are to be approved by Council as part of the Annual Plan or the Long Term Planning (LTP) process, or resolution of Council before the borrowing is affected.

§ All legal documentation in respect to external borrowing and financial instruments will be approved by Council’s solicitors prior to the transaction being executed.

§ Council will not enter into any borrowings denominated in a foreign currency.

§ Council will not transact with any Council Controlled Trading Organisation (CCTO) on terms more favourable than those achievable by Council itself.

§ A resolution of Council is not required for hire purchase, credit or deferred purchase of goods if:

The period of indebtedness is less than 91 days (including rollovers); or

The goods or services are obtained in the ordinary course of operations on normal terms for amounts not exceeding in aggregate, an amount determined by resolution of Council.

General objectives

§ Minimise Council’s costs and risks in the management of its external borrowings.

§ Minimise Council’s exposure to adverse interest rate movements.

§ Monitor, evaluate and report on treasury performance.

§ Borrow funds and transact risk management instruments within an environment of control and compliance under the Council approved Policy so as to protect Council’s financial assets and manage costs.

§ Arrange and structure external long term funding for Council at a favourable margin and cost from debt lenders. Optimise flexibility and spread of debt maturity terms within the funding risk limits established by this Policy statement.

§ Monitor and report on financing/borrowing covenants and ratios under the obligations of Council’s lending/security arrangements.

§ Comply with financial ratios and limits stated within this Policy.

§ Monitor Council’s return on investments. 

§ Ensure the Council, management and relevant staff are kept abreast of the latest treasury products, methodologies, and accounting treatments through training and in-house presentations.

§ Maintain appropriate liquidity levels and manage cash flows within Council to meet known and reasonable unforeseen funding requirements.

§ To minimise exposure to credit risk by dealing with and investing in credit worthy counterparties.

§ Ensure that all statutory requirements of a financial nature are adhered to.

§ Ensure that financial planning will not impose an unequitable spread of costs/benefits over current and future ratepayers.

§ To ensure adequate internal controls exist to protect Council’s financial assets and to prevent unauthorised transactions.

§ Develop and maintain relationships with financial institutions, Local Government Funding Agency (LGFA), credit rating agencies and investment counterparties.   

§ To maintain Councils AA credit rating.

2.3        Policy setting and Management

The Council approves Policy parameters in relation to its treasury activities. The Council’s Chief Executive has overall financial management responsibility for the Council’s borrowing and investments.

The Council exercises ongoing governance over its subsidiary companies (CCO/CCTO), through the process of approving the Constitutions, Statements of (Corporate) Intent, and the appointment of Directors/Trustees of these companies.

3.      Governance and management responsibilities

3.1        Overview of management structure

The following diagram illustrates those individuals and bodies who have treasury responsibilities.  Authority levels, reporting lines and treasury duties and responsibilities are outlined in the following section:

 

3.2        Council

The Council has ultimate responsibility for ensuring that there is an effective policy for the management of its risks.  In this respect the Council decides the level and nature of risks that are acceptable, given the underlying objectives of HCC.

The Council is responsible for approving the Policy.  While the Policy can be reviewed and changes recommended by other persons, the authority to make or change Policy cannot be delegated.

In this respect, the Council has responsibility for:

§ Approving the long-term financial position of HCC through the Long Term Plan (LTP) and Financial Strategy along with the adopted Annual Plan.

§ Approve and adopt the Liability Management and Investment Policies.

§ Approving the Policy following recommendation by the Finance and Audit Committee, incorporating the following delegated authorities:

Borrowing, investment and dealing limits and the respective authority levels delegated to the CE, CFO and other management.

Counterparties and credit limits.

Risk management methodologies and benchmarks.

Guidelines for the use of financial instruments.

Receive a triennial review report on the Policy.

§ Approval for one-off transactions falling outside Policy.

3.3        Finance and PERFORMANCE Committee (FPC)

Under delegation from Council:

§ Evaluate and recommend amendments to Policy.

§ Reviewing debt levels for compliance with Councils Annual Plan, Long Term Plan or specific Council resolution and this Policy.

§ Review treasury activity through monthly reporting, supplemented by exception reporting.

§ Delegating authority to the CE and other officers.

3.4        Chief Executive (CE)

While the Council has final responsibility for the Policy governing the management of Council’s risks, it delegates overall responsibility for the day-to-day management of such risks to the Chief Executive.

In respect of treasury management activities, the Chief Executive’s responsibilities include:

§ Ensuring the policies comply with existing and new legislation.

§ Approving the register of delegated authorties and authorised signatories.

§ Approving new counterparties and counterparty limits.

§ Approving new external borrowing undertaken in line with Council resolution and approved borrowing strategy.

§ In conjunction with the Chief Financial Officer (CFO), approving the opening and closing of bank accounts.

§ Receiving advice of non-compliance of Policy and significant treasury events from the CFO.

3.5        Chief Financial Officer (CFO)

The CFO’s responsibilities are as follows:

§ Management responsibility for all external borrowing and investment activities as delegated by the CE.

§ Recommending Policy changes to the Finance and Audit Committee for approval.

§ Managing the long-term financial position of Council as outlined in the LTP.

§ Ongoing risk assessment of borrowing and investment activity including procedures and controls.

§ Approving treasury transactions in accordance with delegated authority.

§ Authorising the use of approved interest rate management instruments within discretionary authority.

§ Recommending authorised signatories and delegated authorities in respect of all treasury activities.

§ Review all delegated authorities and signatories annually to ensure that they are still appropriate and current.

§ Proposing new funding requirements to the CE, and if required submission to the Finance and Performance Committee.

§ Reviewing and making recommendations on all aspects of the Policy to the CE, including dealing limits, approved instruments, counterparties, and general guidelines for the use of financial instruments.

§ Conducting a review, at least triennially, of the Policy, treasury procedures and counterparty limits.

§ Monitoring and reviewing the performance of the treasury function in terms of achieving the objectives.

§ Monitoring treasury exposures on a regular basis, including current and forecast cash position, interest rate exposures and borrowings.

§ Authorising external borrowing, investing, interest rate, cash management transactions with bank counterparties.  Approving all amendments to Council records arising from checks to counterparty confirmations - with any two authorised signatories.

§ Reviewing and approving treasury spreadsheet reconciliation to internal records.

§ The CFO has oversight, and approves actions undertaken by the Treasury Officer and Financial Accounting Manager per delegated authority.

3.6        Financial AccountING Manager (FAM)

The Financial Accounting Manager’s responsibilities are as follows:

§ Responsible for overseeing the day to day treasury function as delegated by the CFO.

§ Account for all treasury transactions in accordance with legislation and generally accepted accounting principles, Council’s accounting and funding and financial policies.

§ Ensuring management procedures and policies are implemented in accordance with this Treasury Risk Management Policy.

§ Check all treasury deal confirmations against the treasury spreadsheet/deal ticket and report any irregularities immediately to the CFO.

§ Complete general ledger reconciliations to treasury spreadsheet.

§ Review and approve monthly bank reconciliations.

§ Reconcile monthly summaries of outstanding financial contracts from bank counterparties to internal records.

§ Ensuring all financial instruments are valued and accounted for correctly in accordance with current best practice standards.

3.7        Treasury Officer (TO)

The Treasury Officer’s responsibilities are as follows:

§ Execution of external borrowing, investment, and interest rate management transactions in accordance with set limits.  Investigate financing alternatives to minimise borrowing costs, margins and interest rates, making recommendations to the CFO as appropriate.

§ Carry out the day to day cash and short term cash management activities.

§ Co-ordinate the compilation of cash flow forecasts and day-to-day cash management responsibilities.

§ Update treasury spreadsheets for all new, re-negotiated and maturing transactions.

§ Monitor and update credit ratings of approved counterparties.

§ Settlement of external borrowing, investment, cash management, and interest rate management transactions, after approval from CFO/CE and signed-off.

§ Complete monthly reconciliations of On-Call, Investment and Loan Balance Accounts.

§ Handle all administrative aspects of bank counterparty agreements and documentation such as loan agreements and ISDA documents.  Prepare treasury reports.

§ Check compliance against limits and prepare report on an exceptions basis.

§ Foreign exchange transaction processing, ensuring the best rate available.

3.8        Accountant/Fleet Manager

§ Complete bank reconciliations – daily.

3.9        Delegation of authority and authority limits

Treasury transactions entered into without the proper authority are difficult to cancel given the legal doctrine of “apparent authority”.  Also, insufficient authorities for a given bank account or facility may prevent the execution of certain transactions (or at least cause unnecessary delays).

To prevent these types of situations, the following procedures must be complied with:

§ All delegated authorities and signatories must be reviewed at least annually to ensure that they are still appropriate and current.

§ A comprehensive letter must be sent to all bank counterparties at least annually to confirm details of all relevant current delegated authorities empowered to bind Council.

Whenever a person with delegated authority on any account or facility leaves Council, all relevant banks and other counterparties must be advised in writing in a timely manner to ensure that no unauthorised instructions are to be accepted from such persons.

Council has the following responsibilities, either directly itself, or via the following stated delegated authorities:

Activity

Delegated Authority

Limit

Approving and changing Policy

Council

Unlimited

Approve external borrowing for year as set out in the AP/LTP.

Council

Unlimited (subject to legislative and other regulatory limitations)

Acquisition and disposition of investments other than financial investments

Council

Unlimited

Approval for charging assets as security over borrowing

Council

Unlimited

Approving new and reviewing re-financed bank facilities.

FPC (delegated by Council)

Unlimited

Approving transactions outside Policy

FPC (delegated by Council)

Unlimited

Overall day-to-day treasury  management

CE (delegated by Council)

CFO (delegated by CE)

Subject to Policy

Re-financing existing debt

CE (delegated by Council)

CFO (delegated by CE)

Subject to Policy

Approve new external borrowing in accordance with Council resolution or through the adoption of the AP/LTP.

CFO (delegated by CE)

Per Council approved AP/LTP.

Negotiate bank facilities

CFO

N/A

Manage borrowing and interest rate strategy

CFO

N/A

Adjust interest rate risk profile

CFO

Per risk control limits

Managing funding and investment maturities

CFO

Per risk control limits

Maximum daily transaction amount (borrowing, investing, interest rate risk management and cash management) excludes roll-overs on debt and interest rate swaps.

Council

CE

CFO

TO

Unlimited

$35 million

$25 million

$10 million

Manage cash/liquidity requirements

CFO

Per risk control limits

Authorising list of signatories

CE

Unlimited

Opening/closing bank accounts

CE

Unlimited

Triennial review of Policy

CFO

N/A

Ensuring compliance with Policy

CFO

N/A

All management delegated limits are authorised by the CE.

4.      Liability management policy

4.1        Introduction

Council’s liabilities comprise of borrowings (external/internal) and various other liabilities. Council maintains external borrowings in order to:

§ Raise specific debt associated with projects and capital expenditures.

§ Fund the balance sheet as a whole, including working capital requirements.

§ Fund assets whose useful lives extend over several generations of ratepayers.

Borrowing provides a basis to achieve inter-generational equity by aligning long-term assets with long-term funding sources, and ensure that the cost are met by those ratepayers benefiting from the investment.

4.2        Borrowing limits 

Debt will be managed within the following limits:

Item

Borrowing Limit

Net Interest on External Debt / Total Revenue

<10%

Liquidity (External, term debt + committed loan facilities + available liquid investments to existing external debt)

>110%

Net external debt

<150% of Total Revenue in years 1-3

<130% of Total Revenue in years 4-6

<110% of Total Revenue in years 7-12

< 90% of Total Revenue in years 13+

§ Total Revenue is defined as cash earnings from rates, government capital grants and subsidies, user charges, interest, dividends, financial and other revenue and excludes non-government capital contributions (eg, developer contributions and vested assets).

§ Net external debt is defined as total external debt less liquid financial assets and investments.

§ Liquidity is defined as external term debt plus committed bank facilities plus liquid investments divided by current external debt.

Liquid investments are defined as: Overnight bank cash deposits, Wholesale/retail bank term deposits no greater than 30 days, Bank issued RCD’s less than 181 days.

§ Net interest on external debt is defined as the amount equal to all interest and financing costs (on external debt) less interest income for the relevant period.

§ Annual Rates Income is defined as the amount equal to the total revenue from any funding mechanism authorised by the Local Government (Rating) Act 2002 (including volumetric water charges levied) together with any revenue received from other local authorities for services provided (and for which the other local authorities rate).

§ Financial covenants are measured on Council only not consolidated group.

§ Disaster recovery requirements are to be met through the liquidity ratio and special funds.

4.3        Asset management plans

In approving new debt Council considers the impact on its external borrowing limits as well as the economic life of the asset that is being funded and its overall consistency with Council’s LTP and Financial Strategy.

4.4        Borrowing mechanisms

Council is able to externally borrow through a variety of market mechanisms including issuing stock/bonds, commercial paper (CP) and debentures, direct bank borrowing, LGFA, accessing the short and long-term wholesale/retail debt capital markets directly or indirectly, or internal borrowing of reserve and special funds. In evaluating strategies for new borrowing (in relation to source, term, size and pricing) the following is taken into account:

§ Available terms from banks, LGFA, debt capital markets and loan stock issuance.

§ Council’s overall debt maturity profile, to ensure concentration of debt is avoided at reissue/rollover time.

§ Prevailing interest rates and margins relative to term for loan stock issuance, LGFA, debt capital markets and bank borrowing.

§ The market’s outlook on future credit margin and interest rate movements as well as its own.

§ Legal documentation and financial covenants together with security and credit rating considerations.

§ For internally funded projects, to ensure that finance terms for those projects are at least as equitable with those terms from external borrowing.

§ Alternative funding mechanisms such as leasing should be evaluated with financial analysis in conjunction with traditional on-balance sheet funding. The evaluation should take into consideration, ownership, redemption value and effective cost of funds.

Council’s ability to readily attract cost effective borrowing is largely driven by its ability to rate, maintain a strong financial standing and manage its relationships with its investors, LGFA, and financial institutions/brokers and maintain a long term credit rating of at least AA. 

4.5        Security

Council’s external borrowings and interest rate management instruments will generally be secured by way of a charge over rates and rates revenue offered through a Debenture Trust Deed.  Under a Debenture Trust Deed, Council’s borrowing is secured by a floating charge over all Council rates levied under the Local Government Rating Act.  The security offered by Council ranks equally or pari passu with other lenders.

From time to time, and with Council approval, security may be offered by providing a charge over one or more of Councils assets.

Physical assets will be charged only where:

§ There is a direct relationship between the debt and the purchase or construction of the asset, which it funds (eg, project finance).

§ Council considers a charge over physical assets to be appropriate.

§ Any pledging of physical assets must comply with the terms and conditions contained within the security arrangement.

4.6        Debt repayment

The funds from all asset sales, operating surpluses, grants and subsidies will be applied to specific projects or the reduction of debt and/or a reduction in borrowing requirements, unless the Council specifically directs that the funds will be put to another use.

Debt will be repaid as it falls due in accordance with the applicable borrowing arrangement.  Subject to the appropriate approval and debt limits, a loan may be rolled over or re-negotiated as and when appropriate.

Council will manage debt on a net portfolio basis and will only externally borrow when it is commercially prudent to do so.

4.7        Guarantees/contingent liabilities and other financial arrangements

Council may act as guarantor to financial institutions on loans or enter into incidental arrangements for organisations, clubs, Trusts, or Business Units, when the purposes of the loan are in line with Council’s strategic objectives.

Council is not allowed to guarantee loans to Council-controlled trading organisations under Section 62 of the Local Government Act.

Council will ensure that sufficient funds or lines of credit exist to meet amounts guaranteed. Guarantees given will not exceed NZ$1.2 million in aggregate.

Other financial arrangements include:

§ Rural housing loans.

§ Tenant contribution flats.

§ Rural water supply loans.

§ Advances to community organisations and trusts.

§ Heritage trust loans.

Conditions to financial arrangements, such as loan advances, are specified in section 5.5.5.

4.8        Internal borrowing

Council uses its reserves and external borrowing to internally fund both capital expenditure and working capital.  Council approves overall borrowing by resolution during the Annual Plan and/or LTP process.  The finance function is responsible for administering Council’s internal loan portfolio. 

The primary objective in funding internally is to use reserves and external borrowing effectively, by establishing a portfolio that provides funding to internal activity centres.  This creates operational efficiencies, as savings are created by eliminating the margin that would be paid through Council separately investing and borrowing externally.  In addition to external borrowing mechanisms all reserve accounts are used for internal borrowing purposes.

The following operational parameters apply in relation to the management of Council’s internal loan portfolio:

§ All internal borrowing activities are consistent with the principles and parameters, outlined throughout this policy.

§ Council seeks to firstly utilise reserve funds and if insufficient reserves are available, utilises external borrowing mechanisms.

§ In determining an activity centre’s maximum internal loan amount, any existing depreciation reserve amount or other related amount is firstly allocated to that centre. Any additional funding is provided through internal loans.

Specific operating parameters are:

§ Internal loans may be set up as:

Interest only 

A Non-table (reducing balance) loan

A Table loan - (Payments are kept the same over the loan period)

§ An internal loan is set up for all new capital expenditure and any renewal capital expenditure not covered by accumulated depreciation.  The loan is allocated to the activity centre incurring the expenditure.

§ Internal Loans may be consolidated where that course of action is not inconsistent with the borrowing principals included within this document.

§ Interest is set quarterly on all internal loans at the weighted average cost of external borrowing (including credit margin and other related costs).

§ Interest on investment (reserve) balances is set quarterly at the 90 day Bank Bill rate.  No adjustment is included for treasury related operational costs.

§ Council may determine not to pay interest on specific reserve balances or to pay interest at a reduced rate.

§ If required Council has the ability to reset interest rates monthly.

§ Interest is charged on the month-end loan balance.  Interest may be notionally received and allocated to the specific reserve account providing the funds or through the related cost centres income/expenditure accounts.   

§ The term of the loan is the lesser of either:

the economic life of the asset

normally a maximum of 20 years but up to 40 years for long life assets.

§ Principal repayment instalments are charged to the cost centre.  Instalment amounts are agreed upon commencement of the loan.  Instalments are paid monthly. 

§ Interest is charged/paid on Activity balances based on the balance at the start of the financial year.  The interest rate charged on deficit balances is set at the weighted average cost of external borrowing (including credit margin and other related costs).  The interest rate paid on surplus balances is the 90 day bank bill rate.

4.9        New Zealand Local Government Funding Agency (LGFA) Limited Investment

Despite anything earlier in this Policy, the Council may borrow from the New Zealand Local Government Funding Agency Limited (LGFA) and, in connection with that borrowing, may enter into the following related transactions to the extent it considers necessary or desirable:

§ Contribute a portion of its borrowing back to the LGFA as an equity contribution to the LGFA, eg, borrower notes.

§ Provide guarantees of the indebtedness of other local authorities to the LGFA and of the indebtedness of the LGFA itself.

§ Commit to contributing additional equity (or subordinated debt) to the LGFA if required.

§ Secure its borrowing from the LGFA and the performance of other obligations to the LGFA or its creditors with a charge over the Council's rates and rates revenue.

§ Subscribe for shares and uncalled capital in the LGFA.

5.      Investment policy

5.1        Introduction

Council generally holds investments for strategic reasons where there is some community, social, physical or economic benefit accruing from the investment activity.  Generating a commercial return on strategic investments is considered a secondary objective.  Investments and associated risks are monitored and managed, and regularly reported to Council.  Specific purposes for maintaining investments include:

§ For strategic purposes consistent with Council’s LTP.

§ To reduce the current ratepayer burden.

§ The retention of vested land.

§ Holding short term investments for working capital requirements.

§ Holding investments that are necessary to carry out Council operations consistent with Annual Plans, to implement strategic initiatives, or to support inter-generational allocations.

§ Holding assets (such as property) for commercial returns.

§ Provide ready cash in the event of a natural disaster.  The use of which is intended to bridge the gap between the disaster and the reinstatement of normal income streams and assets.

§ Invest amounts allocated to accumulated surplus, Council created restricted reserves and general reserves.

§ Invest proceeds from the sale of assets.

Council recognises that as a responsible public authority all investments held, should be low risk.  Council also recognises that low risk investments generally mean lower returns.

Council can internally borrow from reserve funds in the first instance to meet future capital expenditure requirements, unless there is a compelling reason for establishing external debt.

5.2        Objectives

In its financial investment activity, Council’s primary objective when investing is the protection of its investment capital and that a prudent approach to risk/ return is always applied within the confines of this policy.  Accordingly, only approved creditworthy counterparties are acceptable.  The Council will act effectively and appropriately to:

§ Protect the Council’s investments.

§ Ensure the investments benefit the Council’s ratepayers.

§ Maintain a prudent level of liquidity and flexibility to meet both planned and unforeseen cash requirements.

5.3        Policy

The Council’s general policy on investments is that:

§ The Council may hold financial, property, forestry, and equity investments if there are strategic, commercial, economic or other valid reasons (eg, where it is the most appropriate way to administer a Council function).

§ The Council will keep under review its approach to all major investments and the credit rating of approved financial institutions.

§ The Council will review its policies on holding investments at least once every three years.

5.4        Acquisition of new investments

With the exception of financial investments, new investments are acquired if an opportunity arises and approval is given by Council, based on advice and recommendations from Council officers.  Before approving any new investments, Council gives due consideration to the contribution the investment will make in fulfilling Council’s strategic objectives, and the financial risks of owning the investment.

The authority to acquire financial investments is delegated to the CFO.

5.5        Investment mix

5.5.1     Equity investments

Equity investments, including investments held in CCO/CCTO and other shareholdings.

Council maintains equity investments and other minor shareholdings.  Council’s equity investments fulfil various strategic, economic development and financial objectives as outlined in the LTP.  Equity investments may be held where Council considers there to be strategic community value.

Council seeks to achieve an acceptable rate of return on all its equity investments consistent with the nature of the investment and their stated philosophy on investments.

Any purchase or disposition of equity investments requires Council approval.  Council may also acquire shares that are gifted or are a result of restructuring.

Dividends received from CCOs/CCTOs and unlisted companies not controlled by Council are used firstly to repay debt in relation to that investment.  Then, unless otherwise directed by Council, used to reduce other Council debt. 

Any dividends received, and/or profit or loss arising from the sale of these investments must be recorded in accordance with appropriate accounting standards.  Unless otherwise directed by Council, the proceeds from the disposition of equity investments will be used firstly to repay any debt relating to the investment and then utilised to reduce other council debt.  Council recognises that there are risks associated with holding equity investments and to minimise these risks Council, through the relevant Council committee, monitors the performance of its equity investments on a twice yearly basis to ensure that the stated objectives are being achieved.  Council seeks professional advice regarding its equity investments when it considers this appropriate.

5.5.2.    New Zealand Local Government Funding Agency Limited investment

Despite anything earlier in this Policy, the Council may invest in shares and other financial instruments of the New Zealand Local Government Funding Agency Limited (LGFA), and may borrow to fund that investment.

The Council's objective in making any such investment will be to:

§ Obtain a return on the investment.

§ Ensure that the LGFA has sufficient capital to remain viable, meaning that it continues as a source of debt funding for the Council.

Because of these dual objectives, the Council may invest in LGFA shares in circumstances in which the return on that investment is potentially lower than the return it could achieve with alternative investments.  In connection with the investment, Council subscribes for uncalled capital in the LGFA and is a Guarantor.

5.5.3     Property investments

Council owns property investments for strategic and commercial purposes.  Council reviews ownership through assessing the benefits including financial returns, in comparison to other arrangements that could deliver the similar results. 

Surpluses generated from commercial and semi commercial property investments are treated as an internal dividend to Council.  Other surpluses from property are treated as income in the related Council activity. 

Property disposals are managed to ensure compliance with statutory requirements and where appropriate consultation with Community Boards and Committees.

Property purchases are supported by registered valuations and where appropriate a full business case analysis.  Council will not purchase properties on a speculative basis.

5.5.4     Financial investments

Objectives

Council’s primary objectives when investing is the protection of its investment capital.  Accordingly, Council may only invest in approved creditworthy counterparties.  Creditworthy counterparties and investment restrictions are covered in section 6.3.  Credit ratings are monitored and reported quarterly to Council.

Council may invest in approved financial instruments as set out in section 6.1.3.  These investments are aligned with Council’s objective of investing in high credit quality and highly liquid assets

Council’s investment portfolio will be arranged to provide sufficient funds for planned expenditures and allow for the payment of obligations as they fall due.  Council prudently manages liquid financial investments as follows:

§ Any liquid investments must be restricted to a term that meets future cash flow and capital expenditure projections.

§ Council may choose to hold specific reserves in cash and direct what happens to that investment income.  In effect the income from financial investments will be an interest income stream into the treasury activity.  The treasury activity pays interest on special funds and reserves.

§ Internal borrowing will be used wherever possible to avoid external borrowing.

§ Financial investments do not include shares.

Special funds and reserve funds 

Liquid assets are not required to be held against special funds and reserve funds.  Instead Council will internally borrow or utilise these funds wherever possible.

Trust funds

Where Council hold funds as a trustee, or manages funds for a Trust then such funds must be invested on the terms provided within the Trust.  If the Trust’s investment policy is not specified then this policy should apply.

5.5.5     Loan Advances

Council may provide advances to CCOs, CCTOs, charitable trusts and community organisations for strategic and commercial purposes.  New loan advances are by Council resolution only.  Council does not lend money, or provide any other financial accommodation, to a CCO or CCTO on terms and conditions that are more favourable than those that would apply if Council were borrowing the money or obtaining the financial accommodation.

Council does not lend to CCTOs on more favourable terms than what it can achieve itself, without charging any rate or rate revenue as security.

Advances to charitable trusts, and community organisations do not have to be on a fully commercial basis.  Where advances are made to charitable trusts and community organisations at below Councils cost of borrowing.  The additional cost is treated as an annual grant to the organisation.

Council reviews performance of its loan advances on a regular basis to ensure strategic and economic objectives are being achieved.  

5.6        Departures from normal Policy

The Council may, in its discretion, depart from the Investment Policies where is considers that the departure would advance its broader social or other policy objectives.  Any resolution authorising an investment under this provision shall note that it departs from the Council’s ordinary policy and the reasons justifying that departure.

5.7        Investment management and reporting procedures

Council’s investments are managed on a regular basis, with sufficient minimum immediate cash reserves and a cash buffer maintained.  The daily cash position is monitored and managed through the Daily Cash Position Report, and long-term cashflow through the annual Cash flow Forecast.  To best manage funding gaps, Council’s financial investment maturities are matched with Council’s forecast cash flow requirements.

The performance of Council investments is regularly reviewed to ensure Council’s strategic objectives are being met.  Both performance and policy compliance are reviewed through regular reporting.

6.      Risk recognition / identification management

The definition and recognition of liquidity, funding, interest rate, counterparty credit, operational and legal risk of Council is detailed below and applies to both the Liability Management Policy and Investment Policy.

6.1        Interest rate risk

6.1.1     Risk recognition

Interest rate risk is the risk that funding costs (due to adverse movements in market wholesale interest rates), will materially exceed or fall short of projections included in the LTP or Annual Plan so as to adversely impact revenue projections, cost control and capital investment decisions/returns/feasibilities.

The primary objective of interest rate risk management is to reduce uncertainty relating to interest rate movements through fixing/hedging of interest costs.  Certainty around interest costs is to be achieved through the active management of underlying interest rate exposures.

6.1.2     Interest rate risk control limits

Exposure to interest rate risk is managed and mitigated through the risk control limits below.  Council’s net external debt should be within the following fixed/floating interest rate risk control limit.

Net external debt is defined as total external debt less liquid financial assets and investments.  This allows for pre-hedging in advance of projected physical drawdown of new debt.  When approved forecasts are changed, the amount of fixed rate cover in place may have to be adjusted to ensure compliance with the Policy minimums and maximums.

Debt Interest Rate Policy Parameters (calculated on rolling monthly basis)

Debt Period Ending

Debt Amount

Minimum Fixed

Maximum Fixed

Actual Fixed

Compliant (Y/N)

Current

 

50%

95%

 

 

Year 1

 

45%

95%

 

 

Year 2

 

40%

90%

 

 

Year 3

 

35%

85%

 

 

Year 4

 

30%

80%

 

 

Year 5

 

25%

75%

 

 

Year 6

 

15%

70%

 

 

Year 7

 

5%

65%

 

 

Year 8

 

0%

60%

 

 

Year 9

 

0%

55%

 

 

Year 10

 

0%

50%

 

 

Year 11 plus

 

0%

25%

 

 

A fixed rate maturity profile that is outside the above limits, but self corrects in less than 90-days is not in breach of this Policy.  However, maintaining a maturity profile beyond 90-days requires specific approval by Council.

§ “Fixed Rate” is defined as an interest rate repricing date beyond 12 months forward on a continuous rolling basis.

§ “Floating Rate” is defined as an interest rate repricing within 12 months.  This includes FRN’s with a maturity date beyond one year that are not swapped to a fixed rate.  Floating Rate debt may be spread over any maturity out to 12 months.

§ Any interest rate swaps with a maturity beyond 15 years must be approved by the Finance and Performance Committee through a specific approval.  The exception to this will be if Council raises LGFA funding as fixed rate or swapped floating rate and this maturity is beyond 15 years.

§ Hedging outside the above risk parameters must be approved by the Finance and Performance Committee.

§ Interest rate options must not be sold outright.  However, one for one collar option structures are allowable, whereby the sold option is matched precisely by amount and maturity to the simultaneously purchased option.  During the term of the option, only the sold side of the collar can be closed out (i.e. repurchased) otherwise, both sides must be closed simultaneously.  The sold option leg of the collar structure must not have a strike rate “in-the-money”.

§ Purchased borrower swaptions mature within 18 months.

§ Interest rate options with a maturity date beyond 12 months that have a strike rate (exercise rate) higher than 2.00% above the appropriate swap rate, cannot be counted as part of the fixed rate hedge percentage calculation.

§ The forward start period on swap/collar strategies to be no more than 24 months, unless the forward start swap/collar starts on the expiry date of an existing swap/collar and has a notional amount which is no more than that of the existing swap/collar.

6.1.3     Approved financial instruments

Approved financial instruments (which do not include shares or equities) are as follows:

Category

Instrument

Cash management and borrowing

Bank overdraft

Committed cash advance and bank accepted bill facilities (short term and long term loan facilities)

Loan stock /bond issuance

§ Floating Rate Note (FRN)

§ Fixed Rate Note (Medium Term Note/Bond)

Commercial paper (CP) / Promissory notes

Investments

Bank deposits

Bank certificates of deposit (RCDs)

LGFA borrower notes

Interest rate risk management

Forward rate agreements (“FRAs”) on:

§ Bank bills

Interest rate swaps including:

§ Forward start swaps/collars. Start date <24 months, unless linked to existing maturing swaps/collars

§ Swap extensions and shortenings

Interest rate options on:

§ Bank bills (purchased caps and one for one collars)

§ Interest rate swaptions (purchased  swaptions and one for one collars only)

Any other financial instrument must be specifically approved by the Council on a case-by-case basis and only be applied to the one singular transaction being approved.

All unsecured investment securities must be senior in ranking.  The following types of investment instruments are expressly excluded;

§ Structured debt where issuing entities are not a primary borrower/ issuer

§ Subordinated debt (other than Borrower Notes subscribed from the LGFA), junior debt, perpetual notes and debt/equity hybrid notes such as convertibles.

6.2        Liquidity risk/funding risk

6.2.1     Risk recognition

Cash flow deficits in various future periods based on long term financial forecasts are reliant on the maturity structure of cash, short-term financial investments, loans and bank facilities.  Liquidity risk management focuses on the ability to access committed funding at that future time to fund the gaps.  Funding risk management centres on the ability to re-finance or raise new debt at a future time at the same or more favourable pricing (fees and borrowing margins) and maturity terms of existing loans and facilities.

The management of Council’s funding risks is important as several risk factors can arise to cause an adverse movement in borrowing margins, term availability and general flexibility including:

§ Local Government risk is priced to a higher fee and margin level.

§ Council’s own credit standing or financial strength as a borrower deteriorates due to financial, regulatory or other reasons.

§ A large individual lender to Council experiences its own financial/exposure difficulties resulting in Council not being able to manage their debt portfolio as optimally as desired.

§ New Zealand investment community experiences a substantial “over supply” of Council investment assets.

§ Financial market shocks from domestic or global events.

A key factor of funding risk management is to spread and control the risk to reduce the concentration of risk at one point in time so that if any of the above events occur, the overall borrowing cost is not unnecessarily increased and desired maturity profile compromised due to market conditions.

6.2.2     Liquidity/funding risk control limits

§ External term loans and committed debt facilities together with available liquid investments must be maintained at an amount of 110% over existing external debt.

§ Council has the ability to pre-fund up to 18 months forecast debt requirements including re-financings.  Debt re-financings that have been prefunded, will remain included within the funding maturity profile until their maturity date.

§ The CFO has the discretionary authority to re-finance existing external debt on more acceptable terms.  Such action is to be reported to the CE and the Finance and Performance Committee at the earliest opportunity.

The maturity profile of the total committed funding in respect to all external debt / loans and committed debt facilities, is to be controlled by the following system:

Period

Minimum %

Maximum %

0 to 3 years

15%

60%

3 to 5 years

15%

60%

5 years plus

10%

60%

A maturity schedule outside these limits will require specific Council approval.

§ A funding maturity profile that is outside the above limits, but self corrects itself within 90-days is not in breach of policy.  However, maintaining a maturity profile beyond 90 days requires specific approval by the Finance and Performance Committee.

§ To minimise concentration risk the LGFA require that no more than the greater of NZD 100 million or 33% of a councils borrowings from the LGFA will mature in any 12 month period.

6.3        Counterparty credit risk

Counterparty credit risk is the risk of losses (realised or unrealised) arising from a counterparty defaulting on a financial instrument where the Council is a party.  The credit risk to the Council in a default event will be weighted differently depending on the type of instrument entered into.

Credit risk will be regularly reviewed by the Finance and Performance Committee.  Treasury related transactions would only be entered into with organisations specifically approved by the Council.

Counterparties and limits can only be approved on the basis of long-term Standard & Poor’s, (S&P) credit ratings (or equivalent Fitch or Moody’s rating) being A and above and/or short term rating of A-1 or above.

Limits should be spread amongst a number of counterparties to avoid concentrations of credit exposure.

The following matrix guide will determine limits:


Counterparty/Issuer

Minimum S&P long term / short term credit rating

Investments maximum per counterparty

($m)

Risk management instruments maximum per counterparty ($m)

Total maximum per counterparty

($m)

NZ Government

N/A

Unlimited

none

Unlimited

Local Government Funding Agency (LGFA)

N/A

Unlimited

none

Unlimited

NZ Registered Bank (minimum rating)

AA- / A-1

20.0

20.0

40.0

NZ Registered Bank (minimum rating)

A / A-1

10.0

10.0

20.0

In determining the usage of the above gross limits, the following product weightings will be used:

§ Investments (eg, Bank Deposits) – Transaction Principal ´ Weighting 100% (unless a legal right of set-off exists).

§ Interest Rate Risk Management (eg, swaps, FRAs) – Transaction Notional ´ Maturity (years) ´ 3%.

Each transaction should be entered into a treasury spreadsheet and a quarterly report prepared to show assessed counterparty actual exposure versus limits.

Individual counterparty limits are kept in a spreadsheet by management and updated on a day to day basis.  Credit ratings should be reviewed by the Treasury Officer on an ongoing basis and in the event of material credit downgrades should be immediately reported to the CFO and assessed against exposure limits.  Counterparties exceeding limits should be reported to the Finance and Performance Committee.

Risk management

To avoid undue concentration of exposures, financial instruments should be used with as wide a range of approved counterparties as possible.  Maturities should be well spread.  The approval process must take into account the liquidity of the market and prevailing market conditions the instrument is traded in and repriced from.

6.4        Foreign currency

Council has minor foreign exchange exposure through the occasional purchase of foreign exchange denominated services, plant and equipment.

Generally, all significant commitments for foreign exchange are hedged using foreign exchange contracts, once expenditure is approved and legally committed.  Both spot and forward foreign exchange contracts can be used by HCC.

Council shall not borrow or enter into incidental arrangements, within or outside New Zealand, in currency other than New Zealand currency.  Council does not hold investments denominated in foreign currency.

6.5        Operational risk

Operational risk is the risk of loss as a result of human error (or fraud), system failures and inadequate procedures and controls.

Operational risk is very relevant when dealing with financial instruments given that:

§ Financial instruments may not be fully understood.

§ Too much reliance is often placed on the specialised skills of one or two people.

§ Most treasury instruments are executed over the phone.

§ Operational risk is minimised through the adoption of all requirements of this Policy.

Dealing authorities and limits

Transactions will only be executed by those persons and within limits approved by the Council. 

Segregation of duties

As there are a small number of people involved in the treasury activities, adequate segregation of duties among the core functions of deal execution, confirmation, settling and accounting/reporting is not strictly achievable.  The risk will be minimised by the following process:

§ The CFO reports directly to the CE.

§ The Financial Accounting Manager will report directly to the CFO to control the transactional activities of the Treasury Officer.

§ There is a documented approval and reporting process for borrowing, interest rate and liquidity management activity.

Procedures

All treasury instruments should be recorded and diarised within a treasury spreadsheet, with appropriate controls and checks over journal entries into the general ledger.  Deal capture and reporting must be done immediately following execution/confirmation.  Details of procedures including templates of deal tickets should be compiled in an appropriate operations and procedures manual separate to this Policy.  Procedures should include:

§ Regular management reporting.

§ Regular risk assessment, including review of procedures and controls as directed by the Council or appropriate sub-committee of Council.

§ Organisational, systems, procedural and reconciliation controls to ensure:

§ All borrowing, investing, interest rate and cash management activity is bona fide and properly authorised.

§ Checks are in place to ensure Council accounts and records are updated promptly, accurately and completely.

§ All outstanding transactions are revalued regularly and independently of the execution function to ensure accurate reporting and accounting of outstanding exposures and hedging activity.

Organisational controls

§ The CFO has responsibility for establishing appropriate structures, procedures and controls to support borrowing, investing, interest rate and cash management activity.

§ All borrowing, investing, cash management and interest rate risk management activity is undertaken in accordance with approved delegations authorised by the Council.

Cheque/electronic banking signatories

§ Positions approved by the CE as per register.

§ Dual signatures are required for all cheques and electronic transfers.

§ Cheques must be in the name of the counterparty crossed “Not Negotiable, Account Payee Only” or “Not Transferable, Account Payee Only”, via the Council bank account.

Authorised personnel

§ All counterparties are provided with a list of personnel approved to undertake transactions, standard settlement instructions and details of personnel able to receive confirmations.

Recording of deals

§ All deals are recorded on properly formatted deal tickets by the Treasury Officer and approved by the CFO or in his absence, the Financial Accounting Manager.  Deal summary records for borrowing, investments, interest rate risk management and cash management transactions (on spreadsheets) are maintained and updated promptly following completion of transaction.

Confirmations

§ All inward deal confirmations including LGFA/bank funding and registry confirmations are received and checked by the Treasury Officer against completed deal tickets and the treasury spreadsheet records to ensure accuracy.

§ All deliverable securities are held in the Council’s safe.

§ Deals, once confirmed, are filed (deal ticket and attached confirmation) by the Treasury Officer in deal date/number order.

§ The Financial Accounting Manager checks all dealing activity, deal tickets and confirmations monthly, to ensure documentation is in order.

§ Any discrepancies arising during deal confirmation checks which require amendment to the Council records are signed off by the CFO.

Settlement

§ The majority of borrowing, investing, interest rate and cash management transactions are settled directly via the Councils banking platform.

§ For electronic payments, batches are set up electronically.  These batches are checked by the Treasury Officer to ensure settlement details are correct.  Payment details are authorised by two approved signatories as per Council registers or by direct debit as per setup authority by Council.

Reconciliations

§ Bank reconciliations are performed monthly by the Accountant/Fleet Manager and checked and approved by the Financial Accounting Manager.  Any unresolved un-reconciled items arising during bank statement reconciliation which require amendment to the Council’s records are signed off by the CFO.

§ A monthly reconciliation of the treasury spreadsheet to the general ledger is carried out by the Financial Accounting Manager and approved by the CFO.

6.6        Legal risk

Legal risks relate to the unenforceability of a transaction due to an organisation not having the legal capacity or power to enter into the transaction usually because of prohibitions contained in legislation.  While legal risks are more relevant for banks, HCC may be exposed to such risks.

HCC will seek to minimise this risk by adopting policy regarding:

§ The use of standing dealing and settlement instructions (including bank accounts, authorised persons, standard deal confirmations, contacts for disputed transactions) to be sent to counterparties.

§ The matching of third party confirmations and the immediate follow-up of anomalies.

§ The use of expert advice.

6.6.1     Agreements

Financial instruments can only be entered into with banks that have in place an executed ISDA Master Agreement with Council. 

Council’s internal/appointed legal counsel must sign off on all documentation.

6.6.2     Financial covenants and other obligations

Council must not enter into any transactions where it would cause a breach of financial covenants under existing contractual arrangements.

Council must comply with all obligations and reporting requirements under existing funding facilities and legislative requirements.

7.      Measuring treasury performance

In order to determine the success of Council’s treasury management function, the following benchmarks and performance measures have been prescribed.

Those performance measures that provide a direct measure of the performance of treasury staff (operational performance and management of debt and interest rate risk) are to be reported to Council or an appropriate sub-committee of Council on a quarterly basis.

Management

Performance

Operational performance

§ All policy limits must be complied with, including (but not limited to) counterparty credit limits, control limits and exposure limits.

§ All treasury deadlines are to be met, including reporting deadlines.

Management of debt and interest rate risk (borrowing costs)

§ The actual borrowing cost (taking into consideration any costs/benefits of entering into interest rate management transactions) should be below the budgeted YTD/annual interest cost amount.

§ Actual wholesale interest costs must be benchmarked to market interest rates.  The applicable market interest rate is determined by finding the mid-point policy benchmark rate.

§ HCC policy mid-point represents an average duration of 5-years. The market benchmark rate will be calculated every month and represent the 5-year swap rate monthly rolling average over a 5-year period.

§

8.      Cash management

The Treasury Officer has the responsibility to carry out the day-to-day cash and short-term cash management activities.  All cash inflows and outflows pass through bank accounts controlled by the finance function.

§ The Treasury Officer will calculate and maintain comprehensive rolling cash flow projections on a daily (two weeks forward), weekly (four weeks forward) and monthly (12 months forward) basis.  These cash flow forecasts determine Council’s borrowing requirements and surpluses for investment.

§ On a daily basis, electronically download all Council bank account information.

§ Co-ordinate with Council’s operating units to determine daily cash inflows and outflows with the objective of managing the cash position within approved parameters.

§ Undertake short term borrowing functions as required, minimising overdraft costs.

§ Ensure efficient cash management through improvement to forecasting.

§ Minimise fees and bank charges by optimising bank account/facility structures.

§ Monitor Council’s usage of overdraft and committed bank facilities.  Overdraft facilities are utilised as little as practical.  Committed bank overdraft facilities of not more than $500,000 are maintained.

§ Match future cash flows to smooth overall timeline.

§ Provide reports detailing actual cash flows during the month compared with those budgeted.

§ Maximise the return from available funds by ensuring significant payments are made within the suppliers payment terms, but no earlier than required, unless there is a financial benefit from doing so.

§ Interest rate management on cash management balances is not permitted.

§ Cash is invested in approved instruments and with approved counterparties only.

9.      Reporting

When budgeting interest costs, the actual physical position of existing loans and interest rate instruments must be taken into account.

9.1        Treasury reporting

The following reports are produced:

Report Name

Frequency

Prepared by

Reviewed by

Recipient

Daily Cash Position

Treasury Spreadsheet

Daily

Treasury Officer

Financial Accounting Manager

CFO

Treasury Exceptions Report

Daily

Treasury Officer

Financial Accounting Manager

CFO

Treasury Report

§ Policy limit compliance

§ Borrowing limits

§ Funding and Interest Position

§ Funding facility

§ New treasury transactions

§ Cost of funds vs budget

§ Cash flow forecast report

§ Liquidity risk position

§ Counterparty credit

§ Treasury performance

§ Debt maturity profile

§ Treasury investments

Monthly

Treasury Officer

CFO / Financial Accounting Manager

Finance and Performance Committee / CE

Trustee Report

As required by the  Trustee

Treasury Officer

CFO

Trustee company

Revaluation of financial instruments

Monthly

Treasury Officer

CFO

CE (and Finance & Performance Committee at its 6 weekly meeting)

9.2        Accounting treatment of financial instruments

Council uses financial arrangements (“derivatives”) for the primary purpose of reducing its financial risk to fluctuations in interest rates.  The purpose of this section is to articulate Council’s accounting treatment of derivatives in a broad sense.  Further detail of accounting treatment is contained within the appropriate operations and procedures manual.

Under New Zealand Public Benefit Entity (PBE) International Public Sector Accounting Standards (IPSAS), changes in the fair value of derivatives go through the Income Statement unless derivatives are designated in an effective hedge relationship.

Council’s principal objective is to actively manage the Council’s interest rate risks within approved limits and chooses not to hedge account.  Council accepts that the marked-to-market gains and losses on the revaluation of derivatives can create potential volatility in Council’s annual accounts.

The CFO is responsible for advising the CE of any changes to relevant New Zealand Public Sector PBE Standards which may result in a change to the accounting treatment of any financial derivative product.

All treasury financial instruments must be revalued (marked-to-market) at least every six months for risk management purposes.

10.    Policy review

The Policy is to be formally reviewed on a triennial basis, and annually for internal purposes.

The CFO has the responsibility to prepare the annual review report that is presented to the Council.  The report will include:

§ Recommendation as to changes, deletions and additions to the Policy.

§ Overview of the treasury function in achieving the stated treasury objectives and performance benchmarks.

§ Summary of breaches of Policy and one-off approvals outside Policy.

The Council receives the report, approves Policy changes and/or rejects recommendations for Policy changes.


Attachment 2

Appendix 2 Revised Policy

 

 

treasury risk management policy

Including liability management and investment policies

 

 

 

 

 

 

 

 

 

 

 

 

Division

Finance

Date created

October 2014

Publication date

October 2014

Review period

October 2015

July 2017

May 2020

Owner

Chief Financial Officer

Approved by

Council

 

Version

Author

Date

Description

V 1.0

Paul Blacker

October 2014

Approved by Council.

V 2.0

Brent Kibblewhite

July 2017

Financial Strategy Changes and Triennial review.

V 3.0

Jenny Livschitz

May 2020

Policy changes and Triennial review

 


 Contents

1.     Introduction. 3

1.1       Policy purpose. 3

2.     Scope and objectives. 3

2.1       Scope. 3

2.2       Treasury management objectives. 3

2.3       Policy setting and Management 5

3.     Governance and management responsibilities. 5

3.1       Overview of management structure. 5

3.2       Delegation of authority and authority limits. 6

4.     Liability management policy. 9

4.1       Introduction. 9

4.2       Borrowing limits. 9

4.3       Asset management plans. 10

4.4       Borrowing mechanisms. 10

4.5       Security. 10

4.6       Debt repayment 11

4.7       Guarantees/contingent liabilities and other financial arrangements. 11

4.8       Internal borrowing. 11

4.9       New Zealand Local Government Funding Agency (LGFA) Limited Investment 12

4.10     On-lending to council controlled organisations. 12

5.     Investment policy. 13

5.1       Introduction. 13

5.2       Objectives. 13

5.3       Policy. 13

5.4       Acquisition of new investments. 14

5.5       Investment mix. 14

5.6       Departures from normal Policy. 17

5.7       Investment management and reporting procedures. 17

6.     Risk recognition / identification management 17

6.1       Interest rate risk. 17

6.2       Liquidity risk/funding risk. 20

6.3       Counterparty credit risk. 21

6.4       Foreign currency. 22

6.5       Operational risk. 22

6.6       Legal risk. 23

7.     Measuring treasury performance. 23

8.     Reporting. 24

8.1       Treasury reporting. 24

9.     Policy review.. 25

 


 

1.      Introduction

1.1        Policy purpose

The purpose of the Treasury Risk Management Policy (“Policy”) is to outline the policies in respect of all treasury activity to be undertaken by the Hutt City Council Group (“HCC”) being the Hutt City Council (“Council”) together with its Council Controlled Organisations (“CCO’s”).  The formalisation of such policies will enable treasury risks within HCC to be prudently managed.

As circumstances change, the policies outlined in this Policy will be modified to ensure that treasury risks within HCC continue to be well managed. In addition, regular reviews will be conducted to test the existing Policy against the following criteria:

§ Industry “best practices” for a council the size and type of HCC.

§ The risk bearing ability and tolerance levels of the underlying revenue and cost drivers.

§ The effectiveness and efficiency of the Policy and treasury management function to recognise, measure, control, manage and report on HCC’s financial exposure to market interest rate risks, funding risk, liquidity, investment risks, counterparty credit risks and other associated risks.

§ The operations of a pro-active treasury function in an environment of control and compliance.

§ The robustness of the Policy’s risk control limits and risk spreading mechanisms against normal and abnormal interest rate market movements and conditions.

§ Assistance to HCC in achieving strategic objectives.

2.      Scope and objectives

2.1        Scope

§ This document identifies the policy of HCC in respect of treasury management activities.

§ The Policy has not been prepared to cover other aspects of HCC’s operations, particularly transactional banking management, systems of internal control and financial management.  Other policies and procedures of HCC cover these matters.

§ This Policy should be read in conjunction with the Financial Delegation Policy, which confirms that delegations for Treasury transactions are specifically covered by this Policy.

2.2        Treasury management objectives

The objective of this Policy is to control and manage costs, investment returns and risks associated with treasury management activities.

Statutory objectives

§ All external borrowing, investments and incidental financial arrangements (e.g., use of interest rate hedging financial instruments) will meet requirements of the Local Government Act 2002 and incorporate the Liability Management Policy and Investment Policy.

§ HCC is governed by the following relevant legislation:

Local Government Act 2002, in particular Part 6 including sections 101,102, 104 and 105.

Local Government (Financial Reporting and Prudence) Regulations 2014, in particular Schedule 4.

Trustee Act 1956. When acting as a trustee or investing money on behalf of others, the Trustee Act highlights that trustees have a duty to invest prudently and that they shall exercise care, diligence and skill that a prudent person of business would exercise in managing the affairs of others. Details of relevant sections can be found in the Trustee Act 1956 Part ll Investments.

§ All projected external borrowings are to be approved by Council as part of the Annual Plan (AP), the Long Term Planning (LTP) or CCO’s Statement of Corporate Intent (SOI) process, or resolution of Council before the borrowing is affected.

§ All legal documentation in respect to external borrowing and financial instruments will be approved by HCC’s solicitors prior to the transaction being executed.

§ HCC will not enter into any borrowings denominated in a foreign currency.

§ Council will not transact with any Council Controlled Trading Organisation (CCTO) on terms more favourable than those achievable by Council itself.

§ A resolution of Council is not required for hire purchase, credit or deferred purchase of goods if:

The period of indebtedness is less than 91 days (including rollovers); or

The goods or services are obtained in the ordinary course of operations on normal terms for amounts not exceeding in aggregate, an amount determined by resolution of Council.

General objectives

§ Minimise HCC’s costs and risks in the management of its external borrowings.

§ Minimise HCC’s exposure to volatility in interest costs.

§ Minimise HCC’s exposure to adverse interest rate movements.

§ Monitor, evaluate and report on treasury performance.

§ Borrow funds and transacts risk management instruments within an environment of control and compliance under HCC approved Policy so as to protect HCC’s financial assets and manage costs.

§ Arrange and structure external long term funding for HCC at a favourable margin and cost from debt lenders. Optimise flexibility and spread of debt maturity terms within the funding risk limits established by this Policy statement.

§ Monitor and report on financing/borrowing covenants and ratios under the obligations of HCC’s lending/security arrangements.

§ Comply with financial ratios and limits stated within this Policy.

§ Monitor HCC’s return on investments. 

§ Ensure the Council, HCC management and relevant officers are kept abreast of the latest treasury products, methodologies, and accounting treatments through training and in-house presentations.

§ Maintain appropriate liquidity levels and manage cash flows within HCC to meet known and reasonable unforeseen funding requirements.

§ To minimise exposure to credit risk by dealing with and investing in credit worthy counterparties.

§ Ensure that all statutory requirements of a financial nature are adhered to.

§ Ensure that financial planning will not impose an unequitable spread of costs/benefits over current and future ratepayers.

§ To ensure adequate internal controls exist to protect HCC’s financial assets and to prevent unauthorised transactions.

§ Develop and maintain relationships with financial institutions, Local Government Funding Agency (LGFA), credit rating agencies and investment counterparties.   

§ To maintain Councils AA credit rating.

2.3        Policy setting and Management

The Council approves Policy parameters in relation to its treasury activities. The Council’s Chief Executive has overall financial management responsibility for HCC’s borrowing and investments.

The Council exercises ongoing governance over its subsidiary companies (CCO/CCTO), through the process of approving their Constitutions, SOI’s, and the appointment of Directors/Trustees to these entities.

 

 

 

 

 

3.      Governance and management responsibilities

3.1        Overview of RESPONSIBILITIES

The following diagram illustrates those individuals and bodies who have treasury responsibilities.  Authority levels, reporting lines and treasury duties and responsibilities are summarised in the section that follows. 

 

3.2        Council

The Council has ultimate responsibility for ensuring that there is an effective policy for the management of its risks.  In this respect the Council decides the level and nature of risks that are acceptable, given the underlying objectives of HCC.

The Council is responsible for approving the Policy. While the Policy can be reviewed and changes recommended by other persons, the authority to make or change Policy cannot be delegated.

In this respect, the Council has responsibility for:

§ Approving the long-term financial position, financial strategy and rating levels of HCC through the adoption of the LTP and  AP

§ Approval of annual Statements of Intent for CCOs and CCTOs

§ Approve and adopt the Liability Management and Investment Policies.

§ Adoption of the annual report for HCC.

§ Approving the Policy  and incorporating the following delegated authorities:

Borrowing, investment and dealing limits and the respective authority levels delegated to the Chief Executive (CE), Chief Finanical Officer (CFO) and other HCC officers.

Counterparties and credit limits.

Risk management methodologies and benchmarks.

Guidelines for the use of financial instruments.

Receiving a triennial review report on the Policy.

§ Approval for one-off transactions falling outside Policy. These will include:

Additional borrowings other than in accordance with the LTP, AP or CCO’s SOI.

Purchase or disposal of assets other than in accordance with the LTP, AP or CCO’s SOI,

The establishment and disposal of any CCO and the appointment of their directors or trustees.

3.3        POLICY, Finance and STRATEGY Committee (PFS)

Under delegation from Council:

§ Evaluate and recommend amendments to Policy.

§ Reviewing debt levels for compliance with Councils Annual Plan, Long Term Plan or specific Council resolution and this Policy.

§ Review treasury activity and oversee compliance with this Policy.

3.4        Audit and Risk Subcommittee (AR)

Under delegation from Council:

§ Providing objective advice and recommendations to Council around the sufficiency, quality and results of assurance over HCC’s financial management practices, risk management, internal control systems and governance frameworks.

3.5        Chief Executive (CE)

While the Council has final responsibility for the Policy governing the management of Council’s risks, it delegates overall responsibility for the day-to-day management of such risks to the Chief Executive.

In respect of treasury management activities, the Chief Executive’s responsibilities include:

§ Ensuring the policies comply with existing and new legislation.

§ Approving the delegated authorities in line with the Financial Delegations Policy.

§ Approving new counterparties and counterparty limits.

§ Approving new external borrowing undertaken in line with Council resolution and approved borrowing strategy.

§ In conjunction with the Chief Financial Officer (CFO), approving the opening and closing of bank accounts.

§ Receiving advice of non-compliance of Policy and significant treasury events from the CFO.

3.6        Chief Financial Officer (CFO)

The CFO’s responsibilities are as follows:

§ Management responsibility for all external borrowing and investment activities as delegated by the CE.

§ Recommending Policy changes for approval.

§ Managing the long-term financial position of Council as outlined in the LTP.

§ Ongoing risk assessment of borrowing and investment activity including procedures and controls.

§ Approving treasury transactions in accordance with delegated authority.

§ Authorising the use of approved interest rate management instruments within discretionary authority.

§ Recommending financial delegated authorities in respect of all treasury activities.

§ Review all delegated authorities annually to ensure that they are still appropriate and current.

§ Proposing new funding requirements to the CE, and if required submission to the Council.

§ Reviewing and making recommendations on all aspects of the Policy to the CE, including dealing limits, approved instruments, counterparties, and general guidelines for the use of financial instruments.

§ Conducting a review, at least triennially, of the Policy, treasury procedures and counterparty limits.

§ Monitoring and reviewing the performance of the treasury function in terms of achieving the objectives.

§ Monitoring treasury exposures on a regular basis, including current and forecast cash position, interest rate exposures and borrowings.

§ Authorising external borrowing, investing, interest rate, cash management transactions with bank counterparties.  Approving all amendments to Council records arising from checks to counterparty confirmations - with any two authorised signatories.

§ Reviewing and approving treasury spreadsheet reconciliation to internal records.

§ The CFO has oversight, and approves actions undertaken by the Treasury Officer and Financial Accounting Manager per delegated authority.

3.7        Financial AccountING Manager (FAM)

The Financial Accounting Manager’s responsibilities are as follows:

§ Responsible for overseeing the day to day treasury function as delegated by the CFO.

§ Account for all treasury transactions in accordance with legislation and generally accepted accounting principles, Council’s accounting and funding and financial policies.

§ Ensuring management procedures and policies are implemented in accordance with this Treasury Risk Management Policy.

§ Check all treasury deal confirmations against the treasury spreadsheet/deal ticket and report any irregularities immediately to the CFO.

§ Complete general ledger reconciliations to treasury spreadsheet.

§ Review and approve monthly bank reconciliations.

§ Reconcile monthly summaries of outstanding financial contracts from bank counterparties to internal records.

§ Ensuring all financial instruments are valued and accounted for correctly in accordance with current best practice standards.

3.8        Treasury Officer (TO)

The Treasury Officer’s responsibilities are as follows:

§ Execution of external borrowing, investment, and interest rate management transactions in accordance with set limits.  Investigate financing alternatives to minimise borrowing costs, margins and interest rates, making recommendations to the CFO as appropriate.

§ Carry out the day to day cash and short term cash management activities.

§ Co-ordinate the compilation of cash flow forecasts and day-to-day cash management responsibilities.

§ Update treasury spreadsheets for all new, re-negotiated and maturing transactions.

§ Monitor and update credit ratings of approved counterparties.

§ Settlement of external borrowing, investment, cash management, and interest rate management transactions, after approval from CFO/CE and signed-off.

§ Complete monthly reconciliations of On-Call, Investment and Loan Balance Accounts.

§ Handle all administrative aspects of bank counterparty agreements and documentation such as loan agreements and ISDA documents.  Prepare treasury reports.

§ Check compliance against limits and prepare report on an exceptions basis.

§ Foreign exchange transaction processing, ensuring the best rate available.

3.9        Finance and Treasury Committee (FTC)

This is an internal committee of Officers, comprising the CFO, FAM and TO, and is supported by external specialist treasury advisors as required. The committee considers HCC’s cash flow forecast, current and forward looking debt position, interest rate hedging, upcoming debt issuance requirements, compliance with this Policy and formulates and agrees strategy in those regards.

3.10      Delegation of authority and authority limits

Treasury transactions entered into without the proper authority are difficult to cancel given the legal doctrine of “apparent authority”.  Also, insufficient authorities for a given bank account or facility may prevent the execution of certain transactions (or at least cause unnecessary delays).

To prevent these types of situations, the following procedures must be complied with:

§ All delegated authorities and signatories must be reviewed at least annually to ensure that they are still appropriate and current.

§ A comprehensive letter must be sent to all bank counterparties at least annually to confirm details of all relevant current delegated authorities empowered to bind Council. This letter will also provide each counterparty Councils standard settlement instructions.

Whenever a person with delegated authority on any account or facility leaves Council, all relevant banks and other counterparties must be advised in writing in a timely manner to ensure that no unauthorised instructions are to be accepted from such persons.

Council has the following responsibilities, either directly itself, or via the following stated delegated authorities:

Activity

Delegated Authority

Limit

Approving and changing Policy

Council

Unlimited

Approve external borrowing for year as set out in the AP/LTP.

Council

Unlimited (subject to legislative and other regulatory limitations)

Acquisition and disposition of investments other than financial investments

Council

Unlimited

Approval for charging assets as security over borrowings as set out in the AP/LTP.

CE (delegated by Council)

 

Subject to Policy

Approving new and reviewing re-financed bank facilities.

CE (delegated by Council)

 

Subject to Policy

Approving transactions outside Policy

PFS (delegated by Council)

Unlimited

Overall day-to-day treasury  management

CE (delegated by Council)

CFO (delegated by CE)

Subject to Policy

Re-financing existing debt

CE (delegated by Council)

CFO (delegated by CE)

Subject to Policy

Approve new external borrowing in accordance with Council resolution or through the adoption of the AP/LTP.

CFO (delegated by CE)

Per Council approved AP/LTP.

Negotiate bank facilities

CFO

N/A

Manage borrowing and interest rate strategy

CFO

N/A

Adjust interest rate risk profile

CFO

Per risk control limits

Managing funding and investment maturities

CFO

Per risk control limits

Maximum daily transaction amount (borrowing, investing, interest rate risk management and cash management) excludes roll-overs on debt and interest rate swaps.

Council

CE

CFO

TO

Unlimited

$50 million

$35 million

$10 million

Manage cash/liquidity requirements

CFO

Per risk control limits

Authorising list of signatories

CE

Unlimited

Opening/closing bank accounts

CFO

Unlimited

Triennial review of Policy

CFO

N/A

Ensuring compliance with Policy

CFO

N/A

All management delegated limits are authorised by the CE.

 


 

4.      Liability management policy

4.1        Introduction

Council’s liabilities comprise of borrowings (external/internal) and various other liabilities. Council maintains external borrowings in order to:

§ Raise specific debt associated with projects and capital expenditures.

§ Fund the balance sheet as a whole, including working capital requirements and targeted funding for on-lending to CCOs/CCTOs.

§ Fund assets whose useful lives extend over several generations of ratepayers.

Borrowing provides a basis to achieve inter-generational equity by aligning long-term assets with long-term funding sources, and ensure that the cost are met by those ratepayers benefiting from the investment.

4.2        Borrowing limits 

Debt will be managed within the following limits:

Item

Borrowing Limit

Net Interest on External Debt / Total Revenue

<10%

Liquidity (External debt + committed loan facilities + available liquid investments to existing external debt)

>110%

Net external debt

<150% of Total Revenue in years 1-3

<130% of Total Revenue in years 4-6

<110% of Total Revenue in years 7-12

< 90% of Total Revenue in years 13+

§ Total Revenue is defined as cash earnings from rates, government capital grants and subsidies, user charges, interest, dividends, financial and other revenue and excludes non-government capital contributions (e.g., developer contributions and vested assets).

§ Net external debt is defined as total external debt less liquid financial assets and investments.

§ Liquidity is defined as external term debt plus committed loan facilities plus liquid investments divided by external debt.

§ Liquid investments are defined as: Overnight bank cash deposits, Wholesale/retail bank term deposits no greater than 30 days, Bank issued RCDs less than 181 days.

§ Net interest on external debt is defined as the amount equal to all interest and financing costs (on external debt) less interest income for the relevant period.

§ Annual Rates Income is defined as the amount equal to the total revenue from any funding mechanism authorised by the Local Government (Rating) Act 2002 (including volumetric water charges levied) together with any revenue received from other local authorities for services provided (and for which the other local authorities rate).

§ Financial covenants are measured on Council only not consolidated group.

§ Disaster recovery requirements are to be met through the liquidity ratio and special funds.

4.3        Asset management plans

In approving new debt Council considers the impact on its external borrowing limits as well as the economic life of the asset that is being funded and its overall consistency with Council’s LTP and Financial Strategy.

4.4        Borrowing mechanisms

Council is able to externally borrow through a variety of market mechanisms including issuing stock/bonds, commercial paper (CP) and debentures, direct bank borrowing, LGFA, accessing the short and long-term wholesale/retail debt capital markets directly or indirectly, or internal borrowing of reserve and special funds. In evaluating strategies for new borrowing (in relation to source, term, size and pricing) the following is taken into account:

§ Available terms from banks, LGFA, debt capital markets and loan stock issuance.

§ Council’s overall debt maturity profile, to ensure concentration of debt is avoided at reissue/rollover time.

§ Prevailing interest rates and margins relative to term for loan stock issuance, LGFA, debt capital markets and bank borrowing.

§ The market’s outlook on future credit margin and interest rate movements as well as its own.

§ Legal documentation and financial covenants together with security and credit rating considerations.

§ For internally funded projects, to ensure that finance terms for those projects are at least as equitable with those terms from external borrowing.

§ Alternative funding mechanisms such as leasing should be evaluated with financial analysis in conjunction with traditional on-balance sheet funding. The evaluation should take into consideration, ownership, redemption value and effective cost of funds.

Council’s ability to readily attract cost effective borrowing is largely driven by its ability to rate, maintain a strong financial standing and manage its relationships with its investors, LGFA, and financial institutions/brokers and maintain a long term credit rating of at least AA. 

4.5        Security

Council’s external borrowings and interest rate management instruments will generally be secured by way of a charge over rates and rates revenue offered through a Debenture Trust Deed.  Under a Debenture Trust Deed, Council’s borrowing is secured by a floating charge over all Council rates levied under the Local Government Rating Act.  The security offered by Council ranks equally or pari passu with other lenders.

From time to time, and with Council approval, security may be offered by providing a charge over one or more of Councils assets.

Physical assets will be charged only where:

§ There is a direct relationship between the debt and the purchase or construction of the asset, which it funds (e.g., project finance).

§ Council considers a charge over physical assets to be appropriate.

§ Any pledging of physical assets must comply with the terms and conditions contained within the security arrangement.

4.6        Debt repayment

The nature of Council’s debt is primarily, but not exclusively, related to the purchase or creation of long term assets. Debt repayments will be in accordance with long term and annual plans.  Additional repayments may be made from surplus funds generated by asset sales or operating surpluses.

The funds from all asset sales, operating surpluses, grants and subsidies will be applied to specific projects or the reduction of debt and/or a reduction in borrowing requirements, unless the Council specifically directs that the funds will be put to another use.

Debt will be repaid as it falls due in accordance with the applicable borrowing arrangement.  Subject to the appropriate approval and debt limits, a loan may be rolled over or re-negotiated as and when appropriate.

Council will manage debt on a net portfolio basis and will only externally borrow when it is commercially prudent to do so.

4.7        Guarantees/contingent liabilities and other financial arrangements

Council may act as guarantor to financial institutions on loans or enter into incidental arrangements for organisations, clubs, Trusts, or Business Units, when the purposes of the loan are in line with Council’s strategic objectives.

Council is not permitted to provide any guarantee of indebtedness in favour of any loans to Council Controlled Trading Organisations that are set up under Section 62 of the Local Government Act. Council may act as a financial guarantor to Council Controlled Organisation.

CCO’s are not permitted to provide any guarantee of indebtedness in favour of any loans to third parties.

Council will ensure that sufficient funds or lines of credit exist to meet amounts guaranteed. Guarantees given will not exceed NZ$2.0 million in aggregate.

Conditions to financial arrangements, such as loan advances, are specified in section 5.5.5.

4.8        Internal borrowing

As Council manages all funding and liquidity as a centralised function, ensuring cash and borrowing resources are used in an optimal manner, there is an element of funding per activity which at times is effectively borrowed as excess reserve funds are sometimes used instead of external borrowing.

The capital charge mechanism is applied to activities in the same manner for both internal and external borrowings.

4.9        New Zealand Local Government Funding Agency (LGFA) Limited Investment

Despite anything earlier in this Policy, the Council may borrow from the New Zealand Local Government Funding Agency Limited (LGFA) and, in connection with that borrowing, may enter into the following related transactions to the extent it considers necessary or desirable:

§ Contribute a portion of its borrowing back to the LGFA as an equity contribution to the LGFA, e.g., borrower notes.

§ Provide guarantees of the indebtedness of other local authorities to the LGFA and of the indebtedness of the LGFA itself.

§ Commit to contributing additional equity (or subordinated debt) to the LGFA if required.

§ Secure its borrowing from the LGFA and the performance of other obligations to the LGFA or its creditors with a charge over the Council's rates and rates revenue.

§ Subscribe for shares and uncalled capital in the LGFA.

4.10      On-lending to council controlled organisations

To better achieve its strategic and commercial objectives, Council may provide financial support in the form of debt funding directly or indirectly to CCO/CCTOs. 

Guarantees of financial indebtedness to CCTOs are prohibited, but financial support may be provided by subscribing for shares as called or uncalled capital.  

Any on-lending arrangement to a CCO or CCTO must be approved by Council.  In recommending an arrangement for approval the CFO considers the following:

§ Credit risk profile of the borrowing entity, and the ability to repay interest and principal amount outstanding on due date.

§ Impact on Council’s credit standing, debt cap amount (where applied), lending covenants with the LGFA and other lenders and Council’s future borrowing capacity.

§ The form and quality of security arrangements provided.

§ The lending rate given factors such as; CCO or CCTO credit profile, external Council borrowing rates, borrower note and liquidity buffer requirements, term etc.

§ Lending arrangements to CCTO must be documented on a commercial arm's length basis. A term sheet, including matters such as borrowing costs, interest payment dates, principal payment dates, security and expiry date is agreed between the parties.

§ Accounting and taxation impact of on-lending arrangement.

All on-lending arrangements must be executed under legal documentation (e.g. loan agreement) reviewed and approved by Council’s independent legal counsel.

 

5.      Investment policy

5.1        Introduction

HCC generally holds investments for strategic reasons where there is some community, social, physical or economic benefit accruing from the investment activity.  Generating a commercial return on strategic investments is considered a secondary objective.  Investments and associated risks are monitored and managed, and regularly reported to Council.  Specific purposes for maintaining investments include:

§ For strategic purposes consistent with Council’s LTP, AP and CCO’s Statements of Intent.

§ To reduce ratepayer burden.

§ The retention of vested land.

§ Holding short term investments for working capital requirements.

§ Holding investments that are necessary to carry out Council operations consistent with LTP, AP and CCO’s SOI, to implement strategic initiatives, or to support inter-generational allocations.

§ Holding assets (such as property) for commercial returns.

§ Provide ready cash in the event of a natural disaster.  The use of which is intended to bridge the gap between the disaster and the reinstatement of normal income streams and assets.

§ Invest amounts allocated to accumulated surplus, HCC created restricted reserves and general reserves.

§ Invest proceeds from the sale of assets.

HCC recognises that as a responsible public authority group all investments held should be low risk.  HCC also recognises that low risk investments generally mean lower returns.

Council can internally borrow from reserve funds in the first instance to meet future capital expenditure requirements, unless there is a compelling reason for establishing external debt.

5.2        Objectives

In its financial investment activity, HCC’s primary objective when investing is the protection of its investment capital and that a prudent approach to risk/ return is always applied within the confines of this policy.  Accordingly, only approved creditworthy counterparties are acceptable.  HCC will act effectively and appropriately to:

§ Protect the HCC’s investments.

§ Ensure the investments benefit the HCC’s ratepayers.

§ Maintain a prudent level of liquidity and flexibility to meet both planned and reasonably unforeseen cash requirements.

 

 

5.3        Policy

The HCC’s general policy on investments is that:

§ The HCC may hold financial, property, forestry, and equity investments if there are strategic, commercial, economic or other valid reasons (e.g., where it is the most appropriate way to administer a HCC function).

§ The HCC will keep under review its approach to all major investments and the credit rating of approved financial institutions.

§ The HCC will review its policies on holding investments at least once every three years.

5.4        Acquisition of new investments

With the exception of financial investments, new investments are acquired if an opportunity arises and approval is given by Council, based on advice and recommendations from HCC officers.  Before approving any new investments, HCC officers give due consideration to the contribution the investment will make in fulfilling HCC’s strategic objectives, and the financial risks of owning the investment.

The authority to acquire financial investments is delegated to the CFO.

5.5        Investment mix

5.5.1     Equity investments

Equity investments, includes investments held in CCO/CCTO and other shareholdings.

HCC maintains equity investments and other minor shareholdings.  HCC’s equity investments fulfil various strategic, economic development and financial objectives as outlined in the LTP, AL and CCO’s SOI.  Equity investments may be held where HCC considers there to be strategic community value.

HCC seeks to achieve an acceptable rate of return on all its equity investments consistent with the nature of the investment and their stated philosophy on investments.

Any purchase or disposition of equity investments requires Council approval.  Council may also acquire shares that are gifted or are a result of restructuring.

Dividends received from CCO’s/CCTO’s, and unlisted companies not controlled by Council, are used firstly to repay debt in relation to that investment, then, unless otherwise directed by Council, used to reduce other Council debt. 

Any dividends received, and/or profit or loss arising from the sale of these investments must be recorded in accordance with appropriate accounting standards.  Unless otherwise directed by Council, the proceeds from the disposition of equity investments will be used firstly to repay any debt relating to the investment and then utilised to reduce other debt.  HCC recognises that there are risks associated with holding equity investments and to minimise these risks HCC, through the relevant Council committee, monitors the performance of its equity investments on a twice yearly basis to ensure that the stated objectives are being achieved.  HCC seeks professional advice regarding its equity investments when it considers this appropriate.

5.5.2.    New Zealand Local Government Funding Agency Limited investment

Despite anything earlier in this Policy, in conjunction with their borrowing activity, HCC may enter into the following transactions with the New Zealand Local Government Funding Agency Limited (LGFA):

·      Contribute a portion of its borrowing back to the LGFA as an equity contribution to the LGFA. For example borrower notes.

·      Provide guarantees of the indebtedness of other local authorities to the LGFA and of the indebtedness of the LGFA itself.

·      Commit to contributing additional equity (or subordinated debt) to the LGFA if required.

·      Secure its borrowing from the LGFA and the performance of other obligations to the LGFA or its creditors with a charge over the Council's rates and rates revenue.

·      Subscribe for shares and uncalled capital in the LGFA.

and may borrow to fund that investment.

HCC's objective in making any such investment will be to:

§ Obtain a return on the investment.

§ Ensure that the LGFA has sufficient capital to remain viable, meaning that it continues as a source of debt funding for HCC.

Because of these dual objectives, HCC may invest in LGFA shares in circumstances in which the return on that investment is potentially lower than the return it could achieve with alternative investments.  In connection with the investment, Council subscribes for uncalled capital in the LGFA and is a Guarantor.

5.5.3     Property investments

HCC owns property investments for strategic and commercial purposes.  HCC reviews ownership through assessing the benefits including financial returns, in comparison to other arrangements that could deliver similar results. 

Surpluses generated from commercial and semi commercial property investments are treated as an internal dividend to HCC.  Other surpluses from property are treated as income in the related HCC activity. 

Property disposals are managed to ensure compliance with statutory requirements and where appropriate consultation with Community Boards, Committees and Board of Directors/Trustees.

Property purchases are supported by registered valuations and where appropriate a full business case analysis.  HCC will not purchase properties on a speculative basis.

5.5.4     Financial investments

Objectives

HCC’s primary objectives when investing is the protection of its investment capital.  Accordingly, HCC may only invest in approved creditworthy counterparties.  Creditworthy counterparties and investment restrictions are covered in section 6.3.  Credit ratings are monitored and reported quarterly to Council.

HCC may invest in approved financial instruments as set out in section 6.1.3.  These investments are aligned with HCC’s objective of investing in high credit quality and highly liquid assets

HCC’s investment portfolio will be arranged to provide sufficient funds for planned expenditures and allow for the payment of obligations as they fall due.  HCC prudently manages liquid financial investments as follows:

§ Any liquid investments must be restricted to a term that meets future cash flow and capital expenditure projections.

§ HCC may choose to hold specific reserves in cash and direct what happens to that investment income.  In effect the income from financial investments will be an interest income stream into the treasury activity.  The treasury activity pays interest on special funds and reserves.

§ Internal borrowing will be used wherever possible to avoid external borrowing.

§ Financial investments do not include shares.

Special funds and reserve funds 

Liquid assets are not required to be held against special funds and reserve funds.  Instead HCC will internally borrow or utilise these funds wherever possible.

Trust funds

Where HCC hold funds as a trustee, or manages funds for a Trust then such funds must be invested on the terms provided within the Trust.  If the Trust’s investment policy is not specified then this policy should apply.

5.5.5     Loan Advances

Council may provide advances to CCOs, CCTOs, charitable trusts and community organisations for strategic and commercial purposes.  New loan advances are by Council resolution only.  Council does not lend money, or provide any other financial accommodation, to a CCO or CCTO on terms and conditions that are more favourable than those that would apply if Council were borrowing the money or obtaining the financial accommodation.

Council does not lend to CCTOs on more favourable terms than what it can achieve itself, without charging any rate or rate revenue as security.

Advances to charitable trusts, and community organisations do not have to be on a fully commercial basis.  Where advances are made to charitable trusts and community organisations at below Councils cost of borrowing, the additional cost is treated as an annual grant to the organisation.

Council reviews performance of its loan advances on a regular basis to ensure strategic and economic objectives are being achieved.  

5.6        Departures from normal Policy

The Council may, in its discretion, depart from the Investment Policies where is considers that the departure would advance its broader social or other policy objectives.  Any resolution authorising an investment under this provision shall note that it departs from the Council’s ordinary policy and the reasons justifying that departure.

5.7        Investment management and reporting procedures

HCC’s investments are managed on a regular basis, with sufficient minimum immediate cash reserves and a cash buffer maintained.  The daily cash position is monitored and managed through the Daily Cash Flow Forecast, and long-term cash flow through the annual Cash flow Forecast.  To best manage funding gaps, HCC’s financial investment maturities are matched with HCC’s forecast cash flow requirements.

The performance of HCC investments is regularly reviewed to ensure HCC’s strategic objectives are being met.  Both performance and policy compliance are reviewed through regular reporting.

6.      Risk recognition / identification management

The definition and recognition of liquidity, funding, interest rate, counterparty credit, operational and legal risk of HCC is detailed below and applies to both the Liability Management Policy and Investment Policy.

6.1        Interest rate risk

6.1.1     Risk recognition

Interest rate risk is the risk that funding costs (due to adverse movements in market wholesale interest rates), will materially exceed or fall short of projections included in the LTP, AP or CCO’s SOI so as to adversely impact revenue projections, cost control and capital investment decisions/returns/feasibilities.

The primary objective of interest rate risk management is to reduce uncertainty relating to interest rate movements through fixing/hedging of interest costs.  Certainty around interest costs is to be achieved through the active management of underlying interest rate exposures.

6.1.2     Interest rate risk control limits

Exposure to interest rate risk is managed and mitigated through the risk control limits below.  HCC’s gross external debt should be within the following fixed/floating interest rate risk control limit.

 

Forecast gross external debt is the amount of total external debt for a given period. This allows for pre-hedging in advance of projected physical drawdown of new debt. When approved forecasts are changed (signed off by the CFO or equivalent), the amount of interest rate fixing in place may have to be adjusted to ensure compliance with the Policy minimum and maximum limits.

This allows for pre-hedging in advance of projected physical drawdown of new debt.  When approved forecasts are changed, the amount of fixed rate cover in place may have to be adjusted to ensure compliance with the Policy minimums and maximums.

Debt Interest Rate Policy Parameters (calculated on rolling monthly basis)

Debt Period Ending

Debt Amount

Minimum Fixed

Maximum Fixed

Actual Fixed

Compliant (Y/N)

Current

 

40%

95%

 

 

Year 1

 

40%

95%

 

 

Year 2

 

35%

90%

 

 

Year 3

 

30%

85%

 

 

Year 4

 

25%

80%

 

 

Year 5

 

20%

75%

 

 

Year 6

 

0%

70%

 

 

Year 7

 

0%

65%

 

 

Year 8

 

0%

60%

 

 

Year 9

 

0%

55%

 

 

Year 10

 

0%

50%

 

 

Year 11 plus

 

0%

25%

 

 

A fixed rate maturity profile that is outside the above limits, but self corrects in less than 90-days is not in breach of this Policy.  However, maintaining a maturity profile beyond 90-days requires specific approval by the PFS.

§ “Fixed Rate” is defined as all known interest rate obligations on forecast gross external debt, including where hedging instruments have fixed movements in the applicable reset rate. 

§ “Floating Rate” is defined as any interest rate obligation subject to movements in the applicable reset rate.

§ Fixed interest rate percentages are calculated based on the average amount of fixed interest rate obligations relative to the average forecast gross external debt amounts for the given period (as defined in the table above).

§ Interest rate swap maturities beyond the maximum LGFA bond maturity must be approved by Council/PFS through a specific approval. 

§ Hedging outside the above risk parameters must be approved by the PFS.

§ Interest rate options must not be sold outright.  However, one for one collar option structures is allowable, whereby the sold option is matched precisely by amount and maturity to the simultaneously purchased option.  During the term of the option, only the sold side of the collar can be closed out (i.e. repurchased) otherwise, both sides must be closed simultaneously.  The sold option leg of the collar structure must not have a strike rate “in-the-money”.

§ Purchased borrower swaptions mature within 18 months.

§ Interest rate options with a maturity date beyond 12 months that have a strike rate (exercise rate) higher than 2.00% above the appropriate swap rate, cannot be counted as part of the fixed rate hedge percentage calculation (i.e. an ineffective hedge).

§ The forward start period on swap/collar strategies to be no more than 36 months, unless the forward start swap/collar starts on the expiry date of an existing swap/collar and has a notional amount which is no more than that of the existing swap/collar.

6.1.3     Approved financial instruments

Approved financial instruments (which do not include shares or equities) are as follows:

Category

Instrument

Cash management and borrowing (from LGFA and approved banking institutions)

Bank overdraft

Committed cash advance and bank accepted bill facilities (short term and long term loan facilities)

Committed Standby facilities (where offered)

Loan stock /bond issuance

§ Floating Rate Note (FRN)

§ Fixed Rate Note (Medium Term Note/Bond)

Commercial paper (CP) / Promissory notes

Deferred Settlement committed debt

Investments

Bank deposits

Bank certificates of deposit (RCDs)

LGFA borrower notes

Interest rate risk management

Forward rate agreements (“FRAs”) on:

§ Bank bills

Interest rate swaps including:

§ Forward start swaps/collars. Start date <36 months, unless linked to existing maturing swaps/collars

§ Swap extensions and shortenings

Interest rate options on:

§ Bank bills (purchased caps and one for one collars)

§ Interest rate swaptions (purchased  swaptions and one for one collars only)

Any other financial instrument must be specifically approved by the Council on a case-by-case basis and only be applied to the one singular transaction being approved.

All unsecured investment securities must be senior in ranking.  The following types of investment instruments are expressly excluded;

§ Structured debt where issuing entities are not a primary borrower/ issuer

§ Subordinated debt (other than Borrower Notes subscribed from the LGFA), junior debt, perpetual notes and debt/equity hybrid notes such as convertibles.

6.2        Liquidity risk/funding risk

6.2.1     Risk recognition

Cash flow deficits in various future periods based on long term financial forecasts are reliant on the maturity structure of cash, short-term financial investments, loans and bank facilities.  Liquidity risk management focuses on the ability to access committed funding at that future time to fund the gaps.  Funding risk management centres on the ability to re-finance or raise new debt at a future time at the same or more favourable pricing (fees and borrowing margins) and maturity terms of existing loans and facilities.

The management of HCC’s funding risks is important as several risk factors can arise to cause an adverse movement in borrowing margins, term availability and general flexibility including:

§ Local Government risk is priced to a higher fee and margin level.

§ HCC’s own credit standing or financial strength as a borrower deteriorates due to financial, regulatory or other reasons.

§ A large individual lender to HCC experiences its own financial/exposure difficulties resulting in HCC not being able to manage their debt portfolio as optimally as desired.

§ New Zealand investment community experiences a substantial “over supply” of Council investment assets.

§ Financial market shocks from domestic or global events.

A key factor of funding risk management is to spread and control the risk to reduce the concentration of risk at one point in time so that if any of the above events occur, the overall borrowing cost is not materially unnecessarily increased and desired maturity profile compromised due to market conditions.

6.2.2     Liquidity/funding risk control limits

§ External term loans and committed debt facilities together with available liquid investments must be maintained at an amount of 110% over existing external debt.

§ HCC has the ability to pre-fund up to 18 months forecast debt requirements including re-financings.  Debt re-financings that have been prefunded will remain included within the funding maturity profile until their maturity date.

§ The CFO has the discretionary authority to re-finance existing external debt on more acceptable terms.  Such action is to be reported to the CE and the PFS at the earliest opportunity.

The maturity profile of the total committed funding in respect to all external debt / loans and committed debt facilities, is to be controlled by the following system:

 

 

Period

Minimum %

Maximum %

0 to 3 years

15%

60%

3 to 7 years

25%

60%

7 years plus

0%

60%

A maturity schedule outside these limits will require specific Council approval.

§ A funding maturity profile that is outside the above limits, but self corrects itself within 90-days is not in breach of policy.  However, maintaining a maturity profile beyond 90 days requires specific approval by the PFS.

§ To minimise concentration risk the LGFA require that no more than the greater of NZD 100 million or 33% of a councils borrowings from the LGFA will mature in any 12 month period.

6.3        Counterparty credit risk

Counterparty credit risk is the risk of losses (realised or unrealised) arising from a counterparty defaulting on a financial instrument where HCC is a party.  The credit risk to HCC in a default event will be weighted differently depending on the type of instrument entered into.

Credit risk will be regularly reviewed by the PFS.  Treasury related transactions would only be entered into with organisations specifically approved by the Council.

Counterparties and limits can only be approved on the basis of long-term Standard & Poor’s, (S&P) credit ratings (or equivalent Fitch or Moody’s rating) being A and above and/or short term rating of A-1 or above.

Limits should be spread amongst a number of counterparties to avoid concentrations of credit exposure.

The following matrix guide will determine limits:


Counterparty/Issuer

Minimum S&P long term / short term credit rating

Total maximum per counterparty

($m)

NZ Government

N/A

Unlimited

Local Government Funding Agency (LGFA)

N/A

Unlimited

NZ Registered Bank (minimum rating)

AA- / A-1

50.0

NZ Registered Bank (minimum rating)

A / A-1

25.0

In determining the usage of the above gross limits, the following product weightings will be used:

§ Investments (e.g., Bank Deposits) – Transaction Principal ´ Weighting 100% (unless a legal right of set-off exists).

§ Interest Rate Risk Management (e.g., swaps, FRAs) – Transaction Notional ´ Maturity (years) ´ 3%.

Each transaction should be entered into a treasury spreadsheet and a monthly report prepared to show assessed counterparty actual exposure versus limits.

Individual counterparty limits are kept in a spreadsheet by management and updated on a day to day basis.  Credit ratings should be reviewed by the Treasury Officer on an ongoing basis and in the event of material credit downgrades should be immediately reported to the CFO and assessed against exposure limits.  Counterparties exceeding limits should be reported to the PFS.

Risk management

To avoid undue concentration of exposures, financial instruments should be used with as wide a range of approved counterparties as possible.  Maturities should be well spread.  The approval process must take into account the liquidity of the market and prevailing market conditions the instrument is traded in and repriced from.

6.4        Foreign currency

HCC has minor foreign exchange exposure through the occasional purchase of foreign exchange denominated services, plant and equipment.

Generally, all significant commitments for foreign exchange are hedged using foreign exchange contracts, once expenditure is approved and legally committed.  Both spot and forward foreign exchange contracts can be used by HCC.

HCC shall not borrow or enter into incidental arrangements, within or outside New Zealand, in currency other than New Zealand currency.  HCC does not hold investments denominated in foreign currency.

6.5        Operational risk

Operational risk is the risk of loss as a result of human error (or fraud), system failures and inadequate procedures and controls.

Operational risk is very relevant when dealing with financial instruments given that:

§ Financial instruments may not be fully understood.

§ Too much reliance is often placed on the specialised skills of one or two people.

§ Most treasury instruments are executed over the phone.

§ Operational risk is minimised through the adoption of all requirements of this Policy.

Dealing authorities and limits

Transactions will only be executed by those persons and within limits approved by the Council. 

Segregation of duties

As there are a small number of people involved in the treasury activities, adequate segregation of duties among the core functions of deal execution, confirmation, settling and accounting/reporting is not strictly achievable.  The risk will be minimised by the following process:

§ The CFO reports directly to the CE.

§ The FAM will report directly to the CFO to control the transactional activities of the TO.

§ There is a documented approval and reporting process for borrowing, interest rate and liquidity management activity.

6.6        Legal risk

Legal risks relate to the unenforceability of a transaction due to an organisation not having the legal capacity or power to enter into the transaction usually because of prohibitions contained in legislation.  While legal risks are more relevant for banks, HCC may be exposed to such risks.

HCC will seek to minimise this risk by adopting policy regarding:

§ The use of standing dealing and settlement instructions (including bank accounts, authorised persons, standard deal confirmations, contacts for disputed transactions) to be sent to counterparties.

§ The matching of third party confirmations and the immediate follow-up of anomalies.

§ The use of expert advice.

6.6.1     Agreements

Financial instruments can only be entered into with banks that have in place an executed ISDA Master Agreement with HCC. 

HCC’s internal/appointed legal counsel must sign off on all documentation.

6.6.2     Financial covenants and other obligations

HCC must not enter into any transactions where it would cause a breach of financial covenants under existing contractual arrangements.

HCC must comply with all obligations and reporting requirements under existing funding facilities and legislative requirements.

7.      Measuring treasury performance

In order to determine the success of HCC’s treasury management function, the following benchmarks and performance measures have been prescribed.

Those performance measures that provide a direct measure of the performance of the Treasury function (operational performance and management of debt and interest rate risk) are to be reported to Council or an appropriate sub-committee of Council on a quarterly basis.

 

§     Management

§     Performance

§     Operational performance

§ All policy limits must be complied with, including (but not limited to) counterparty credit limits, control limits and exposure limits.

§ All treasury deadlines are to be met, including reporting deadlines.

§     Management of debt and interest rate risk (borrowing costs)

§ The actual borrowing cost (taking into consideration any costs/benefits of entering into interest rate management transactions) should be below the budgeted YTD/annual interest cost amount.

§ Actual wholesale interest costs must be benchmarked to market interest rates.  The applicable market interest rate is determined by finding the mid-point policy benchmark rate.

§ HCC policy mid-point represents an average duration of 5-years. The market benchmark rate will be calculated every month and represent the 5-year swap rate monthly rolling average over a 5-year period.

8.      Reporting

When budgeting interest costs, the actual physical position of existing loans and interest rate instruments must be taken into account.

8.1        Treasury reporting

The following reports are produced:

Report Name

Frequency

Prepared by

Reviewed by

Recipient

Daily Cash Flow Forecast

 

Daily

TO

FAM

CFO

Treasury Exceptions Report

Daily

TO

FAM

CFO

Treasury Report

§ Policy limit compliance

§ Borrowing limits

§ Funding and Interest Position

§ Funding facility

§ New treasury transactions

§ Cost of funds vs budget

§ Cash flow forecast report

§ Liquidity risk position

§ Counterparty credit

§ Treasury performance

§ Debt maturity profile

§ Treasury investments

§ Revaluation of financial instruments

Monthly

TO

CFO / FAM

FTC

Treasury Report (Sample attached)

Quarterly

CFO

P FS

Council

Credit ratings update

 

CCO/CCTO loans and guarantees, financial arrangements

Monthly

TO

FAM

CFO

Trustee Report

As required by the  Trustee

TO

CFO

Trustee company

Compliance Certificate

Annually

TO

CFO

LGFA

9.      Policy review

The Policy is to be formally reviewed on a triennial basis, and annually for internal purposes.

The CFO has the responsibility to prepare the annual review report that is presented to the Council.  The report will include:

§ Recommendation as to changes, deletions and additions to the Policy.

§ An overview of the treasury function in achieving the stated treasury objectives and performance benchmarks.

§ A summary of breaches of Policy and one-off approvals outside Policy.

The Council receives the report, approves Policy changes and/or rejects recommendations for Policy changes.


                                                                                      85                                                            16 June 2020

Audit and Risk Subcommittee

20 May 2020

 

 

 

File: (20/427)

 

 

 

 

Report no: ARSC2020/4/115

 

Review of Agreement to Lease Events Centre and Develop a Hotel

 

Purpose of Report

1.    To report back an independent review of the Events Centre and Hotel development contracts. 

Recommendations

That the Subcommittee recommends that Council:

(i)    notes the independent report of Thomas Dewar, Lawyers entitled Review of Events Centre and Hotel Development Contracts for Hutt City Council dated 3 March 2020 attached as Appendix 1 to the report; and

 

(ii)   notes the conclusions and recommendations and applies the recommendations relating to reporting and review protocols for future projects.

For the reason that Council has commissioned an independent review of a series of contracts relating to the development of the Events Centre and Hotel in Lower Hutt.

 

Background

2.    From 2013 Council has been involved in determining arrangements for the Lease of the Events Centre and Development of a Hotel in Hutt City.

3.    Thomas Dewar has been commissioned by Council to undertake an independent review of the contracts relating to the Lease of the Events Centre and Hotel Development and to report back to Council.

4.    Thomas Dewar were not engaged by Council in any of the underlying transactions and until the current year had not seen or reviewed the relevant contracts and background documents.

5.    Partner Gerard Dewar’s report is attached and is in 3 Sections as follows:

i.   Historical review of Council decision making and assessment of costs/benefits visible to Council at the time decisions were made;

 

ii.  Review of events post contract, subsequent actions and costs; and

 

iii. Address possible options in light of the contracts against a desired outcome that Hutt City seeks a successful Hotel and Events centre operating without Council subsidy and an objective assessment of what options the contracting party might have.

Discussion

6.    The report is self-explanatory and includes salient, in hindsight recommendations as to setting specific reporting back and review protocols that can be applied to future large scale Council projects.

7.    Mr Gerard Dewar from Thomas Dewar, Lawyers will be in attendance to speak to his report.

Options

8.    To recommend that Council note the report, its conclusions and recommendations or not.

Climate Change Impact and Considerations

9.    The matters addressed in this report have been considered in accordance with the process set out in Council’s Climate Change Considerations Guide.

10.  There are no climate change impacts.  

Legal Considerations

11.  There are no further legal considerations.

Financial Considerations

12.  There are no financial considerations.

Appendices

No.

Title

Page

1

Appendix 1: Review of Events Centre and Hotel Development Contracts for Hutt City Council

86

    

 

 

 

 

 

Author: Gary Craig

Head of City Growth

 

 

 

Author: Bradley Cato

Chief Legal Officer

 

 

 

 

 

 

Approved By: Jo Miller

Chief Executive

 


Attachment 1

Appendix 1: Review of Events Centre and Hotel Development Contracts for Hutt City Council

 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 

 


                                                                                     124                                                           16 June 2020

Audit and Risk Subcommittee

26 May 2020

 

 

 

File: (19/492)

 

 

 

 

Report no: FPC2019/2/51

 

Tax Risk Governance Framework Update

 

 

 

 

1.    Council approved a Tax Risk Governance Framework in May 2018. This report is to update the Committee on the current year’s tax activities of Council and its Council Controlled Organisations (CCOs), collectively referred to as the “Group”.

 

Recommendation

That the Subcommittee:

(i)    notes and receives the report; and

(ii)   approves the Tax Governance Plan in relation to the years ending 30 June 2021 and 2022.

Background

2.    Council is currently exempt from paying corporate income tax with the exception for income derived from Council Controlled Organisations (CCOs). CCOs (with the exception of The Hutt City Community Facilities Trust), are however subject to corporate income tax. All entities in the Group are subject to and required to correctly account for all indirect taxes including:

·    Goods and Services Tax (GST)

·    Fringe Benefit Tax (FBT)

·    Pay As You Earn Tax (PAYE); and

·    A range of other withholding taxes (WHT).

3.    The Group returns in excess of $15.9M annually to the Inland Revenue Department (IRD) in relation to both direct and indirect taxes.

4.    IRD has an expectation that all large organisations should have tax risk management incorporated within their governance framework. Council developed a “best practice” tax risk governance framework and tax risk management strategy that was approved by Council in May 2018.

5.    It is a requirement of the framework that officers will report on all tax risk management matters to this Subcommittee at least once a year.

Discussion

6.    To the best of officers’ knowledge, all Council and Group returns in respect of direct and indirect taxes have been filed on time and settlements with IRD have been made by the due dates.

Annual Update

7.    PricewaterhouseCoopers (PwC) has provided their second annual update, attached as Appendix 1 to this report.  PwC’s annual update provides:

·    a summary of the more substantive tax advice Council and its CCOs have sought from PwC up to 27 May 2020;

·    commentary on tax matters currently being addressed as at 27 May 2020; and

·    a more general high-level update on the wider tax environment which may affect Council and Council Controlled Entities.

Tax Advice

8.    Where the need arises, the Group continues to engage PwC to provide advice on various tax matters.  The advice assists the Group to comply with various tax legislations.

9.    During the last 12 months, Council sought advice from PwC on:

(a)  GST treatment in relation to underwrite transactions;

(b)  preparing the tax notes for Council and CCO annual reports; and

(c)  preparation and lodgement of all Group final income tax returns.

Update of Tax Risk Governance Framework

10.  The Tax Risk Management Strategy within the Tax Risk Management Framework, has been extended out to June 2021.  A copy of the updated framework, with changes tracked, is attached as Appendix 2 to this report.

Climate Change Impact and Considerations

11.  There are no climate change impacts arising from this report.

Consultation

12.  Consultation is not required.

Legal Considerations

13.  There are no legal considerations arising from this report.

Financial Considerations

14.  There are no financial consideration arising from this report

 

Appendices

No.

Title

Page

1

Appendix 1: PwC - Annual tax update

125

2

Appendix 2: Tax Risk Governance Framework - updated 26 May 2020

138

    

 

 

 

 

 

 

 

Author: Darrin Newth

Financial Accounting Manager

 

 

 

 

 

 

Approved By: Jenny Livschitz

Chief Financial Officer

 

 


Attachment 1

Appendix 1: PwC - Annual tax update

 


 


 


 


 


 


 


 


 


 


 


 


 


Attachment 2

Appendix 2: Tax Risk Governance Framework - updated 26 May 2020

 

tax risk governance framework

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Division

Finance

Date created

April 2018

Owner

Financial Accounting Manager

Approved by

Audit and Risk Subcommittee 

 

Version

Author

Date

Description

V 1.0

Darrin Newth

18/4/18

Approved by Finance and Performance Committee.

V1.1

Darrin Newth

8 May 2019

Approved by Finance and Performance Committee.

V1.2

Darrin Newth

26 May 2020

Annual update for approval by the Audit and Risk Subcommittee

 


Contents

 

1.     Purpose. 3

1.1       Background. 3

1.2       Risk Management 3

2.     Tax risk profile. 4

3.     Tax risk management strategies. 4

3.1       Responsibility for tax issues. 4

3.2       Reporting tax risks to Audit and Risk Subcommittee. 4

3.3       Tax awareness and training. 5

3.4       Meetings and correspondence with Inland Revenue. 5

3.5       Tax advice and rulings. 5

3.6       Tax returns and payments. 5

3.7       Filing and record keeping. 6

3.8       Regular reviews. 6

3.9       Penalties and voluntary disclosures. 6

3.10     Tax policies. 6

4.     Hutt City Council’s tax risk management strategy. 7

 

1.     
Purpose

This document establishes the tax governance framework for Hutt City Council's (Council) Audit and Risk Subcommittee.

1.1        Background

Council is a large, high profile, organisation that is responsible for providing services to the New Zealand public. As such, Council must maintain exemplary governance and tax compliance standards.

Although Council is largely exempt from paying corporate income tax, it is required to correctly account for Goods and Services Tax, Fringe Benefit Tax, PAYE, and a range of other withholding taxes. These taxes make up a significant portion of the New Zealand Government's annual tax take. Accordingly, the tax obligations of Council cannot be taken lightly.

Inland Revenue has signalled its expectation that all large organisations should have tax risk management incorporated within their governance framework. This is consistent with international best practice; tax authorities in foreign jurisdictions, including Australia and the United Kingdom, have been advocating this approach is taken by large Public and Private sector organisations.

1.2        Risk Management

The Audit and Risk Subcommittee is, along with other responsibilities, tasked to:

§ Assist Council to determine its appetite for risk.

§ Review whether management has in place a current and comprehensive risk management framework and associated procedures for effective identification and management of Council's significant risks.

§ Consider whether appropriate action is being taken by management to mitigate Council's significant risks.

§ Ensure that management is kept appraised of Council's governance body's views on uncontrolled risk.

§ Ensure management are keeping the Audit and Risk Subcommittee fully appraised of all independent sources of assurance, via the risk management framework.

Proactive tax risk management can facilitate mitigation of:

§ Operational risk – by way of reducing the potential for reputational damage befalling Council as a result of non-compliance, and the possible negative impacts on various stakeholders, such as employees and suppliers.

§ Financial risk - through minimising the financial impact of non-compliance, and the costs associated with over or under-paying tax by Council.

§ Compliance risk- in terms of ensuring areas of non-compliance are identified, thereby minimising any penalties or interest being imposed by Inland Revenue and reducing the risk of Council being subject to an Inland Revenue Performance.

2.      Tax risk profile

Council has an obligation to fulfil its tax compliance obligations as required by tax legislation, including the Income Tax Act 2007, Goods and Services Tax Act 1985 and Tax Administration Act 1994.

Given the high profile and public nature of Council, there is a need to adopt a conservative approach towards tax compliance. Accordingly, Council will adopt a "LOW" tax risk profile such that it has an open and honest working relationship with Inland Revenue.

3.      Tax risk management strategies

The following strategies will be adopted by Council to ensure that it maintains a low tax risk profile and effectively manages its tax obligations and potential tax risks.

Council will develop a tax risk management strategy to be formally adopted by the Audit and Risk Subcommittee. The strategy will be reviewed at least every three years. The strategy will:

§ Identify key areas of tax compliance risk that are faced by Council

§ Establish the steps required to effectively manage or mitigate each risk area

§ Provide clear and realistic time frames to carry out the steps.

3.1        Responsibility for tax issues

The Chief Financial Officer has overall responsibility for the management of the tax issues of Council. As appropriate, the Chief Financial Officer may delegate      responsibility for tax issues to another appropriately qualified person.

3.2        Reporting tax risks to Audit and Risk Subcommittee

As the Audit and Risk Subcommittee meets on a six weekly basis, any significant tax risks will be reported in the first instance to the Chief Financial Officer as soon as they are identified and where appropriate, to the chair of the Audit and Risk Subcommittee within two weeks of being identified.

A 'significant tax risk' to Council may be where an incorrect interpretation is made that results in:

§ A situation where penalties and interest could be imposed against Council

§ A situation where a tax liability outside of routine operating tax liabilities, is required to be settled that is in excess of $20,000

§ A situation where Council could be subject to prosecution

§ A situation where an accusation of tax avoidance could be levied.

Council will report on all tax risk management matters to the Audit and Risk Subcommittee at least once a year. As part of that report, a summary should be prepared and presented to the Audit and Risk Subcommittee setting out key issues, and may include the following:

§ Key financial information including any outstanding taxes due, and any interest or penalties imposed during the year

§ Particulars of any proposed legislative tax changes which could impact on Council

§ Details of any significant outstanding taxes in dispute with Inland Revenue

§ Details of advice sought and future matters to consider

§ A table of tax tools and services used and whether each aligns with Council's 'LOW' risk tax profile i.e. Strategy vs Achievement.

3.3        Tax awareness and training

Council will ensure that all relevant staff are provided with adequate training and resources to effectively identify and manage its tax obligations and risks. Where appropriate, this may involve sending selective staff on external courses or engaging an external speaker to conduct in-house training.

3.4        Meetings and correspondence with Inland Revenue

Council will endeavour to maintain strong working relationships with Inland Revenue, other government bodies, and related third parties. All dealings with external parties will be undertaken in a professional and timely manner.

Apart from routine PAYE, FBT and GST returns and payments, all other correspondence, meeting requests or queries from Inland Revenue must be immediately referred to the Chief Financial Officer. The Chief Financial Officer is the only person authorised to correspond or meet with Inland Revenue to discuss the tax matters of Council - although they may delegate this responsibility to others where appropriate.

3.5        Tax advice and rulings

Council will maintain detailed information and computations supporting all tax return filing positions. If there is any uncertainty in respect of a filing position where the amount of tax exceeds $50,000 or if there is political or public risk the Chief Financial Officer will seek written advice from external tax advisors.

In some instances, the degree of uncertainty over a particular tax issue may warrant seeking a Binding Ruling from Inland Revenue. No approach should be made for a Binding Ruling without the prior approval of the Chief Financial Officer. However, the Chief Financial Officer may obtain agreement from the Audit and Risk Subcommittee if considered appropriate.

3.6        Tax returns and payments

Council will file all returns and pay any resulting tax liability on, or before, the stipulated due dates. When preparing and filing tax returns, Council will be transparent, and fully disclose all relevant information supporting a tax position in a tax return. Council will only adopt tax positions that are highly likely to be correct based on current law. Notwithstanding this, Council will endeavour to ensure that the most tax efficient position is adopted.

Tax payment s must be authorised in accordance with Council’s delegated authorities. Any tax payments in excess of $20,000 must be authorised by the Chief Financial Officer. However, the Chief Financial Officer may delegate this in accordance with Council’s delegation authorities.

Tax payments must be supported by detailed tax computations and explanations which are initialled by the preparer and then countersigned by that person's superior prior to payment.

3.7        Filing and record keeping

In terms of the Tax Administration Act 1994, Council is required to retain tax records for several years. To assist in archiving and the subsequent retrieval of relevant tax records, Council will separately file each tax return and supporting computation and advisory correspondence based on the year of assessment and tax type.

In addition, Council will maintain a detailed index of the relevant tax files to enable their efficient retrieval should they be requested by Inland Revenue in later years. Specifically, the index should contain details relating to the file reference, relevant tax period, tax type, subject of the document on file and location of the file, and evidence of review by the Chief Financial Officer. This index should be maintained irrespective of whether the information is in electronic or hard copy format.

3.8        Regular reviews

The tax risks of Council potentially increase over time through a combination of personnel and legislative changes. To ensure the tax compliance procedures of Council are kept up to date and accurate, an independent external review of GST, PAYE/Withholding Taxes and FBT and other areas of tax risk should be undertaken every three years. This review will tend to be undertaken in a 'rolling' format, with a different tax type being reviewed each year.

3.9        Penalties and voluntary disclosures

Wherever possible Council should endeavour to minimise any penalties and Use of Money Interest. Accordingly, any tax discrepancies identified should be addressed and disclosed to Inland Revenue as soon as possible. Unless the discrepancy has been identified pursuant to a (current) tax investigation, Council (in consultation with the Audit and Risk Subcommittee) should always consider making a Voluntary Disclosure as a means of minimising any potential penalties.

3.10      Tax policies

To assist staff with the day to day tax treatment of issues specific to Council and to ensure a consistent tax treatment of items across the organisation, Council subscribes to PwC's Online Tax Policies. PwC maintains PAYE, GST, FBT, and KiwiSaver tax policies, and are regularly updated for legislative changes.

These tax policies will provide an outline of common tax issues arising and how they should be treated in the various tax returns of Council.

 


 


4.      Hutt City Council’s tax risk management strategy

 

tax services

financial year ending
30/06/2016

COMPLETED

financial year ending
30/06/2017

COMPLETED

financial year ending
30/06/2018

COPMPLETED

financial year ending
30/06/2019

Completed

financial year ending
30/06/2020

Completed

financial year ending
30/06/2021

PROPOSED

financial year ending
30/06/2022

PROPOSED

Tax helpdesk facility

ü

ü

ü

ü

ü

ü

 

ü

Access to online taxation policies

ü

ü

ü

ü

ü

ü

 

ü

Tax compliance reviews undertaken[1]

 

 

 

 

 

 

 

§  Tax fixed asset register review for council controlled organisations

 

 

ü

 

 

ü

 

 

§  FBT

 

ü

 

 

 

 

 

§  PAYE/withholding taxes

 

 

 

 

 

 

 

ü

§  GST

ü

 

 

 

 

ü

 

Income tax return independently reviewed

ü

ü

ü

ü

ü

ü

 

ü

Tax disclosure notes – external support when required

ü

ü

ü

ü

ü

ü

 

ü

Tax agency – income tax

ü

ü

ü

ü

ü

ü

 

ü

External advice sought on major tax issues

ü

ü

ü

ü

ü

ü

 

ü

Tax training provided to staff

As required

 

 


                                                                                     148                                                           16 June 2020

Audit and Risk Subcommittee

28 May 2020

 

 

 

File: (20/175)

 

 

 

 

Report no: ARSC2020/2/69

 

Seismic Performance Register

 

Purpose of Report

1.    To provide an update to the Subcommittee on Council’s programme of work to assess the seismic strength of Council-owned buildings. This update will be provided to each meeting. A six-monthly report will be provided to Council.

Recommendations

That the Subcommittee notes and receives the report.

 

 

Background

2.    Council published a seismic performance register in November 2019 which lists council-owned buildings, identifies their seismic rating and links to the latest assessment report. A link to the register can be found here: http://huttcity.govt.nz/seismicregister

3.    Since publishing the register, assessments have been added as they are completed. Some buildings that were originally on the register have now been removed following engineering advice from WSP that assessments are not required. This includes mainly public toilets, small kiosks and some changing rooms. The rationale for this is that these structures present limited risk to the public due to being single level, construction occurred post 1976 when the first significant seismic codes were introduced in New Zealand and that occupancy is low. Council is maintaining a list of these buildings, but has removed these from the website link above.

4.    Since the last report an operational management policy has been developed that will provide staff with a framework for undertaking engineering assessments for Council buildings going forward.