Treasury Management Financial Review 2009/10 (including 4th qtr update)

Report: 10
Date: 30 September 2010
By: Treasurer

Summary

This report presents the Annual Review of Treasury Management for the 12 month period ended 31 March 2010 and includes an update for Quarter 4 2009/10.

A. Recommendations

that Members:

1. note the 2009/10 annual report and 4th Qtr update of the Treasury Management function
2. approve continued membership of the jointly funded creditor action for the return of Icelandic deposits
3. note the statement of assurance from the Treasurer and Director of Resources

B. Supporting information

Background Information

1. The MPA operates in accordance with CIPFA’s Code of Practice for Treasury Management which requires that the Authority formally receives an annual report on treasury management activities and arrangements after the year-end.

2. In November 2009 CIPFA released the revised Code of Practice for Treasury Management and the revised Prudential Code for Capital Finance in Local Authorities. The Prudential Code requires the setting of relevant treasury management indicators and these were incorporated into the Treasury Management Strategy 2009-10 approved by the March 2009 Resources and Productivity Sub-Committee, the Finance and Resource Committee and the Full Authority.

3. The annual financial review sets out :

• a review of investment operations during 2009/10
• a review of debt management operations
• a summary of interest rate movement and investment performance for 2009/10
• a review of risk and compliance issues
• a review of the treasury management Prudential Code indicators

4. Additionally this report starts with a brief headline review of 2009/10 4th quarter treasury management activity. Quarterly reports are reviewed by the Resources and Productivity Sub-Committee and due to the timing of the annual review, which includes 4th quarter activity, a brief update of 4th quarter activity will avoid unnecessary duplication in the same report.

4th Quarter 2009/10 Update

5. The following is a summary of 2009/10 4th quarter treasury management activity:

• Average cash balances invested £120m
• Debt Management Office (DMO) portfolio balance at 16% (4th quarter market sector balances illustrated at Appendix 1). Call money balance at 36%, held with Royal Bank of Scotland (RBS)
• Notional limit of £50m with RBS exceeded on three occasions, on each occasion for one night, due to late in the day receipt of funds. The excess funds were on lent the following day
• There were 72 investments with three UK banks, two foreign banks, one building society and the DMO
• Investment income of £0.168m at a return of 0.56% (interest and return by market sector for the 4th quarter is shown at Appendix 1)
• Cash flow, borrowing requirements and the funding of the capital programme were kept under constant review. With approval from the Treasurer new borrowing of £35m in four maturity loans and £15m at variable rate was undertaken
• One maturing loan of £4.338m was repaid
• Members have previously requested that a statement of assurance by the Treasurer and Director of Finance about treasury management activities for the quarter is provided. This assurance, endorsed by the Director of Exchequer Services acting for the Director of Finance post, is attached at Appendix 6

Annual Review 2009/10

6. This annual review of the 2009/10 treasury management function consolidates the 4th quarter update at paragraph 5 above with quarters 1 to 3 which have previously been reviewed by the Resources and Productivity Sub-Committee.

Average Balances

7. The average size of the investment portfolio during 2009/10 was £152m. These cash balances available for investment include balance sheet reserves and provisions, unapplied capital receipts and grant and cash arising from the timing of large receipts and payments.

8. The structure of the portfolio continues to reflect the investment instruments selected for investment purposes as defined by the 2009/10 Treasury Management strategy. Appendix 2 provides an analysis of average investment balances for each counter-party sector. With 31% of the portfolio the DMO is the largest sector and with 29% invested in call money and 26% placed with UK Government guaranteed banks this highlights the limited opportunities to invest outside these 3 sectors as determined in the 2009/10 Treasury Management Strategy. The final 14% was placed with Building Societies (11%) and Non UK Banks 3%.

9. There were 296 deposits made during 2009/10 (this does not include call money). These deposits were made with three UK banks, two foreign banks, Nationwide building society and the DMO, a total of seven institutions. The average size of investments was £11.8 million and the average term 9 days. The short-term nature of the deposits illustrates lower cash balances during the year and the need to invest for shorter periods to cover daily expenditure.

Income on Investments

10. Income on investments for 2009/10 was £0.824 million with a return of 0.57% on the investment portfolio. Appendix 2 shows the rate of return and the income received by market sector. The call money account return is 1.04% continued to show the most attractive return while also providing liquidity. The DMO is still the lowest rate of return at 0.26% for the year.

11. The interest on investments budget for 2009/10 was £2.1m, determined when prevailing and anticipated interest rates were higher. With the prospect of continuing lower interest rates for the remainder of 2009/10 and base rate at 0.5% the estimated outturn for 2009/10 was reduced in May 2009 to £0.75 million. However as set out at Appendix 3, 2009/10 final income was £0.824 million (excluding £55k of impaired interest from Landsbanki).

Borrowing

12. In line with Treasury Management Policy the MPA Treasurer takes the decision on external borrowing ensuring compliance with the CIPFA Treasury Management Code of Practice. While approval for borrowing rests with the Treasurer officers of MPS finance and treasury advisors Arlingclose meet monthly to discuss all treasury management matters which includes an assessment of borrowing requirements. While consideration is given to short term cash flow requirements and the ability of the MPA to meet its liabilities the long term position of borrowing to support the capital programme is also kept under review. A report on aligning borrowing requirements with the capital programme and cash flow requirements was submitted to the Finance and Resources committee on 21 January 2010 and the recommended borrowing strategy was approved.

13. In line with the recommended strategy additional external borrowing was undertaken. This was additional to borrowing undertaken earlier in the year. All borrowing has been undertaken with the Public Loans Board (PWLB). Table 1 below provides details of new loans raised.

Table 1 - 2009/10 new loans raised with the PWLB

14. The new borrowing of £80m detailed at Table 1, the repayment of one loan for £4.338m and repayment of principal of Equal Instalment of Principal (EIP) loans, gives an outstanding portfolio balance of £121.95m at 31 March 2010. All debt is with the PWLB of which £106.95m is fixed rate and £15m variable rate.

15. Expenditure on the debt is included at Appendix 3. The 2009/10 expenditure budget of £3.6m included estimated expenditure for new borrowing in year. Expenditure outturn for borrowing, including interest due on the new borrowing, was to budget at £3.6m, at an average rate of interest of 4.88%.

Interest rate movement and investment performance for 2009/10

16. During 2009/10 the Bank of England kept base rate unchanged at 0.5%. Although this keeps short term rates low (around 0.6%for one month), we continued to see a positive yield curve (upward sloping indicating higher future rates) with money market rates at 1.90% for one year compared with base rate of 0.5%.

17. We continue to monitor performance against the British Bankers Association (BBA) LIBOR rate. The MPA return of 0.57% compares with BBA LIBOR (1 week) of 0.54% and BBA LIBOR (1 month) of 0.59%. The MPA return again illustrates that deposits were made in the short end of the money markets.

18. All investment and borrowing activity has been undertaken within the guidelines and objectives set out in current policy and strategy. Liquidity has been maintained to ensure that obligations have been discharged. All investments were compliant with the requirements of the strategy and achieved a rate of return consistent with the limited opportunities available.

Risk assessment and compliance

19. The Treasury Management strategy restricts lending to institutions with a high credit rating or, as set out in the 2009/10 strategy. In November 2009 the MPA engaged Arlingclose as treasury management advisors. Arlingclose regularly attend meetings with MPA and MPS officers to asses risk management and to assist with more strategic matters. During 2009/10 the MPA adopted the Arlingclose lending list which was consistent with 2009/10 strategy requirements.

20. The MPA uses rating agencies as well as other soft information from Arlingclose, Reuters and other sources to assess counterparty risk. The minimum selected standards for a counterparty are:

21. In addition to counterparty ratings the sovereign rating is also considered with only a AAA rating accepted.

22. Institutions meeting the credit rating criteria have an individual lending limit. The highest limit during the year was £50 million and applied to all UK banks and Nationwide Building Society on the lending list. The highest limit for other banks was £20 million.

23. All transactions undertaken during the year were conducted within the criteria set out in the 2009/10 Treasury Management strategy. Constant monitoring of the lending list against the ratings agencies credit information ensured that all institutions met the prescribed credit ratings and all investments were compliant.

24. To provide additional assurance Members have requested that monitoring reports contain a statement of assurance from the Treasurer and Director of Resources in the absence of Director of Finance. (The assurance about treasury management operations during the 4th quarter 2009/10 is attached at Appendix 6).

25. Following an audit in February 2008 of investments, borrowing and cash management, Internal Audits’ follow-up report this year gives their overall opinion that significant progress has been made in improving the control framework. All seven recommendations made by Internal Audit, and the 13 recommendations arising from the February 2009 KPMG review, have now been fully implemented.

Treasury management Prudential Code indicators

26. Prudential Code indicators specific to treasury management are designed to ensure that treasury management is carried out in accordance with good professional practice. Indicators for 2009/10, 2010/11 and 2011/12 were presented as part of the 2009/10 treasury management strategy.

27. The 2009/10 indicators and actual figures for the year are set out at Appendix 5. Investment and borrowing activity has been maintained within indicator limits.

Landsbanki Update

28. During 2009/10, following indications from the administrators of Landsbanki that local authorities, as preferential creditors, are likely to receive about 83% of their deposits, the MPA has impaired 17% of the £30m deposited with Landsbanki. The preferential creditor status of local authorities who have funds frozen with Landsbanki is being challenged by a number of non-priority creditors. In order to confirm local authority status a number of test cases are being referred to the Icelandic courts. This process is likely to take around 12 months.

29. Members are reminded that the Local Government Association (LGA) and their legal advisors continue to provide a co-ordinated response on behalf of local authority creditors. Legal costs are apportioned across all creditors represented with MPA costs to date of £30.5k. It is recommended that the MPA continues to be represented within this group response and that members approve this approach. Without preferential creditor status the expected recovery of funds is likely to be 32%, so the relatively low costs to the MPA need to be balanced against the potential £15.3m at stake.

C. Race and equality impact

Consideration is given to the requirements of the Race Relations (Amendment) Act through the MPA/MPS Environmental Strategy and the developing Ethical Investment Policy whereby best practice standards are promoted.

D. Financial implications

1. This is a financial report and the details are set out in the body of the report.

2. Any 2009-10 figures discussed in this report are consistent with those advised in quarterly updates during the year. However members should note that the combination of continued low interest rates and the very short length of investments due to lower cash balances will have a significant impact on future investment income. The 2010/11 budget for investment income has been set at £0.8m.

E. Legal implications

1. Under Section 1 of the Local Government Act 2003, the MPA as local authority defined under s23 of that Act, may borrow money for any purpose relevant to its functions under any enactment, or for the purpose of the prudent management of its financial affairs.

2. The Mayor is required under s3 of the Local Government Act 2003 to determine how much money the GLA and each functional body (which includes the MPA) can afford to borrow. In complying with this duty, Regulation 2 of the Local Authorities (Capital Finance and Accounting)(England) Regulations 2003 requires the Mayor to have regard to the Prudential Code for Capital Finance in Local Authorities when determining how much the MPA can afford.

3. The MPA’s standing orders provide the Treasurer, is responsible for the proper administration of the MPA’s financial affairs, and for advising the Authority on all matters related to treasury management, investments and borrowing, and for ensuring that treasury management arrangements are in compliance with the CIPFA Code of Practice for Treasury Management in Local Authorities.

4. The Financial Regulations set out in the MPA’s standing orders under Part F also requires the Treasurer to report to the Authority, or designated committee of the Authority, on treasury management operations on a quarterly basis, and submit an annual report on treasury management to be presented by 30 September of the succeeding financial year.

5. This report discharges the requirement set out in the above paragraph, and the requirement set out in the CIPFA Code of Practice, as described in the body of the report.

F. Background papers

• Treasury Management Strategy 2009/10 – MPA Finance and Resources Committee Report 19 March 2009
• Treasury Management Quarterly Updates 2009/10 - MPA Resources and Productivity Committee Reports 3 September 2009, 5 November 2009 and 1 February 2010

G. Contact details

Report authors: Paul Daly, Director of Exchequer Services, MPS

For more information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

Abbreviations

BBA

British Bankers Association

CIPFA

Chartered Institute of Public Finance & Accountancy

DMO

Debt Management Office

EIP

Equal Instalment of Principal

LGA

Local Government Association

LIBOR

London Interbank Offered Rate

PWLB

Public Works Loan Board

RBS

Royal Bank of Scotland

Appendix 5: Treasury Management Prudential Indicators for the Metropolitan Police Authority

Treasury Management Indicators – Comparison of 2009/10 estimate to actual position for the 12 months to 31 March 2010

Gross Outstanding Borrowing.

Limits in interest rate exposure calculated with reference to net outstanding borrowing sums

Gross Outstanding Investment.

Limits in interest rate exposure calculated with reference to outstanding investment sums

Maturity Structure of Borrowing – Upper and Lower Limits

Amount of projected borrowing that is fixed rate maturing in each period as a percentage of total projected borrowing that is fixed rate

• Principal sums invested for longer than 364 days
• Treasury management strategy 2009/10 restricts all investments to less than 365 days.
• The MPA has adopted the CIPFA Code of Practice for Treasury Management in Public Services.

External Debt Indicators

Authorised Limit for External Debt

This is the maximum amount that the Authority allows itself to borrow in each year. They are based on the estimate of the most likely, prudent but not worst-case scenario, with in addition sufficient headroom over and above this to allow for operational management, for example unusual cash movements. Risk analysis and risk management strategies have been taken into account, as have plans for capital expenditure and estimates of cashflow requirements.

Operational Boundary for External Debt.

The Operational Boundary for external debt is based on the same estimates as the Authorised Limit but reflects directly the estimate of the most likely, prudent, but not worst case scenario, without the additional headroom included within the Authorised Limit to allow for example for unusual cash movements and equates to the maximum of external debt projected by this estimate.

Actual External Debt

Actual External Debt 31/3/2010 (2009/10): 121,950 (£000)

Appendix 6: Certificate of Assurance

We confirm that the Treasury management report for the fourth quarter of 2009/10 is an accurate record of the treasury management activity of the Metropolitan Police Authority for the period ended 31 March 2010 and that all activity has been undertaken in accordance with the agreed policies and strategy.

Bob Atkins, Treasurer, MPA and Anne McMeel, Director of Resources, MPS

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