Treasury management - 3rd quarter 2009/10 update

Report: 4
Date: 1 February 2010
By: MPA Treasurer

Summary

This report invites members to review Treasury Management activity for the period 1 October 2009 to 31 December 2009.

A. Recommendations

That Members note this report including the statement of assurance from the Treasurer and Director of Finance.

B. Supporting information

1. In line with CIPFA guidelines for the monitoring of treasury management operations this quarterly report reviews treasury management and performance for the 3rd quarter 2009/10.

2. The report is similar in format to previous quarterly reports reviewed by the Resources and Productivity Sub-Committee and includes additional information on debt expenditure at Appendix 2 and a statement of assurance from the Treasurer and the Director of Finance at Appendix 4.

Average balances

3. Average cash balances invested during the quarter were £184 million, lower than the previous quarter by £19 million.

4. Appendix 1 gives a breakdown by market sector of where funds were invested. The largest sector with 32% of the portfolio is call money. This represents funds held with the MPA’s banker Royal Bank of Scotland (RBS) and provides both liquidity and a competitive return. The Debt Management Office (DMO) sector represents 31% of the portfolio. This is 16% lower than the previous quarter because of more opportunities to place funds with British and Foreign banks. This sector size also satisfies the current strategy requirement that at least 25% of the portfolio should be placed with the DMO. The remaining 37% of the portfolio represents British banks (other than RBS), foreign banks and the Nationwide building society.

5. During the quarter 80 deposits were made with two UK banks, two foreign banks, Nationwide building society and the DMO, a total of six institutions.

Income on investments

6. Income on investments for the quarter was £0.236 million at a return of 0.51%. Income is slightly lower than the previous quarter due to lower cash balances, but the rate of return on those balances is 0.3% higher. With greater opportunities available from both UK and foreign banks and less funds being placed with the DMO this has helped to improve the rate of return slightly. The average length of investments was 10 days and is similar to the previous quarter. The Bank of England again maintained Base Rate at 0.5% during the quarter.

7. Appendix 1 also shows the rate of return and income by sector. The call money account return of 1.05% for the quarter remains attractive and is significantly higher than the return from other sectors. The DMO still represents the lowest return at 0.25%.

8. The interest on investments budget for 2009/10 is £2.1 million, 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 2, with 2009/10 income to date of £0.657 (excluding £55k of impaired interest from Landsbanki), the estimated outturn is adjusted to £0.8 million.

Borrowing

9. As previously advised to members the MPA Treasurer and officers of MPS finance meet monthly to discuss all treasury management matters which includes an assessment of borrowing requirements. Consideration is given to short term cash flow requirements and the ability of the MPA to meet its liabilities and a longer term view is taken when assessing borrowing needs and particularly the status and funding of the capital programme.

10. Cash balances were lower, as advised above at paragraph 3, but there was no need to undertake any long term borrowing during the quarter to meet cash flow requirements. However, an advance of grant was negotiated with the GLA to meet cash flow requirements during the first week of January 2010. The long term position of borrowing to support the capital programme is also kept under review and a report on aligning borrowing requirements with the capital programme and cash flow requirements was submitted to this sub committee on 11 January 2010. Interest rates for new borrowing remain low, but have increased during the quarter. The long term view remains that rates will increase as the UK recovers from recession and the Government’s quantitative easing programme is concluded.

11. Expenditure on the debt is included at Appendix 2. The 2009/10 expenditure budget of £3.6 million included estimated expenditure for new borrowing in year, of which £30 million was taken during the 1st quarter of the year. A further £50 million of new borrowing is expected to be undertaken in the 4th quarter of 2009/10 (as advised to this sub committee on 11 Jan 2010). Estimated expenditure outturn is to budget of £3.6 million.

Performance

12. 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.

13. All investments were compliant with the requirements of the strategy and achieved a rate of return consistent with the limited opportunities available.

14. Members have requested that monitoring reports contain a statement of assurance from the Treasurer and Director of Finance. This assurance about treasury management operations during the quarter is attached at Appendix 4.

Economic background

15. The Bank of England held Base Rate at 0.5% during quarter 3. The asset purchase facility was increased by £25 billion taking the total to £200 billion in November 2009. The Monetary Policy Committee has decided to reassess this facility in February 2010.

Landsbanki update

16. 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. Conversely the administrators of Glitnir Icelandic bank have rejected preferential creditor status for local authorities and local authorities are the party submitting a challenge in relation to this non-priority status. If the court's decision on these challenges is that local authorities are considered to be non-priority creditors the estimated funds recoverable will be reduced to 33%. This position and CIPFA guidance on this matter will be closely monitored.

C. Race and equality impact

Consideration is given to the requirements of equality legislation through the MPA/MPS Environmental Strategy and Ethical Investment Policy whereby best practice standards are promoted.br>The MPS Ethical Investment Policy was considered and approved by Resources Sub Committee on 16 March 2009.

D. Financial implications

The interest on investments budget for 2009/10 is £2.1 million. The estimated outturn was adjusted in May 2009 to £0.75 million and in December 2009 to £0.8 million.

E. Legal implications

1. This is a financial monitoring report; therefore there are no direct legal implications.

2. The Treasurer’s responsibilities are set out in the Financial Regulations under Part E of the MPA standing orders. In accordance with the standing orders the Treasurer is required to report to the Authority, or a designated committee of the Authority, on treasury management operations on a quarterly basis.

3. The Resources and Productivity sub-committee has authority in accordance with its terms of reference to receive and review the MPS Treasury Management report on a quarterly basis.

F. Background papers

None

G. Contact details

Report authors: Paul James, Director of Finance, MPS

For more information contact:

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

Appendix 4

Certificate of assurance

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

Bob Atkins (Treasurer)  Paul James (Director of Finance)

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