Treasury Management - 3rd quarter 2010/11 update

Report: 5
Date: 17 February 2011
By: Treasurer

Summary

This report invites members to review Treasury Management activity for the period 1 October 2010 to 31 December 2010.

A. Recommendations

That members

1. Note this report and attached appendices which include a statement of assurance from the Treasurer and Director of Finance.

B. Supporting information

1. To satisfy the requirements of the Chartered Institute for Public Finance and Accountancy (CIPFA) guidelines for the monitoring of treasury management operations this quarterly report reviews treasury management and performance for the 3rd quarter 2010/11.

2. Activity in this period has been undertaken in line with the 2010/11 Treasury Management Strategy Statement, approved by Finance and Resources Committee on 18 March 2010. Members are reminded that the 2010/11 approved counterparty list for investments was extended. Members approved a further addition to the counterparty list and an increase to the individual limits for UK banks at the meetings of the Resources and Productivity sub Committee on 6 December 2010 and the Finance and Resources Committee on 16 December 2010.

3. The report is similar in format to previous quarterly reports reviewed by the Resources and Productivity Sub-Committee but additionally includes information on the benchmarking of investments at Appendix 4. The statement of assurance from the Treasurer and the Director of Finance is attached at Appendix 5.

The investment portfolio

4. Average cash balances invested during the quarter were £179 million, lower than the previous quarter by £31 million.

5. Appendix 1 gives a breakdown by market sector of where funds were invested. The largest sector with 31% of the portfolio is call money. This represents funds held with the MPA’s banker Royal Bank of Scotland (RBS) and Lloyds Banking Group (HBOS); this provides both liquidity and a competitive return. The Non UK bank sector represents 28% of the portfolio. The third largest sector represents UK banks (excluding RBS) at 26%. The remainder was made up of 11% with the Nationwide building society and only 4% with the DMO.

6. During the quarter 78 deposits were made with four UK banks, four non UK banks, Nationwide building society and the DMO, a total of ten institutions.

7. The notional limit of £30 million with RBS was not exceeded during this reporting period.

Income on Investments

8. Income on investments for the quarter was £0.310 million at a return of 0.69%. Income is slightly lower than the previous quarter due to lower cash balances, but the rate of return on those balances is 0.06% higher. This reflects greater opportunities available from both UK and foreign banks and less funds being placed with the DMO which has helped to improve the rate of return slightly. The average length of investments was 8 days, down from 17 days during the previous quarter as no longer term investments were made during the quarter due to lower cash balances. The Bank of England again maintained Base Rate at 0.5% during the quarter.

9. The lower section of Appendix 1 also shows the rate of return and income by sector. The two call money accounts return of 1% for the quarter remains the most attractive and is significantly higher than the return from other sectors. The DMO still represents the lowest return at 0.25%, but with this sector only representing 4% of the total portfolio it is less significant.

10. The interest on investments budget for 2010/11 is £0.8 million as set out at Appendix 2, with 2010/11 income to date of £0.832 million the estimated outturn is expected to be closer to £0.95 million.

Borrowing

11. The MPA Treasurer and officers of MPS finance continue to 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.

12. Although cash balances were lower, as advised above at paragraph 4, there was no cash flow requirement to undertake any additional borrowing during the quarter. Estimates did initially indicate that cash balances towards the end of December 2010 would be low and arrangements to access a short term loan from the GLA were negotiated. However, because of the early receipt from the Home Office of a quarterly grant access to these funds was not required. The long term position of borrowing to support the capital programme was also kept under review. Interest rates for new borrowing remain relatively low but did show some increases during the quarter. Most significantly Public Works Loans Board (PWLB) rates have increased as part of the Government’s spending review as explained further at paragraph 20 below. The longer term view remains that rates will increase as the UK recovers from recession and the Government’s quantitative easing programme is concluded.

13. With no new borrowing undertaken during the quarter and two part maturing Equal Instalment of Principal (EIP) loans being repaid the outstanding portfolio balance with the PWLB is £165.6 million. This is made up of 24 loans and includes £15 million at variable rate. The average interest rate on the portfolio is 4.15%.

14. Expenditure on the debt portfolio during the nine months to 31 December 2011 was £4.854 million. A summary of the period’s expenditure on the debt against the 2010/11 budget of £3.6 million is provided at Appendix 2. As reported to previous committees the estimated outturn for 2010/11, based on the current level of external debt (£165.6 million), continues to show an emerging budget pressure of approximately £2 million. Options are currently being considered for dealing with this pressure as part of a review of the wider MPS budget.

Performance and Benchmarking

15. All investment and borrowing activity has been undertaken within the guidelines and objectives set out in 2010/11 Treasury Management Policy and Treasury Management Strategy. Liquidity has been maintained to ensure that obligations have been discharged.

16. All investments were compliant with the requirements of the Treasury Management Strategy 2010/11 and achieved a rate of return consistent with the opportunities available.

17. At the Finance and Resources Committee of 16 December 2010 Members discussed the MPA counterparty list and it was suggested that benchmarking of the MPA position against other clients of treasury advisors Arlingclose would be useful. Arlingclose have provided benchmarking information and the graph at Appendix 4 shows the average credit risk and rate of return for the MPA compared with their other clients as at 30 September 2010.

18. This shows that MPA investments during the illustrated 2nd quarter, in terms of counterparty credit risk, are broadly in line with other local authorities. While the rate of return will be determined by the counterparties used this is only one variable and the length of investments, which are very short for the MPA due to cash flow considerations, will also have a significant effect on the rate of return.

19. 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 5.

Economic background

20. The Bank of England held Base Rate at 0.5% during quarter 3. The asset purchase facility was also held at £200 billion although there were calls for this to be increased. As part of the comprehensive spending review delivered on the 20 October, HM Treasury directed the PWLB to increase the average interest rate on all new loans to an average of 1% above the Government’s cost of borrowing with immediate effect. This resulted in maturity PWLB loans increasing by 0.87% across all terms.

21. During November the focus turned to the Eurozone’s finances, in particular the Irish Republic’s. As with Greece earlier in the year the Irish Government had to approach both the EU and the IMF for financial support. Support of 85 billion Euros (£72 billion) was agreed of which 35 billion Euros was used to support the Irish banking system. This increased upward pressure on bond yields across Europe.

22. The Office for National Statistics announced a record high in public sector borrowing in November with net borrowing totalling £23.3 billion and CPI inflation increased to 3.3%. This will add to upward pressure on UK interest rates during 2011.

Landsbanki update

23. 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 the £30 million deposited with Landsbanki by £5.1 million. 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% and an additional impairment of £15 million will be required. This position and CIPFA guidance on this matter will be closely monitored.

24. The appointed legal advisors working with the Local Government Association (LGA) have been preparing for the trial of the test cases, which have been provisionally listed for 15 to 17 February 2011. For non test cases, which include the MPA, the challengers had until 10 December 2010 to file their submissions in relation to the first tranche of the non test cases and it is expected a deadline will be given shortly for filing all submissions. The legal team are on track to complete the first drafts of all non test case submissions by the end of January 2011.

C. Other organisational and community implications

Equality and Diversity Impact

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

Consideration of MET Forward

2. The Treasury Management Strategy 2010/11 defines MPA treasury management activities as ‘the management of the organisation’s investments and cash flows, its banking, money market and capital market transactions; the effective control of the risks associated with those activities; and the pursuit of optimum performance consistent with those risks.”

3. The achievement of optimum performance from treasury management activities, by maximising yield from cash balances invested and minimising the cost of borrowing while effectively controlling associated risk, supports the objective of achieving better value for money.

Financial implications

4. The financial implications have been discussed in the report. The 2010/11 estimated outturn for interest on investments is above budget at £0.95 million. The 2010/11 estimated outturn for expenditure on the current debt portfolio of £165.6 million is £6.7 million, an emerging pressure of £2.0 million against budget once a corresponding increase in Loan Charges Grant is allowed for. This is due to the scheduling of new loans with the full year cost having been recognised in future years but not the partial in year impact. Any additional borrowing during 2010/11 will add to this pressure but alternatives to long term borrowing to cover cash flow shortfalls have been considered, as mentioned at paragraph 12 above. Options for dealing with this budget pressure are being examined as part of the wider review of the MPS budget.

Legal implications

5. This is a financial monitoring report primarily for information only.

6. The Treasurer’s responsibilities are set out in the Financial Regulations under Part E of the MPA standing orders. In accordance with those standing orders, the Treasurer is responsible for advising the Authority on all matters relating 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. This report fulfils this requirement.

7. 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. The report will also be referred to the Finance & Resources Committee for final approval.

Environmental implications

8. There are no direct environmental impacts arising from the treasury management activity discussed in this report. However the MPA ethical investment policy seeks to avoid the investment of funds in organisations whose core activity contributes to significant negative environmental impacts the MPA will not invest funds in any organisation involved in animal testing, the fur trade and blood sports.

9. It should be noted that the MPS Corporate Social Responsibility (CSR) Strategy is currently awaiting review by the MPA. This Strategy takes into account a broader scope of issues than the current MPS Environmental Strategy, extending also to social/ethical and economic issues. Consequently, the "Environmental Implications" section will, in due course, be replaced by a section that addresses these broader issues.

10. With this in mind, there are no corporate social responsibility issues directly arising from this report. The consideration of environmental, social/ethical and economic issues arising from MPS investment is appropriately directed by the MPA ethical investment policy.

Risk implications

11. The risks associated with treasury management activity are addressed by the CIPFA Code of Practice and set out in Treasury Management Practices. Furthermore the Treasury Management Strategy 2010/11 sets objectives to identify, monitor and control risk. Specifically the objectives and the associated areas of risk covered are:

• To undertake treasury management operations with regard for the security of capital invested (Credit and Counterparty Risk)
• To ensure that sufficient cash is available such that the MPA is able to discharge its financial obligations in accordance with approved spending plans (Liquidity Risk)
• To minimise the cost of borrowing and to maximise the yield from investments consistent with the security and liquidity objectives identified above (Market or Interest Rate Risk)
• To minimise the amount of borrowing to be replaced at any one time by maintaining an evenly spread maturity profile (Refinancing Risk)
• To undertake treasury management activity with regard to Prudential Code Indicators (All areas of Risk)

Roles and responsibilities for treasury management are clearly established and set out in the Treasury Management Policy Statement 2010/11 and includes regular review, reporting and scrutiny of treasury management activity.

D. Background papers

None

E. 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

Appendix 5

Certificate of assurance

We confirm that the Treasury management report for the third quarter of 2010/11 is an accurate record of the treasury management activity of the Metropolitan Police Authority for the period ended 31 December 2010 and that all activity has been undertaken in accordance with the agreed policies and strategy.

Bob Atkins - Treasurer, MPA

Nick Rogers - Director of Finance, MPS

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