Treasury Management first quarter 2011/12 update

Report: 6
Date: 22 September 2011
By: Treasurer

Summary

This report invites members to review Treasury Management activity for the period 1 April 2011 to 30 June 2011.

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 1st quarter 2011/12.

2. Activity in this period has been undertaken in line with the 2011/12 Treasury Management Strategy Statement, approved by Finance and Resources Committee on 14 March 2011. Members are reminded that the 2011/12 approved counterparty list for investments is fully aligned to the counterparty list currently adopted by Arlingclose with the aim of spreading risk amongst a wider range of institutions.

3. The report is similar in format to previous quarterly reports reviewed by the Resources and Productivity Sub-Committee and includes information on investment income at Appendix 1, debt expenditure at Appendix 2 and a statement of assurance from the Treasurer and the Director of Finance at Appendix 4.

The investment portfolio

4. Average cash balances invested during the quarter were £151.6m. This compares with an average balance of £151.0m for 2010/11. Cash balances available for investment include balance sheet reserves, unapplied capital receipts and grant and cash arising from the timing of large receipts and payments.

5. Investment decisions are made with regard to cash flow, to ensure that sufficient cash is available to meet financial obligations arising from approved spending plans. To manage this liquidity risk the short-term and medium-tem cash position is continuously reviewed.

6. The structure of the portfolio reflects the investment instruments selected for investment purposes as defined by the 2011/12 Treasury Management strategy and approved counterparty list. Appendix 1 provides an analysis of average investment balances for each counterparty sector. With 40% of the portfolio the largest sector was call money. These instantly accessible funds were held with the Royal Bank of Scotland (RBS) and Halifax Bank of Scotland (HBOS). With 29% of the portfolio the second largest sector was non UK banks and 26% was placed with UK Banks (not including RBS and HBOS call money). Only 3% was placed with the one building society currently on the MPA counterparty list and 1% placed with the Debt Management Office (DMO). A nominal amount of one deposit for 3 days was also placed with a Local Authority.

7. The expansion of the counterparty list has achieved the objective of redirecting funds from the DMO to other sectors although the DMO does still provide a secure alternative for placing funds at times when cash surpluses are higher than usual due to quarterly grant income. During 2010/11 approximately 4% of the portfolio was placed with the DMO and this has reduced further to 1% this quarter as this facility is used only when an alternative counterparty is not available.

8. During the quarter 66 deposits were made with five UK banks, five non UK banks, Nationwide building society, the DMO, and Leeds County Council, a total of thirteen institutions.

9. On one occasion the notional limit of £35.0m with RBS was exceeded, on 19 May by £15.0m. This was due to late in the day receipt of funds, which were placed in the call account with RBS overnight, with the funds on lent the following day.

Income on Investments

10. Income on investments during the quarter was £0.3m at a return of 0.75%. The rate of return achieved is lower than the previous quarter because two £5.0m one year deposits placed at favourable interest rates matured in May and June 2011. The average length of investments placed during the quarter remained short at 7 days.

11. The lower part of Appendix 1 shows the rate of return and income achieved by sector. The 1% return from the two call money accounts remains the most attractive. The graph shows that the building society sector has the highest rate due to a £5.0m one year deal, with a July 2011 maturity date, with the Nationwide building society. As expected the DMO return of 0.25% continues to provide the lowest return of all the sectors.

12. The interest on investments budget for 2011/12 is £0.8m as set out at Appendix 2. With income at £0.3m this quarter and allowing for future pressure on cash balances the estimated outturn is currently to budget at £0.8m.

Borrowing

13. Cash balances vary considerably during the month from a high at the start of the month when grant payments are received through to lower balances as monthly commitments are met. Although there was no new long term borrowing undertaken cash balances did fall into overdraft on the last day of the quarter and an overnight loan of £30.0m was negotiated with the GLA.

14. The approval for borrowing rests with the Treasurer who meets monthly with MPS finance staff and treasury advisors Arlingclose to review options. Consideration is given to short term cash flow requirements to cover daily commitments and the ability of the MPA to meet its long term liabilities to support the capital programme.

15. Following repayment of £0.6m of an EIP loan in May 2011 the outstanding portfolio balance with the PWLB at 30 June 2011 was  £209.8m. This is made up of 25 loans and includes £60.0m at variable rate. The average interest rate on the portfolio is 3.65%.

16. In deciding the length of new fixed term loans the maturity profile of existing debt is considered, with new loans scheduled to complement that existing profile.  A varied spread of maturity dates avoids the possibility of renegotiating a large proportion of the debt when prevailing interest rates are high, and Prudential Code indicator limits are set accordingly. Appendix 3 illustrates the maturity profile and the percentage of the debt maturing for each prudential code limit. Appendix 3 also sets out the other treasury management prudential code indicators relevant to borrowing.

17. Expenditure on the debt portfolio during the quarter was £1.9m. A summary of the quarter’s expenditure on the debt against the 2011/12 budget of £14.3m is provided at Appendix 2. The estimated outturn for 2011/12 based on the current level of external debt (£209.8m) and the estimated interest on further borrowing of £68.0m to support the capital programme is £11.1m.

18. While the 2011/12 borrowing strategy includes provision to borrow £68.0m careful consideration must be given to decisions about the timing of taking on new external borrowing. Initial indications that cash balances will fall towards the end of the 3rd quarter 2011/12 are being revised due to pressures on cash flow arising from the response to the August 2011 public disorder within London. Additional costs incurred to 26 August are estimated at about £35.5m (with additional further costs as investigations continue). Although these costs are likely to be reimbursed by special grant it is estimated that the short term pressure on cash flow will result in the need to undertake borrowing in October. This position will be closely monitored and will also need to incorporate the impact of potential liabilities arising from the Riot Damages Act (RDA) as that position becomes clearer.

19. Furthermore the timing of borrowing must consider the prevailing and predicted market conditions. Although PWLB rates have remained low and it is uncertain when they may rise, market expectations are that an increase in interest rates is predicted during quarter 4 2011/12 or quarter 1 2012/13. The position will be closely monitored by the MPS treasury team, the Treasurer and Arlingclose and have regard to the implications on revenue expenditure.

Economic background and investment performance

20. The Bank of England held base rate at 0.5% throughout the quarter and retained the asset purchase facility (quantitative easing) at £200bn. In the US the rating agencies have warned that the US long term credit rating could be downgraded amidst fears that the government will fail to reach an agreement on increasing the debt ceiling (with a subsequent downgrade to AA+ by Standard and Poor’s). The Bank of England still expect the Consumer Price Index (CPI) to peak at about 5% over the next three months, which would coincide with the energy price rises led by several leading national utilities suppliers effective from August 2011. Further more the Eurozone continues to deal with excessive debt among member states along with the prospect of little or no growth.

21. Short term interest rates have remained low (around 0.50% for one month) although a positive yield curve remains (that is upward sloping with the market anticipating higher future rates) with rates at 1.9% for one year compared with base rate of 0.5%.

22. Performance is monitored against the British Bankers Association (BBA) LIBID rate (this is the rate that a bank will bid to borrow funds in the international interbank market). The MPS return of 0.75% compares with BBA LIBID (one week) of 0.51% and BBA LIBID (one month) of 0.51%. The higher MPS return is expected to fall in future months as three higher yielding one year deposits have now matured leaving only very short term deposits in the portfolio.

23. The GLA have become the first local authority to issue a bond for over ten years. There has been lots of speculation regarding this alternative type of funding for local authorities following the Governments increase in PWLB margins over gilt yields in October 2010. The GLA bond was a public issue priced at 0.80 basis points (+ 3bp’s for costs) over the gilt yield and 0.17 basis points below PWLB.

Compliance

24. All investment and borrowing activity has been undertaken within current guidelines to achieve the objectives set out in the 2011/12 Treasury Management Policy and Treasury Management Strategy.

25. All investments were compliant with the requirements of the Treasury Management Strategy 2011/12 and achieved a rate of return consistent with the opportunities available. The monitoring of cash flow ensured that liquidity was maintained, supported by the £30.0m short term loan from the GLA.

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

Landsbanki update

27. There have been no further updates from the Local Government Association (LGA) since priority status as creditors was granted to local authorities reported in June 2011. The Icelandic Supreme Court is currently considering the appeal from non priority status investors.

28. Members are reminded that the LGA and their legal advisors continue to provide a co-ordinated response on behalf of local authority creditors. The legal costs, which the LGA advise amounts to less than 1% of the cash now expected to be recovered, are apportioned across all creditors represented with MPA costs to date of £0.159m.

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 2011/12 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 2011/12 estimated outturn for interest on investments is to budget at £0.8m. The 2011/12 estimated outturn for expenditure on the current debt portfolio of £209.8m plus interest on any additional borrowing during 2011/12 is £11.1m.

Legal Implications

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

6. 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.

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.

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. The MPS Corporate Social Responsibility (CSR) Strategy has been adopted which includes the finance related objective to “discharge our fiduciary duty through the efficient, ethical and transparent management and use of all resources entrusted to us, delivering value for money to the public”. Although there are no corporate social responsibility issues directly arising from this report the consideration of environmental and social/ethical issues resulting from MPS investment activity is appropriately directed by the MPA ethical investment policy.

Risk Implications

10. 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 2011/112 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 2011/12 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 4

Treasury Management 1st Quarter 2011/12

Certificate of Assurance

We confirm that the Treasury management report for the first quarter of 2011/12 is an accurate record of the treasury management activity of the Metropolitan Police Authority for the period ended 30 June 2011 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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