Treasury Management quarterly report

Report: 4
Date: 13 September 2010
By: Treasurer

Summary

This report invites members to review Treasury Management activity for the period 1 April 2010 to 30 June 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 1st 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 combining increased opportunities with lower individual limits 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 £104m. This compares with an average balance of £152m for 2009/10 (and last quarter 2009/10 of £120m). 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 2010/11 Treasury Management strategy and approved counterparty list. Appendix 1 provides an analysis of average investment balances for each counterparty sector. With 47% 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 the addition of the Lloyds Banking Group to the counterparty list the HBOS account became an available opportunity and has offered a competitive rate of return. With 26% of the portfolio the second largest sector was non UK banks and 21% was placed with UK Banks (not including RBS and HBOS call money). The 4% with the building society sector highlights that there is only one building society on the counterparty list. Only 2% was placed with the Debt Management Office (DMO).

7. The expansion of the counterparty list has achieved the objective of redirecting funds from the DMO to other sectors. During 2009/10 in excess of 31% of the portfolio was placed with the DMO but decreased to 2% this quarter. Conversely during 2009/10 the non UK bank sector was 3% of the portfolio but has increased this quarter to 26%.

8. During the quarter 56 deposits were made with four UK banks, four non UK banks, Nationwide building society and the DMO, a total of ten institutions. The number of deposits is lower than in recent quarters due to higher balances held in call accounts and overall lower cash balances.

9. On two occasions the notional limit of £30m with RBS was exceeded, on 21 May by £6m and on 28 May by £17m. 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 £0.189m at a return of 0.72%. Income and the rate of return achieved are slightly higher than the previous quarter even though cash balances have been lower. This highlights the greater number of opportunities available due to the extended 2010/11 counterparty list and the diversion of cash away from the DMO. The average length of investments during the quarter was 17 days. This is relatively high due to one-year deposits placed with Santander UK and with Nationwide Building Society.

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 while the DMO return of 0.25% continues to provide the lowest return of all the sectors.

12. The interest on investments budget for 2010/11 is £0.8m as set out at Appendix 2. With income at £0.189m this quarter the estimated outturn is to budget at £0.8m.

Borrowing

13. Cash balances this quarter have been lower, as advised above at paragraph 4, and it was recognised that borrowing would be required to support the cash position. The Treasurer gives the approval for borrowing having reviewed the options available with MPS finance staff and treasury advisors Arlingclose. Full consideration is given to the short term cash flow requirements and the long term position of borrowing to support the capital programme and on 7 May 2010 £45m fixed rate long term borrowing was undertaken with the Public Works Loan Board (PWLB). A breakdown of the six new loans is shown at Table 1 below.

Table 1 - 2010/11 Quarter 1 new loans raised with the PWLB

14. The new borrowing of £45m at Table 1 added to existing debt gives an outstanding portfolio balance with the PWLB of £166.4m. This is made up of 24 loans and includes £15m at variable rate. The average interest rate on the portfolio is 4.15%.

15. 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.

16. Expenditure on the debt portfolio during the quarter was £1.396m. A summary of the quarter’s expenditure on the debt against the 2010/11 budget of £3.6m is provided at Appendix 2. The estimated outturn for 2010/11, based on the current level of external debt (£166.4m), shows an emerging budget pressure of approximately £2m. Options are currently being considered for dealing with this pressure as part of a review of the wider MPS budget.

17. The 2010/11 borrowing strategy included provision to borrow £90m and careful consideration must be given to decisions about the untaken balance of £45m. Indications are that cash balances will fall towards the end of the 3rd quarter 2010/11 and there may be further pressure resulting from future strategic decisions about the use of reserves. Furthermore the timing of borrowing must consider the prevailing and predicted market conditions. PWLB rates have moved considerably lower moving below (in August 2010) 4% for 50 years. It could be advantageous to schedule new borrowing before possible rate increases even though the cash flow requirement may be later in the year. The position will be closely monitored by the MPS treasury team, the Treasurer and Arlingclose and have regard to the additional revenue expenditure which will add to the budget pressure mentioned above at paragraph 16.

Economic background and investment performance

18. The Bank of England held base rate at 0.5% throughout the quarter and retained the asset purchase facility (quantitative easing) at £200bn. In Europe the EU approved a Euro stability package of €750bn to ensure the Greece debt crisis did not extend to other Eurozone countries particularly following rating agency Standard and Poors’ downgrading the sovereign ratings of Spain, Portugal and Greece. Furthermore the Committee of European Banking Supervisors (CEBS) applied a stress test to examine the financial standing of 91 EU banks. Seven banks failed this test but due to the high credit quality criteria that MPA counterparty banks must satisfy none of these institutions would have been considered as a suitable counterparty.

19. Within this economic climate short term interest rates have been low (around 0.45% for one month) although a positive yield curve remains (that is upward sloping with the market anticipating higher future rates) with rates at 1.8% for one year compared with base rate of 0.5%.

20. 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 0.72% compares with BBA LIBID (one week) of 0.26% and BBA LIBID (one month) of 0.47%. The higher MPS return is attributable to the return achieved on the call accounts, three longer term deposits with higher yields and lower balances with the DMO.

Compliance

21. All investment and borrowing activity has been undertaken within current guidelines to achieve the objectives set out in the 2010/11 Treasury Management Policy and Treasury Management Strategy.

22. 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. The monitoring of cash flow ensured that liquidity was maintained, supported by the £45m borrowing, enabling obligations to be met.

23. 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

24. The first hearing of Landsbanki test cases in the Reykjavik District Court took place on 30 April 2010. This was a procedural hearing about how the case is to be conducted, rather than a hearing on the merits of local authorities’ claims. The Landsbanki winding up board has agreed to refer all the non-test cases to court, which is positive as it should facilitate the earliest possible resolution of matters for all authorities with exposure to Landsbanki.

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 to budget at £0.8m. The 2010/11 estimated outturn for expenditure on the current debt portfolio of £166.4m is £6.7m, an emerging pressure of £2m 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. Options for dealing with this pressure are being examined as part of the wider review of the MPS budget.

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. 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 4

Treasury Management 1st Quarter 2010/11 - Certificate of assurance

We confirm that the Treasury management report for the first quarter of 2010/11 is an accurate record of the treasury management activity of the Metropolitan Police Authority for the period ended 30 June 2010 and that all activity has been undertaken in accordance with the agreed policies and strategy.

Bob Atkins
Treasurer

Nick Rogers
Director of Finance

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