Treasury Management Financial Review 2010/11 – including quarterly monitoring report – quarter 4

Report: 4
Date: 13 June 2011
By: Treasurer

Summary

This report presents the Annual Review of Treasury Management for the 12 month period ended 31 March 2011 and includes an update for Quarter 4 2010/11.

A. Recommendations

That members

1. Note the 2010/11 annual report and 4th Qtr update of the Treasury Management function
2. 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 2010-11 approved by the March 2010 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 2010/11
• a review of debt management operations
• a summary of interest rate movement and investment performance for 2010/11
• 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 2010/11 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 2010/11 Update

5. The following is a summary of 2010/11 4th quarter treasury management activity:

• Average cash balances invested £110m
• Sector balances illustrated at Appendix 1. Call money was the largest balance at 48%, held with Royal Bank of Scotland (RBS) and Halifax Bank of Scotland (HBOS)
• Notional limit of £35m with RBS was not exceeded during the quarter
• There were 52 investments with two UK banks, four foreign banks and one building society
• Investment income of £0.229m at a return of 0.87% (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 £45m at variable rate was undertaken in March
• A further temporary short term (7 day) loan for £25m was also negotiated to cover cash requirements at the end of March
• One part maturing EIP loan of £0.25m 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 is attached at Appendix 6

Annual Review 2010/11

6. This annual review of the 2010/11 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 and Finance and Resources Committee.

Average Balances

7. The average size of the investment portfolio during 2010/11 was £151m. 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 2010/11 Treasury Management strategy. Appendix 2 provides an analysis of average investment balances for each counter-party sector. These balances reflect the opportunities available under the 2010/11 Treasury Management strategy counterparty list (amended in December 2010 to add an additional UK counterparty and to increase UK bank limits to £35m). Most significantly the portfolio has been realigned away from the low yielding DMO, with only 4% of investments placed with this sector during the year.

9. There were 288 deposits made during 2010/11 (this does not include call money). These deposits were made with three UK banks, four foreign banks, Nationwide building society and the DMO, a total of nine institutions. The average size of all investments was £14.5m and the average term 64 days. This average includes three one year deposits which inflate the average term. Removing the three one year deposits from the calculation gives a more representative average term of 12 days.

Income on Investments

10. Income on investments for 2010/11 was £1.061m with a return of 0.78% on the investment portfolio. Appendix 2 shows the rate of return and the income received by market sector. The call money account return at 1% continued to show the most attractive return (and represented 34% of the portfolio) while also providing liquidity. The DMO rate of return is the lowest at 0.25%.

11. The interest on investments budget for 2010/11 was £0.8m. The estimated outturn was adjusted in January 2011 to £0.95m. Although interest rates remained low during 2010/11 expanding the counterparty list to introduce further non UK banks helped this revenue stream. As set out at Appendix 3, 2010/11 final income was £1.061m.

Borrowing

12. In accordance 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 MPA, 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.

13. The 2010/11 strategy included a borrowing requirement of £90m. Taking into account the cash flow position the following loans have been undertaken with the Public Works Loans Board (PWLB). Table 1 provides details of new loans raised.

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

14. The addition to the debt portfolio of the new loans of £90m detailed at Table 1, less part repayment of £1.6m principal of Equal Instalment of Principal (EIP) loans, gives an outstanding portfolio balance of £210.35m at 31 March 2011. All debt is with the PWLB of which £150.35m is fixed rate and £60m variable rate.

15. Expenditure on the debt is included at Appendix 3. The 2010/11 expenditure budget of £3.6m did not include estimated expenditure for new borrowing in year. However, as advised to Members throughout the year, this emerging pressure was recognised and considered as part of the review of the wider MPS budget. Including expenditure on the new borrowing the outturn for 2010/11 was £6.7m. The weighted average of all loans (weighted by size of loan and the rate of interest paid) at 31 March 2011 was 3.65%.

16. An alternative to negotiating long term loans, to cover short term cash requirements, is to borrow from the market short term until the cash position is restored. One such loan, for £25m for 7 days, was undertaken in March 2011.

Interest rate movement and investment performance for 2010/11

17. During 2010/11 the Bank of England retained base rate at 0.5%. Money market rates increased marginally at the shorter end (overnight to three months). The six to 12 month rates increased between 0.25% to 0.30% over the 12 month period. This movement reflects the expectation that the bank base rate would be raised later in 2011.

18. Investment performance is monitored against the British Bankers Association (BBA) LIBID rate. The MPA return of 0.73% compares with BBA LIBID (1 week) of 0.45% and BBA LIBID (1 month) of 0.58%. The MPA return includes call accounts which currently yield 1%.

19. All investment and borrowing activity has been undertaken within the guidelines and objectives set out in current policy and strategy. Liquidity has been maintained, supplemented where necessary by short term borrowing as described at paragraph 16 above, 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 opportunities available.

Risk assessment and compliance

20. The Treasury Management strategy 2010/11 restricts lending to institutions that have a high credit rating and that meet other requirements that determine its overall credit quality. Arlingclose attend monthly meetings with MPA and MPS officers to asses risk management and to assist with more strategic matters. During 2010/11 the MPA adopted the Arlingclose lending list which was consistent with 2010/11 strategy requirements.

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

22. In addition to counterparty ratings the sovereign rating is also considered with AA+ as the lowest accepted rating.

23. Arlingclose provide benchmarking information of the MPA credit risk position in relation to that of their other local authority clients. The information reported to Members in February 2011 illustrated that MPA investments, in terms of investment counterparty risk, are broadly in line with other local authorities. This position remained unchanged at year end and will be monitored quarterly going forward.

24. Institutions meeting the credit rating criteria have an individual lending limit. The highest limit during the year was £35 million and applied to all UK banks and Nationwide Building Society on the lending list. The highest limit for other banks was £20m.

25. All transactions undertaken during the year were conducted within the criteria set out in the 2010/11 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.

26. To provide additional assurance Members have requested that monitoring reports contain a statement of assurance from the Treasurer and Director of Finance. (The assurance about treasury management operations during the 4th quarter 2010/11 is attached at Appendix 6).

27. Following a Material Systems audit in 2010/11 of Treasury Management investments and borrowing, Internal Audit’s finding was that all controls were effective and that no further action was required.

Treasury management Prudential Code indicators

28. 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 2010/11, 2011/12 and 2012/13 were presented as part of the 2010/11 treasury management strategy.

29. The 2010/11 indicators and actual figures for the year are set out at Appendix 5. Investment and borrowing activity has been maintained within indicator limits. The increase to the limit for variable rate borrowing from 15% to 30%, approved by Members in December 2010, has ensured that this indicator was not exceeded when variable rate borrowing was subsequently undertaken.

Landsbanki update

30. CIPFA advise the latest position is that local authorities with investments in Landsbanki have been granted priority status as creditors. A ruling by Iceland’s district court means that deposits placed by UK wholesale depositors will now have priority in the winding up of Landsbanki. However as expected other creditors have now appealed this decision to the Icelandic Supreme Court.

31. 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. 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 £159k.

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

Any 2010-11 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.
Legal Implications

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

Environmental Implications

10. 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 and the MPA will not invest funds in any organisation involved in animal testing, the fur trade and blood sports.

11. 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

13. 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 set out 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

• Treasury Management Strategy 2010/11 – MPA Resources and Productivity Committee Report 1 March 2010
• Treasury Management Quarterly Updates 2010/11 - MPA Resources and Productivity Committee Reports 13 September 2010, 6 December 2010 and 3 February 2011

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

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