Treasury management strategy 2001/02

Report: 9
Date: 20 February 2001
By: the Treasurer

Summary

This report sets out the Treasury Management Strategy recommended for 2001/02 and proposed borrowing limits to be recommended for formal adoption by the Metropolitan Police Authority.

A. Recommendations

1. The strategy set out in this report for 2001/02 be approved
2. The borrowing limits set out in paragraph 21 are approved and referred to the meeting of the Metropolitan Police Authority on 8 March 2001 for formal adoption.

B. Supporting information

1. On 10 July 2000 the Metropolitan Police Authority formally adopted the Code of Practice on Treasury Management issued by the Chartered Institute of Public Finance and Accountancy (CIPFA) together with a Treasury Management Policy Statement as a policy framework within which Treasury Management operations are to be conducted.

2. The Policy Statement requires that the Treasurer presents an annual Treasury Management Strategy and this report is submitted in accordance with that requirement.

3. Section 45 of the Local Government and Housing Act 1989 also requires that the MPA set limits on the total amount of borrowing that can be outstanding at any one time and the amount of both short term and variable rate debt within that overall limit. These limits must be determined before the start of the financial year to which they relate.

4. The exercise of that determination is a function that cannot be delegated to a committee or an officer. This Committee is therefore requested to consider and approve the Treasury Management Strategy for 2001/02 and refer the proposed borrowing limits to the MPA for formal approval.

Strategic objectives

5. The objectives underpinning the strategy for 2001/02 are as follows:

1. To undertake treasury management operations with primary regard for the security of capital invested.
2. To minimise the cost of borrowing and to maximise the return on investments subject to (1) above.
3. To ensure that sufficient cash is available such that the MPA is able to discharge its financial obligations in accordance with approved spending plans.

The investment portfolio

6. At 1 April 2001 the MPA is projected to have cash balances in the region of £200 million. This cash represents:

1. Earmarked Reserves, Provisions and Balances held to cover specific or general liabilities.
2. Unapplied Capital receipts and grants pending payments in respect of capital projects.
3. The net cashflow position of revenue income and expenditure including major creditors such as the Inland Revenue.

7. Cash balances are invested in approved investments as specified in regulations made under the Local Government and Housing Act 1989. These regulations restrict the borrowing instruments available to a Local Authority to those prescribed by the Secretary of State and limit the investment period to 364 days. Within this framework, the Treasury Management Policy Statement sets out the policy for investment of MPA funds. Specifically in 2001/02 it is proposed that the portfolio be invested with the following institutions:

1. UK Banks.
2. Foreign banks registered in the UK.
3. UK local authorities.
4. Mutual building societies.

8. Overall limits are imposed for these market sectors, with the aim of maintaining a balanced portfolio. The Sector Limits are currently set at £150 million for each of sectors (I) and (II) and £70 million for each of sectors (III) and (IV). Changes to these Sector Limits, as with other amendments to operational practice, are made through the preparation of Treasury Practice Notes, which are approved by senior management in consultation with the Treasurer.

9. The regulations prescribed by the Secretary of State permit lending to banks regulated by the Bank of England under the Banking Act 1987. There are many more banks on the Bank of England list of regulated banks than appear on the MPA Lending List. This is because the Treasury Management Policy Statement restricts lending to institutions with very high credit ratings reflecting the need to minimise risk in the lending strategy.

Interest rates

10. Interest rates movements are reviewed continuously using informed comment appearing in the financial press, brokers advice sheets and with regard to financial and economic indicators. Investment operations are undertaken taking account of these factors.

Long term borrowing

11. At 31 March 2001 the MPA debt portfolio will total £136 million. This includes debt held on behalf of the Inner London Magistrates’ Courts Service (ILMCS) and the Inner London Probation Service (ILPS). The breakdown between the three services is as follows:-

12. ILMCS and ILPS have an obligation to reimburse the MPA for costs incurred in discharging their debt. Consideration is currently being given to a mechanism that would allow the Courts and Probation services to refinance their debt and redeem their liability to the MPA. Pending the full redemption of the debt, repayments of 4% of the balance outstanding are made annually.

13. In determining the Treasury Management Strategy consideration needs to be given to the MPA borrowing requirements in 2001/02. The major issues impacting on this requirement are the loans falling due for repayment in the year and the financing of the capital programme.

14. Loans totalling £10 million are due for repayment during the year. Provision is made within the revenue budget for the redemption of debt based on a statutory requirement to set aside a minimum amount each year. For 2001/02 this amounts to £7.5 million and this is available to finance part of the repayment.

15. Credit approvals in support of the capital programme are currently forecast to be £12.9 million. Borrowing quota covering this will be available from the Public Works Loans Board (PWLB). The quota calculation also covers the full amount of maturing debt thereby permitting borrowing from them up to £22.9 million.

16. However, in deciding the policy for new borrowing, consideration must be given to the cashflow of the MPA and whether it is necessary to raise funds externally. It should be noted that it is unlawful for a Local Authority to borrow for the purpose of onlending those funds. Taking account of the funding of £7.5 million available from the revenue budget and the overall level of cash balances forecast to be available, it is proposed that no new borrowing be undertaken in 2001/02. This will also have the benefit of reducing the MPA’s long term commitment in respect of loan debt.

The structure of the debt portfolio

17. The Treasury Management Policy Statement requires that a balance should be maintained in the portfolio between debt taken at fixed and variable rates of interest. Fixed rate debt means that interest costs are stable and unaffected by changes in interest rates. Conversely variable rate debt is sensitive to changes in interest rates and allows savings to be made when interest rates fall, but leads to increased costs when they rise.

18. At the start of the financial year on 1 April 2001 all of the loans portfolio will be held at fixed interest rates. No new borrowing is proposed and the question of using fixed or variable rates on new borrowing will therefore not arise. However the terms of loans with the PWLB do permit a switch between fixed and variable rates. At present it is not proposed that any of the fixed rate borrowing be switched to variable rate but the option should be kept open for such a switch to be made in appropriate circumstances. To avoid undue risk from an adverse movement in rates, the proportion of borrowing held as variable rates should be limited and it is proposed that the limit be set at 15% of the total borrowing limit.

19. The Policy Statement also requires that the proportion of the portfolio maturing in any one year should not exceed 15% of the total. This limit is set to restrict the exposure of the MPA to having to refinance a significant proportion of its loan debt at a time when interest rates may be high. The current position is consistent with this recommendation, with the exception of 2004/05, when PWLB loans of £22.966 million representing 16.9% of the portfolio will mature.

20. The excess over the limit of 15% of total debt is marginal and should not give rise to any difficulty in financing the repayment. However, to maintain a position that keeps within the Policy Statement it is proposed to reschedule a loan of £4.3 million currently maturing in 2004/05 to mature in 2009/10. Interest rates are currently lower than when the loan was initially taken out and a premium will therefore be payable when the rescheduling is undertaken. This will however be broadly matched by reduced interest over the revised loan period and will therefore be financially neutral. As a result of the rescheduling, the proportion of debt maturing in 2004/05 will be reduced to 13.7%.

Borrowing limits

21. The borrowing limits that are required to be set for 2001/02 need to take account of the investment strategy outlined above. Account also needs to be taken of possible requirements that may arise in the event of temporary revenue requirements such as the late payment of grant. To cover this situation it is proposed that the borrowing limit should include £100 million for this purpose.

The borrowing limits recommended are therefore as follows:

1. Maximum borrowing limit
   • Debt outstanding 1 April 2001: £136m
   • New borrowing in year: 0
   • Temporary revenue requirements: £100m
   • Total: £236m
2. Short term borrowing limit: £100m
3. Variable rate limit - Proportion of total: 15%

C. Financial implications

The budgetary assumptions discussed in this report are consistent with those in the MPA budget proposals for 2001-02.

D. Background Papers

None.

E. Contact details

The author of this report is Mike Jennings, Acting Head of Exchequer Services, MPS.

For information contact:

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

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