Treasury management financial review 2001/02

Report: 15
Date: 29 May 2002
By: Treasurer

Summary

This report presents the Annual Review of Treasury Management for the 12 – month period ended 31 March 2002.

A. Recommendations

1. That the annual report of the Treasury Management function is noted

B. Supporting information

Background information

1. On 21 March 2002 the Metropolitan Police Authority formally adopted the key recommendations of CIPFA's revised Treasury Management in the Public Services: Code of Practice (the Code), set out in Section 4 of that Code.

2. The Code requires that the MPA receives an annual report on Treasury Management after the year's close. This report is submitted in accordance with that recommendation.

Investment transactions

3. The average size of the investment portfolio during 2001/02 was £203.4 million with a balance of £190.6 million invested at 31 March 2002.

4. A total of 453 investment transactions were undertaken (excluding call money, see section 9), with an average size of £6 million and average term of 26 days.

5. Accrued interest received on investments in 2001/02 was £9.4 million against an original budget of £12 million. On 19 June 2001 this Committee was advised of a likely shortfall against budget of up to £2 million, due to an unfavourable grant payment profile and reductions in base rate. The 8 November 2001 Committee was advised that further unanticipated base rate reductions resulted in a lower estimated outturn of £9.1 million. Increased balances towards the end of 2001/02, and some longer term investment placements, have contributed to an outturn above the November 2001 forecast.

6. In order to discharge liabilities short term borrowing of £22 million was undertaken in May 2001 and a further £1.3 million in January 2002. These short-term loans covered a total of 14 days.

Risk assessment

7. The investment instruments selected for investment during 2001/02 were in accordance with the Treasury Management Strategy approved by this Committee on 20 February 2001. These market sectors, with the appropriate sector limit also prescribed by the 2001/02 Strategy, are included at Table 1 below.

Table 1 – Investment portfolio. Market sectors 2001/02

8. Table 1 also shows the average size of each sector by value and percentage. Fewer opportunities with Building Societies and the generally less attractive rates offered by Local Authorities, have contributed to increased activity in the Banking sectors.

9. The portfolio balances include call money. These funds are instantly accessible and since August 2001 have been placed in a Bank of Scotland (now HBOS) Business Reserve Account. This account pays an attractive rate of interest (see performance section 13) with high liquidity, so balances have been maintained at a high level, but subject to investment limits.

10. Treasury Management Policy restricts lending to institutions with very high credit ratings with such ratings provided to the MPA by Fitch Ratings. The selected minimum standards during 2001/02 include 'Short-term credit: F1+' indicating an exceptionally strong capacity for timely payment of financial commitments. This is the highest credit rating for short-term (less than 365 day) obligations. Additionally required is a minimum standard of 'Long-term Investment Grade: AA-' denoting a very low expectation of credit risk and very strong capacity for timely payment.

11. Institutions meeting the credit rating criteria for inclusion on the lending list have an individual lending limit determined by the financial size of the institution. This highest limit is £25 million for AAA rated institutions but more generally the individual limit is £20 million. Building Societies tend to have much lower limits than banks and the upper limit for Local Authorities is £10 million.

Compliance with agreed limits

12. Transactions were conducted within the criteria described above. Sector limits and individual limits were adhered to and constant monitoring of the lending list against Fitch Ratings' criteria ensured all institutions met the prescribed credit rating criteria.

Performance

13. Investment performance monitored by market sector provides a measure of relative performance across the portfolio. The quarterly return achieved and interest accrued for each sector is shown at Table 2.

Table 2 – Quarterly Rate of Return and Interest Accrued by Market Sector 2001/02

14. The reduction in the rate of return across all sectors from Qtr 1 to Qtr 4 reflects market conditions and the base rate reduction of 175 basis points during 2001/02 from 5.75% to 4%.

15. Investment performance is monitored using the London Interbank Bid Rate (LIBID). Investment transactions placed in year across all sectors achieved a return of 4.56% compared with the 1 month LIBID figure of 4.5%.

16. The 2001/02 investment activity will be monitored by IPF's Treasury Management Benchmarking Club, of which the MPA is a member. Returns were submitted to IPF mid May 2002. Draft analysis is expected mid June 2002 with full reports issued towards the end of July 2002 or during August 2002.

17. The benchmark used by the IPF Benchmarking Club is the British Bankers Association (BBA) LIBOR and for consistency this measure has been adopted to measure performance. The 2001/02 MPA return of 4.56% compares with the BBA LIBOR (1 week) of 4.6% and BBA LIBOR (1 month) of 4.63%.

Debt management operations

18. In line with Treasury Management Strategy no borrowing took place during 2001/02. Maturing loans totalling £10 million were repaid, reducing the balance of debt at 31 March 2002 to £125.97 million (of which £14.2 million is held on behalf of the former Inner London Magistrates' Courts Service and the former Inner London Probation Service).

19. To meet the requirement of the Policy Statement that the proportion of the portfolio maturing in any one year shall not exceed 15% of the total, Treasury Management Strategy also proposed the rescheduling of a £4.3 million loan. This loan has been rescheduled from a maturity date in 2004/05 to a maturity date in 2009/10, ensuring compliance with policy.

20. The average size of the portfolio during 2001/02 was £134.5 million with an average rate of interest paid on the portfolio of 6.39%. All debt is held in fixed rate maturity loans with the PWLB.

C. Financial implications

The outturn figures discussed in this report are consistent with those previously advised.

D. Background papers

None.

E. Contact details

Report author: Stephen Skirten, Treasury Manager, Exchequer Services, MPS.

For information contact:

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

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