Treasury management strategy 2003/04

Report: 09
Date: 13 February 2003
By: Treasurer

Summary

This report sets out the Treasury Management Strategy recommended for 2003/04 including the proposed borrowing limits to be recommended for formal adoption by the Metropolitan Police Authority.

A Recommendations

That

1. the strategy set out in this report for 2003/04 be approved; and
2. the borrowing limits set out in paragraph 24 be approved, and referred to the meeting of the Metropolitan Police Authority on 27 February 2003 for formal adoption.

B Supporting information

Background information

1. On 21 March 2002, the Metropolitan Police Authority formally adopted the key recommendations of CIPFA’s Code of Practice for Treasury Management in the Public Services as set out in Section 4 of that Code.

2. The Code requires that the MPA will receive an annual strategy and plan in advance of the year. 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 2003/04 and refer the proposed borrowing limits to the MPA for formal approval.

Strategic objectives

5. The objectives underpinning the strategy for 2003/04 are as follows:

• To undertake treasury management operations with primary regard for the security of capital invested.
• To minimise the cost of borrowing and to maximise the return on investments subject to the objective above.
• 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 2003 the MPA is projected to have cash balances in the region of £240 million. This cash represents:

• Earmarked reserves, provisions and balances held to cover specific or general liabilities.
• Unapplied Capital receipts and grants pending payments in respect of capital projects.
• 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. The Local Authorities (Capital Finance and Approved Investments) (Amendment) (England) Regulations 2002 added two new kinds of investments, Money Market Funds and the Debt Management Account Deposit Facility, to the existing list of approved investments prescribed by the Secretary of State. On 14 November 2002, this Committee approved the recommendation that these investment types are added to the list of approved investments as set out in the Treasury Management Policy Statement. It is proposed that during 2003/04 the portfolio is invested with the following institutions:

• UK Banks.
• Foreign banks registered in the UK.
• Mutual building societies.
• UK local authorities.
• Money Market Funds.
• Debt Management Account Deposit Facility.

8. Operational practice is documented in Treasury Management Practice Notes, approved by senior management in consultation with the Treasurer under delegated authority. A revision of lending limits, sector limits and credit ratings has been undertaken due to the increased size of the investment portfolio. These changes will be reported in the 2002-03 annual report considered by this Committee.

9. The regulations prescribed by the Secretary of State permit lending to authorised deposit takers regulated by the Financial Services Authority (FSA) under the Financial Services and Markets Act 2000. There are many more authorised deposit takers registered with the FSA than appear on the MPA Lending List. This is because the Treasury Management Policy Statement restricts lending to institutions with high credit ratings reflecting the need to minimise risk in the lending strategy.

Interest rates

10. Interest rate movements are reviewed continuously using informed comment appearing in the financial press, brokers advice sheets and with regard to financial and economic indicators. The market rates for periods up to one year ahead (the yield curve) are considered and investment operations are undertaken taking account of these factors.

Long term borrowing

11. At 31 March 2003, the MPA debt portfolio is forecast to total £114.47 million. This includes debt held on behalf of the former Inner London Magistrates’ Courts Service (ILMCS) and the former Inner London Probation Service (ILPS). The breakdown between the three services is shown in Table 1.

Table 1 – Outstanding debt at 31 March 2003

12. The Greater London Magistrates’ Courts Authority and the National Probation Service have an obligation to reimburse the MPA for costs incurred in discharging the debt of ILMCS and ILPS respectively. Currently the Courts and Probation services make annual repayments to the MPA of 4% of the balance of debt outstanding plus interest charges.

13. In determining Treasury Management Strategy, consideration needs to be given to the MPA borrowing requirements in 2003/04. 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, currently 4% of the adjusted credit ceiling. For 2003/04 this amounts to £6.9 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 £21.7 million. (The actual allocation for 2003/04 has not been notified at the time this report was completed). 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 £31.7 million.

16. 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 also be noted that it is unlawful for a Local Authority to borrow for the purpose of onlending those funds. On this basis, the strategies for 2001/02 and 2002/03 determined that no new borrowing would be undertaken during these financial years.

17. When considering the new borrowing policy for 2003/04, taking note of the £6.9 million funding available from the revenue budget and the overall level of cash balances forecast to be available, it is again proposed that no new borrowing be undertaken.

The structure of the debt portfolio

18. 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.

19. At the start of the financial year on 1 April 2003, 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.

20. 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.

21. With no new borrowing, the reduction in the size of the portfolio during 2002/03 has meant that proportionately the amount of debt maturing in 2004/05 has increased and is now 16.27% of the total. To address this a £5 million loan due to mature in 2004/05 will be rescheduled, reducing the 2004/05 maturity to 11.9% of the total portfolio.

Borrowing limits

22. The borrowing limits that are required to be set for 2003/04 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:

C. Equality and diversity implications

There are no equality and diversity implications arising from this report.

D. Financial implications

The budgetary assumptions discussed in this report are consistent with those in the MPA budget proposals for 2003/04.

E. Background papers

None.

F. Contact details

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

For more information contact:

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

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