Treasury management financial review 2002/03

Report: 10
Date: 10 July 2003
By: Treasurer

Summary

This report presents the Annual Review of Treasury Management for the 12-month period ended 31 March 2003.

A. Recommendations

That the annual report of the Treasury Management function be noted.

B. Supporting information

Background information

1. The MPA has always operated in accordance with CIPFA’s Code of Practice on Treasury Management. On 21 March 2002 the 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 receive an annual report on Treasury Management after the year’s close. This report is submitted in accordance with that recommendation.

Investment transactions

3. The Treasury Management Strategy for 2002/03 was approved by this Committee on 21 February 2002 and set out investment instruments available for receiving funds. This Committee on 14 November 2002 added Money Market Funds (MMFs) and the Debt Management Account Deposit Facility (DMADF) to the approved list of investments. Although available these additional instruments were not used during 2002/03 (see paragraph 7).

4. Market sector investment limits were also prescribed by the 2002/03 strategy, and were assessed and revised in February 2003. This enabled greater operational flexibility in placing funds. The market sectors with the revised sector limits are included at Table 1.

Table 1 – Investment portfolio. Market sectors 2002/03

5. The average size of the investment portfolio during 002002/03 was £305.8 million with a balance of £322.3 million invested at 31 March 2003. However the size of the investment portfolio increased progressively during the year, from an average size of £228 million in April 2002 to £398 million in March 2003.

6. A total of 459 investment transactions were undertaken (this does not include call money balances, see paragraph 8). The average size of investments was £13.2 million and average term 76 days.

7. Table 1 also shows the average size of each sector by value and by percentage. The level of activity in the banking sectors reflects the number of opportunities available and the rates available. The local authority sector, money market funds and the DMADF rates are continuously monitored but did not offer competitive rates during 2002/03.

8. The portfolio balances include call money. These funds are instantly accessible in accounts with The Bank of Scotland and Abbey National plc. These accounts give a competitive return compared with prevailing money market rates (performances paragraph 14) and have the benefit of high liquidity. High balances have been maintained on these accounts, subject to investment limits.

Risk assessment

9. Treasury Management Policy restricts lending to institutions with high credit ratings with such ratings provided to the MPA by Fitch Ratings. The selected minimum standards include ‘short-term’ of F1, indicating the strongest capacity for timely payment of financial commitments and ‘long term’ of A+, indicating a low expectation of credit risk.

10. 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. The highest limit is £30 million, and applies to most institutions in the two banking sectors. The Building Society limits range from £30 million for the largest society to £2 million for the smallest.

Compliance with agreed limits

11. 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 Rating information ensured all institutions met the prescribed credit ratings.

Performance

12. Accrued interest received on investments in 2002/03 was £11.9 million against an original budget of £8 million. On 14 November 2002 this Committee was advised of additional income against budget of up to £1 million, due to a strengthening of balance sheet reserves and provisions in 2001/02 and the timing of large receipts and payments. Subsequently the additional income was reflected in budget monitoring reports to the Committee.

13. Continuing high balances to year-end, reflecting the timing of large receipts and payments, including the receipt of Airwave capital grant, contributed to the additional income.

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

Table 2 – Rate of return and interest accrued by market sector 2002/03

15. Differing rates of return between sectors reflect available dealing opportunities which are subject to lending criteria. The higher return of the building society sector illustrates the generally longer term profile of deals in this sector. Investments in the banking sectors are shorter term and influenced by cash flow considerations.

16. Investment performance is monitored using the British Bankers Association London Interbank Offer Rate (LIBOR) for one week and one month. The 2002/03 MPA return of 3.90% compares with the one week BBA LIBOR figure of 3.88% and one month BBA LIBOR figure of 3.94%.

17. The MPA is a member of IPF’s Treasury Management Benchmarking Club and investment activity for 2002/03 was submitted to IPF in May 2003. Draft analysis has been received but detailed reports, including comparison with selected larger local authorities, will be available towards the end of July 2003. This comparison will be included in the six monthly update on treasury management presented to this committee later this year.

Debt management operations

18. In line with Treasury Management Strategy no borrowing took place during 2002/03. Maturing loans totalling £11.5 million were repaid, reducing the balance of debt at 31 March 2003 to £114.47 million (of which £13.6 million is held on behalf of the former Inner London Magistrates’ Courts Service and the former Inner London Probation Service).

The average size of the portfolio during 2002/03 was £125.3 million with an average rate of interest paid on the portfolio of 6.43%. All debt is held in fixed rate maturity loans with the PWLB.

C. Equality and diversity implications

There are none specific to this report

D. Financial implications

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

E. Background papers

None

F. Contact details

Report author: Stephen Skirten, Treasury Manager, MPS

For more information contact:

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

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