Treasury management half year review 2005/06

Report: 07
Date: 20 October 2005
By: Commissioner and the Treasurer

Summary

This report provides a review of treasury management for the six-month period ended 30 September 2005 and reviews current developments in 2005-06.

A. Recommendation

That members note the report and the budgetary implications.

B. Supporting information

Introduction

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

2. In line with the Code the MPA have adopted a treasury management policy statement that requires that the Treasurer submit a regular report on treasury and debt management operations during the financial year. This report is submitted in accordance with that requirement.

3. Additionally, under Part 1 of the Local Government Act 2003, the Authority is required to have regard to the Prudential Code for Capital Finance including the setting of Prudential Indicators. Relevant treasury management indicators were incorporated into the Treasury Management Strategy 2005-06 approved by this Committee on 7 April 2005.

4. This report sets out:

• A review of investment operations for the six months to 30 September 2005
• A summary of interest rate movement and investment performance for the six months to September 2005
• A comparison of MPA return to Benchmarking Club average return for 2004-05
• A review of debt management operations
• An update on the treasury management Prudential Code indicators

Investment operations for the 6 months to 30 September 2005

5. The average size of the investment portfolio for this period was £313 million compared to an average portfolio size of £349 million during 2004/05. 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.

6. The structure of the portfolio continues to reflect the investment instruments selected for investment purposes as defined by Treasury Management strategy. Table 1 provides an analysis of average investment balances for each counter-party sector.

Table 1 – Portfolio average sector size six months to 30 September 2005

7. The increase in the counterparty limit with UK banks to £40 million during 2004/05 has increased activity in the sector to 31.2% of the portfolio (this excludes call money). Conversely the share of the portfolio with non-UK banks has decreased to the same level, 31.2% of the portfolio. This has achieved the objective of securing a more balanced portfolio between these two sectors. Opportunities with Building Societies remain limited by the number of counter-parties within both the specified sector (with credit ratings) and the unspecified sector (no credit ratings).

8. The call money sector represents instant access funds held with Halifax Bank of Scotland (HBOS) and the Royal Bank of Scotland (RBS). The average return in excess of base rate on these accounts has been attractive so high balances have been maintained with the liquidity available to cover short term cash flow requirements.

9. Although available as approved investments since November 2002 Money Market Funds remain uncompetitive and have not been used. Similar liquidity with a higher return is achieved from the call accounts.

Interest rate movement and investment performance for the 6 months to September 2005

10. The upward movement in interest rates peaked in August 2004 at 4.75%. This rate was maintained until August 2005 when the base rate was reduced to 4.5%.

11. Interest on investments for the six-month period was £7.5 million compared to the 2005-06 budget of £12.56 million. The revised annual forecast for interest receivable on investments is now £12.41 million which includes a budget adjustment of -£0.99 million reflecting the loss of investment income following the purchase of Marlowe House in August 2005. This position is summarised in Table 2.

Table 2 – Interest receivable 2005/2006 – actual and forecast

12. Performance is monitored against the British Bankers Association (BBA) LIBOR rate. The six-month MPA return of 4.77% compares with BBA LIBOR (1 week) of 4.74% and BBA LIBOR (1 month) of 4.75%. The period LIBOR returns reflect the inverted yield curve so are expected to be lower than the return on fixed term, fixed rate investments.

Comparison of MPA return to Benchmarking Club average return for 2004-05

13. The MPA is a member of the Institute of Public Finance’s Treasury Management Benchmarking Club. Interim data for the 6 month period to 30 September will be submitted to IPF during the autumn. However, analysis from financial year 2004/05 can be reviewed. Table 3 compares the MPA return to the group average.

Table 3 – Comparison of MPA return to Benchmarking Club average 2004/05

14. The favourable return on call money supports the policy of maintaining high balances in these accounts, with balances frequently maintained at the maximum permitted by the counterparty limits.

15. The MPA return on fixed term investments (cash < 364 days) remains below the average return for the group. However, an analysis of the monthly rates of return shows that from November 2004 return was above average due to additional opportunities available following the increase to the counterparty limits with UK banks as detailed at paragraph 7 above. Additionally the necessity of placing funds short-term for cash flow considerations has meant not always taking the optimum market rate, particularly when the money market yield curve is upwards.

Debt management operations

16. The balance of debt outstanding at 30 September 2005 is £85.84 million, unchanged from 31 March 2005. The rate of interest paid on the debt portfolio was 6.18% and no long-term debt management operations were undertaken this period.

Treasury management Prudential Code indicators

17. 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 2005-06, 2006-07 and 2007-08 were presented to this Committee as part of the 2005-06 Treasury Management Strategy.

18. The 2005-06 indicators and actual figures for the six months to 30 September 2005 are set out at Appendix 1. Investment activity has been maintained within indicator limits with the exception of the upper limit on variable rate exposure for gross outstanding investment. The limit of 40% was exceeded on two days in September 2005 as fixed rate investments maturing to cover payments resulted in a higher percentage of the portfolio held in the call accounts. It is not proposed to amend the limit from 40% but to review the amount of the portfolio maintained in the call accounts.

19. Additionally the maturity structure of borrowing shows that 38.4% of debt is due to mature over 10 years and above against a limit of 35%. Although no borrowing has taken place the maturity of debt in March 2005 has resulted in a change to the proportions of the overall debt. At this time it is not proposed to reschedule any debt but the prudential code limits will be reviewed for 2006-07.

C. Race and equality impact

As part of the MPS's environmental strategy a review of the environmental and ethical policies of organisations receiving funds is being undertaken.

D. Financial implications

The financial implications of this report is that investment income in the current financial year is likely to be at least £0.8 million in excess of budget.

E. Background papers

• Treasury Management Strategy 2005/06 – MPA Finance Committee Report 7 April 2005

F. Contact details

Report author: Stephen Skirten, Treasury & Control Manager, Finance Services.

For more information contact:

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

Appendix 1

Treasury Management Indicators – comparison of 2005-06 estimate to actual position for the six months to 30 September 2005

Gross outstanding borrowing

Gross outstanding investment

Maturity structure of borrowing – upper and lower limits

Principal sums invested for periods longer than 364 days
No sums have been invested for longer than 364 days.

The MPA has adopted the CIPFA Code of Practice for Treasury Management in Public Services.

External debt indicators

Authorised limit for external debt

This is the maximum amount that the authority allows itself to borrow in each year. They are based on the estimate of the most likely, prudent but not worst-case scenario, with in addition sufficient headroom over and above this to allow for operational management, for example unusual cash movements. Risk analysis and risk management strategies have been taken into account, as have plans for capital expenditure and estimates of cashflow requirements.

Operational boundary for external debt

The Operational Boundary for external debt is based on the same estimates as the Authorised Limit but reflects directly the estimate of the most likely, prudent, but not worst case scenario, without the additional headroom included within the Authorised Limit to allow for example for unusual cash movements and equates to the maximum of external debt projected by this estimate.

Actual external debt

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