Treasury management half year review

Report: 7
Date: 19 October 2006
By: Director of Resources for the Commissioner and the Treasurer

Summary

This report provides a review of treasury management for the 6-month period ended 30 September 2006 and reviews current developments in 2006-07.

A. Recommendations

1. That members note the report.

B. Supporting information

Introduction

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. 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 2006-07 approved by this Committee on 20th April 2006.

4. This report sets out:

• a review of investment operations for the 6 months to 30 September 2006
• a summary of interest rate movement and investment performance for the 6 months to September 2006
• a comparison of MPA return to Benchmarking Club average return for 2005-06
• a review of debt management operations
• an update on the treasury management Prudential Code indicators

Investment operations for the 6 months to 30 September 2006

5. The average size of the investment portfolio for this period was £337 million compared to an average portfolio size of £272 million during 2005/06. 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 6 months to 30 September 2006

7. During 2004/05 the counterparty limit with UK banks was raised to £40 million. The objective of this move was to secure a more balanced portfolio between the UK Bank and non-UK Bank sectors and this continues to be achieved with similar balances for each sector. Opportunities with Building Societies remain limited by the number of counterparties within both the specified sector (with credit ratings) and the unspecified sector (no credit ratings). Additionally unspecified Building Societies tend to be less aggressive in the market when interest rate rises are predicted whereas banks will remain active in taking funds.

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 and high balances have been maintained. However with fixed term maturity deposits giving a higher yield as interest rate rises are predicted call money balances have been reduced to 13% of the portfolio (from 25% for the same period in 2004/05). These lower balances still maintain sufficient liquidity to cover short-term cash flow requirements.

9. Although available as approved investments since November 2002 Money Market Funds continue to be 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 2006

10. The base rate move downward to 4.5% in August 2005 was maintained until the move upward back to 4.75% in August 2006.

11. The reported annual forecast for interest receivable on investments is currently £9.2 million, an additional £1 million against budget, reflecting higher cash balances and increased return. The current position is summarised in Table 2.

Table 2 – Interest receivable 2006/2007

12. Performance is monitored against the British Bankers Association (BBA) London Inter-Bank Offer Rate (LIBOR). The 6-month MPA return of 4.67% compares with BBA LIBOR (1 week) of 4.69% and BBA LIBOR (1 month) of 4.72%. The period LIBOR returns reflect the upward yield curve (that is the market has priced in future interest rate rises) so are expected to be higher than the return on fixed term, fixed rate investments.

Comparison of MPA return to Benchmarking Club average return for 2005-06

13. The MPA is a member of the Institute of Public Finance (IPF) 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 2005/06 can be reviewed. Table 3 compares the MPA return to the group average.

Table 3 – Comparison of MPA return to Benchmarking Club Average 2005/06

14. The favourable return the MPA achieves on call money reflects negotiations held with the call account providers (see paragraph 8) to recognise in the rate of return offered the size of balances held in these accounts.

15. The MPA return on fixed term investments (cash < 364 days) is above average for the group. This is a significant improvement on 2004/05 when the MPA return was 0.15% below the average for the group. This indicates that increasing opportunities with UK Banks (detailed at paragraph 7) and the switch to lower call money balances described at paragraph 8 have contributed to an enhanced return for the MPA.

Debt management operations

16. The balance of debt outstanding at 30th September 2006 is £70.84 million, unchanged from 31st March 2006. The rate of interest paid on the debt portfolio was 5.78% 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 2006-07, 2007-08 and 2008-09 were presented to this Committee as part of the 2006-07 treasury management strategy.

18. The 2006-07 indicators and actual figures for the 6 months to 30 September 2006 are set out at Appendix 1. Investment activity has been maintained within indicator limits.

19. The maturity structure of borrowing shows that 36.1% of debt is due to mature over 10 years and above against a limit of 35%. This is because the proportions of overall debt change as debt matures and the portfolio reduces. At this time it is not proposed to reschedule any debt but the prudential code limits will be reviewed for 2007-08.

Abbreviations

MBBA

British Bankers Association

CIPFA's

Code of Practice for Treasury Management in the Public Services

HSBO

Halifax Bank of Scotland

IPF

Institute of Public Finance

LIBOR

London Inter-Bank Offer Rate

RBS

Royal Bank of Scotland

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 ongoing.

D. Financial implications

The financial implications of this report is that investment income in the current financial year is likely to be at least £1.0 million in excess of budget.

E. Background papers

None

F. Contact details

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

For more information contact:

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

Appendix 1

Treasury management Prudential indicators for the MPA

Treasury management indicators – Comparison of 2006-07 estimate to actual position for the 6 months to 30 September 2006

Gross outstanding borrowing

Gross outstanding investment

Maturity structure of borrowing – upper and lower limits

Principal sums invested for periods longer than 364 days.

Agreed upper limit of £40M

A total of £40 million has 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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