Treasury Management financial review 2006/07

Report: 13
Date: 19 July 2007
By: Director of Strategic Finance on behalf of the Commissioner and the Treasurer

Summary

This report presents the Annual Review of Treasury Management for the 12 month period ended 31 March 2007.

A. Recommendations

That

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

B. Supporting information

Background information

1. The MPA operates in accordance with CIPFA’s Code of Practice on Treasury Management which requires that the Authority receives an annual report on treasury management after the year’s close.

2. 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 20 April 2006.

3. This report sets out:

• a review of investment operations during 2006/07
• a summary of interest rate movement and investment performance for 2006/07
• a review of risk and compliance issues
• a review of debt management operations
• a review of the treasury management Prudential Code indicators

Investment operations during 2006/07

4. The average size of the investment portfolio during 2006/07 was £302 million. 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.

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

Table 1 – Portfolio average sector size 2006/07

6. During 2004/05 the increase in the counterparty limit with each UK bank to £40 million has continued to increase activity in the sector to 36.21% of the portfolio. The level of activity with non-UK banks is also higher at 41.4% as opportunities with Building Societies are limited by the number of counter-parties within both the specified sector (with credit ratings) and the unspecified sector (no credit ratings). Building Societies continue to be less active than banks in the sterling market and this is reflected in the overall percentages.

7. A total of 412 investment transactions were undertaken (not including call money, see paragraph 8 below). The average size of investments was £8.5 million and average term 25 days.

8. The call money sector represents instant access funds held with Halifax Bank of Scotland (HBOS) and Royal Bank of Scotland (RBS). With the market showing a positive upward sloping yield curve, indicating higher future rates, these accounts have been less attractive so balances have been reduced, but they still offer good liquidity used 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 yield is achieved from the call accounts.

Interest rate movement and investment performance for 2006/07

10. Base rate was unchanged for a year from August 2005 to August 2006 when we had the first of three increases during the year from 4.5% to 4.75%. The two further 25 basis point increases were seen in November 2006 and January 2007 with a positive yield curve (upward sloping indicating higher future rates) still prevalent.

11. Performance is monitored against the British Bankers Association (BBA) LIBOR rate. The MPA return of 4.88% compares with BBA LIBOR (1 week) of 4.94% and BBA LIBOR (1 month) of 4.99%.

Risk assessment and compliance with agreed limits

12. The Treasury Management Policy restricts lending to institutions with a high credit rating or, as set out in the 2006/07 strategy and in line with guidance, to building societies that are not credit rated but are in the top 20 in terms of asset size.

13. The MPA uses Fitch Ratings to assess counterparty risk and the minimum selected 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.

14. Institutions meeting the credit rating criteria have an individual lending limit determined by the financial size of the institution. The highest limit is £40 million and applies to all UK banks on the lending list (section 6 explained this limit was applied in 2004/05). The highest limit for other banks is £30 million and the limits for building societies range from £30 million for the largest society to £2 million for the smallest.

15. The average balance of long-term investments, longer than 364 days, for this period was £40 million. A proposal accepted by the Full Authority on 30 March 2006 set a limit of £40 million, which was incorporated into the 2006/07 strategy.

16. All other transactions undertaken in 2006/07 were conducted within the criteria described above. Constant monitoring of the lending list against Fitch Ratings information ensured that all specified institutions met the prescribed credit ratings.

Debt management operations

17. Although the 2006/07 Treasury Management Strategy allowed for the possibility of limited long term borrowing no such borrowing took place during the year. Maturing loans totalling £13.5 million were repaid reducing the balance of debt at 31 March 2007 to £57.34 million (of which £11.13 million is held on behalf of the former Inner London Magistrates Courts Service and the former Inner London Probation Service).

18. The average size of the portfolio during 2006/07 was £68.61 million with an average rate of interest paid on the portfolio of 5.76%. All debt is held in fixed rate maturity loans with the Public Works Loans Board (PWLB).

Treasury management Prudential Code indicators

19. 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 as part of the 2006/07 Treasury Management Strategy.

20. The 2006/07 indicators and actual figures for the year are set out at Appendix 1. Investment activity has been maintained within indicator limits.

21. The maturity structure of borrowing shows that 36.11% 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 January and February 2006 resulted in a change to the proportions of the overall debt. It was not proposed to reschedule any debt this year with future additional borrowing adjusting these percentages. The 2007/08 limits now reflect the maturity profile of the portfolio.

Abbreviations

BBA

British Bankers Association

CIPFA

Chartered Institute of Public Finance & Accountancy

HBOS

Halifax Bank of Scotland

LIBOR

London Interbank Offered Rate

RBS

Royal Bank of Scotland

PWLB

Public Works Loans Board

C. Race and equality impact

As part of the MPS's ethical strategy the Treasury Management function are reviewing the ethical policies of organisations they invest funds with. The outcome and any changes will be reported to Finance Committee.

D. Financial implications

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

E. Background papers

• Treasury Management Strategy 2006/07 – MPA Finance Committee Report 20 April 2006

F. Contact details

Report author: Simon Hart, A/Director of Finance Services, MPS

For more information contact:

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

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