Treasury management financial review 2007/08

Report: 06
Date: 19 June 2008
By: the Director of Resources 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 2008.

A. Recommendations

Members are invited to note the annual report of the Treasury Management function.

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 2007-08 approved by this Committee on 15 February 2007.

3. This report sets out :

• a review of investment operations during 2007/08
• a summary of interest rate movement and investment performance for 2007/08
• 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 2007/08

4. The average size of the investment portfolio during 2007/08 was £298 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 2007/08 

6. From August 2007 the USA sub prime mortgage market difficulties started to effect the sterling market. Banking institutions became less willing to lend to each other leading to a shortage of cash and an increase in rates. In September 2007 Northern Rock was removed from our lending list (the bank withdrew from the sterling market in December 2007) and the ratings of UK Banks operating in similar markets have been closely monitored. This has contributed to a reduction in activity in the UK Bank sector. 

7. The call money sector represents instant access funds held with Bank of Scotland (BOS) and Royal Bank of Scotland (RBS). BOS currently offer a competitive 0.25% above Bank of England Base Rate. We have maintained high cash levels in this account, subject to the counterparty limit of £40m, which provides sufficient liquidity to cover short-term cash flow requirements.

8. A total of 378 investment transactions were undertaken (not including call money, see paragraph 7 above). The average size of investments was £10.7 million and average term 23 days.

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 2007/08

10. The cycle of base rate increases peaked in July 2007 at 5.75%. In December 2007 the Bank of England started to reduce rates to ease the difficulties in the credit markets. Typically a base rate reduction would ease money market rates but we continued to see a positive yield curve (upward sloping indicating higher future rates) with market rates significantly higher than base rate.

11. We continue to monitor performance against the British Bankers Association (BBA) LIBOR rate. The MPA return of 5.66% compares with BBA LIBOR (1 week) of 5.71% and BBA LIBOR (1 month) of 6.39%. The distorted 1 month rate is a reflection of the credit squeeze in the cash market as banks and building societies needed to cover liquidity from a reduced supply of available funds.

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 2007/08 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. 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. While credit ratings underpin our approach to reducing exposure to risk the professionalism and experience of the Treasury section brings added reassurance to MPA investment activity. The section uses its contacts and other sources, such as brokers and other treasury professionals, to assess market conditions to determine the suitability of investments. This includes liaison with the treasury sections of the GLA and other functional bodies.

16. 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 2007/08 strategy.

17. All transactions undertaken in 2007/08 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

18. Although the 2007/08 Treasury Management Strategy allowed for the possibility of limited long term borrowing no such borrowing took place during the year. Maturing loans totalling £15 million were repaid reducing the balance of debt at 31 March 2008 to £42.34 million (of which £10.51 million is held on behalf of the former Inner London Magistrates Courts Service and the former Inner London Probation Service).

19. The average size of the portfolio during 2007/08 was £52.11 million with an average rate of interest paid on the portfolio of 5.66%. All debt is held in fixed rate maturity loans with the PWLB.

Treasury management Prudential Code indicators

20. 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 2007/08, 2008/09 and 2009/10 were presented as part of the 2007/08 treasury management strategy.

21. The 2007/08 indicators and actual figures for the year are set out at Appendix 1. Investment activity has been maintained within indicator limits.

22. The borrowing limits for 2009/10 and 2010/11 approved by Finance Committee on 21 February 2008 as part of the 2008/09 Treasury Management Strategy were submitted to the GLA as part of the approved budget process and reflected in the 2008-11 business plan and budget approved in March 2008. The Authority however received a late notification (25 March 2008) from the GLA that the borrowing limits approved by the previous Mayor were different to the limits submitted by the Authority. The changes are set out below:

Table 2 – Details of Operational Boundary 

Table 3 – Details of Authorised Limit 2008/09

23. These changes restrict the Authority’s ability to undertake external borrowing to meet both its short and long term needs. Discussions are ongoing with the GLA about the likely impact on the Service’s activities and how this situation might be resolved. The outcome of these discussions will be provided to the Finance Committee in July as part of the update on the Capital programme.

Abbreviations

BBA

British Bankers Association

BOS

Bank of Scotland

CIPFA

Chartered Institute of Public Finance & Accountancy

LIBOR

London Interbank Offered Rate

RBS

Royal Bank of Scotland

C. Race and equality impact

1. Consideration is given to the requirements of the Race Relations (Amendment) Act through the MPA/MPS Environmental Strategy and Ethical Investment Policy whereby best practice standards are promoted.

2. The draft MPS Ethical Investment Policy was included for consideration by Finance Committee on 21 February 2008 as part of the Treasury Management Strategy 2008/09. Following review of the proposed Ethical Investment Policy by Finance Committee further information and consultation is required before the policy can be communicated to all MPA finance counter parties.

D. Financial implications

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

E. Background papers

• Treasury Management Strategy 2007/08 – MPA Finance Committee Report 15 February 2007

F. Contact details

Report author(s): Simon Hart, Acting Director of 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 Metropolitan Police Authority

Treasury Management Indicators – Comparison of 2007/08 estimate to actual position for the 12 months to 31 March 2008

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 £40 million

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

Send an e-mail linking to this page

Feedback