Treasury Management – 2nd quarter 2009/10 update

Report: 6
Date: 5 November 2009
By: Treasurer

Summary

This report invites members to review Treasury Management activity for the period 1 July 2009 to 30 September 2009.

A. Recommendations

That Members note this report including the statement of assurance from the Acting Treasurer and Director of Finance.

B. Supporting information

1. In line with CIPFA guidelines for the monitoring of treasury management operations this quarterly report reviews treasury management and performance for the 2nd quarter 2009/10.

2. The report is similar in format to the 1st quarter 2009/10 report reviewed by Resources Sub-Committee on 3 September 2009. At that meeting members requested additional information on debt expenditure, which is now included at Appendix 2, and a statement of assurance from the Treasurer and the Director of Finance, which is included at Appendix 4.

Average Balances

3. Average cash balances invested during the quarter were £203 million, higher than the previous quarter largely due to a pensions top up grant of £115 million received on 2 July 2009.

4. Appendix 1 gives a breakdown by market sector of where funds were invested. The largest sector with 46% of the portfolio is the Debt Management Office (DMO). There is no upper investment limit with the DMO and with the combination of a restricted lending list and more cash to invest the proportion of funds with the DMO has increased. The call money sector at 28% represents cash held with RBS and continues to provide instant access to meet short term commitments while providing an attractive return. The remaining 26% of the portfolio represents British banks (other than RBS), foreign banks and the Nationwide building society.

5. During the quarter 74 deposits were made with 2 UK banks, 1 foreign bank, Nationwide building society and the DMO.

Income on Investments

6. Income on investments for the quarter is £0.248 million at a return of 0.48%. Income is slightly higher than the previous quarter due to higher cash balances, but the rate of return on those balances is 0.4% lower. With limited opportunities available from the current lending list and the default position of balances being placed with the DMO the rate of return is unlikely to improve in the short term. The average length of investments is 12 days again reflecting higher cash balances and the ability to invest slightly longer. The Bank of England again maintained Base Rate at 0.5% during the quarter.

7. Appendix 1 also shows the rate of return and income by sector. The call money account return of 1.05% for the quarter is significantly higher than the return from other sectors, for example the 0.26% return from the DMO.

8. The interest on investments budget for 2009/10 is £2.1 million, determined when prevailing and anticipated interest rates were higher. With the prospect of continuing lower interest rates and base rate at 0.5% the estimated outturn for 2009/10 was reduced in May 2009 to £0.75 million. As set out at Appendix 2 2009/10 income to date is £0.476 million and with further interest rates estimated to remain low estimated outturn is maintained at £0.75 million.

Borrowing

9. As advised to members in the 1st quarter 2009/10 report the MPA Treasurer and officers of MPS finance meet monthly to discuss all treasury management matters which includes an assessment of borrowing requirements. Consideration is given to short term cash flow requirements and the ability of the MPA to meet its liabilities and a longer term view is taken when assessing borrowing needs and particularly the status and funding of the capital programme.

10. Due to higher cash balances, advised above at paragraph 3, there has been no need to borrow during the quarter to meet cash flow requirements. The long term position of borrowing to support the capital programme is also kept under review and as advised to the last meeting of this committee a report on aligning borrowing requirements with the capital programme will be submitted to a future meeting. Interest rates for new borrowing remain at historic low levels and the long term view remains that rates will increase as the Government’s quantitative easing programme is concluded.

11. At the meeting on 3 September members requested additional information about expenditure on the debt which is included at Appendix 2. The 2009/10 expenditure budget of £3.6 million included estimated expenditure for new borrowing in year of £50 million, of which £30 million was taken during the 1st quarter of the year. It is currently estimated that the expenditure outturn will be to budget of £3.6 million.

Performance

12. All investment and borrowing activity has been undertaken within the guidelines and objectives set out in current policy and strategy. Liquidity has been maintained to ensure that obligations have been discharged.

13. All investments were compliant with the requirements of the strategy and achieved a rate of return consistent with the limited opportunities available.

14. Members have requested that monitoring reports contain a statement of assurance from the Treasurer and Director of Finance. This assurance about treasury management operations during the quarter is attached at Appendix 4.

Economic background

15. The Bank of England held Base Rate at 0.5% during quarter 2. The asset purchase scheme has been maintained at £175 billion which the Monetary Policy Committee expects will be concluded in November 2009.

C. Race and equality impact

Consideration is given to the requirements of equality legislation through the MPA/MPS Environmental Strategy and Ethical Investment Policy whereby best practice standards are promoted.

The MPS Ethical Investment Policy was considered and approved by Resources Sub Committee on 16 March 2009.

D. Financial implications

The interest on investments budget for 2009/10 is £2.1 million. The estimated outturn was adjusted in May 2009 to £0.75 million

E. Legal implications

This is a financial monitoring report; therefore there are no direct legal implications.

The Treasurer’s responsibilities are set out in the Financial Regulations under Part E of the MPA standing orders. In accordance with the standing orders the Treasurer is required to report to the Authority, or a designated committee of the Authority, on treasury management operations on a quarterly basis.

The Resources sub-committee has authority in accordance with its terms of reference to receive and review the MPS Treasury Management report on a quarterly basis.

F. Background papers

• Appendix 1: Treasury Management 2nd Quarter 2009/2010; Interest Earned on Portfolio
• Appendix 2: Budget Estimate against Income April 2009 to March 2010; Budget Estimate against Debt Expenditure April 2009 to March 2010
• Appendix 3: Maturity Profile

G. Contact details

Report author: Paul James, Director of Finance

For more information contact:

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

Abbreviations

DMO

Debt Management Office

Appendix 4

Statement of assurance

We confirm that the Treasury management report for the second quarter of 2009/10 is an accurate record of the treasury management activity of the Metropolitan Police Authority for the period ended 30 September 2009 and that all activity has been undertaken in accordance with the agreed policies and strategy.

As signed by
Annabel Adams
Acting Treasurer

As signed by
Paul James
Director of Finance

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