Treasury Management 2015-16 Outturn Report

Reference code: 
PCD 58
Date signed: 
03 October 2016
Authorisation name: 
Sophie Linden, Deputy Mayor, Policing and Crime

Executive summary

DMPC is asked to note the progress and performance of Treasury Management in 2015-16 and to approve proposed revisions to the 2016/17 investment strategy.

In 2015-16 investment income was £1.8m against budget of £0.8m at an average rate of return of 0.63%.   Debt interest expenditure was below budget at £7.2m due to no new long term debt being undertaken. The weighted average borrowing rate of all long term loans (weighted by size of loan and the rate of interest paid) at 31 March 2016 was 3.98%.

All investment and borrowing activity during 2015-16 was undertaken within the guidelines and objectives set out in the relevant policy and investment and borrowing strategies, except for a breach in relation to counterparty concentration limits for Lloyds Bank at the end of the year.

Recommendation

The DMPC is asked to

  1. Note the 2015/16 treasury management outturn results against the 2015/16 Treasury Management Strategy Statement (TMSS).
  2. Note the breach of the TMSS, in relation to counterparty concentration limits for Lloyds Bank, which were exceeded over the period 28 March 2016 to 12 April 2016. No losses arose from this breach of the TMSS, and details of the sums involved and reasons for the breach are set out in Appendix 1, paragraphs 3 to 11.
  3. Approve revisions to the 2016/17 Group Investment Syndicate (GIS) Investment Strategy, as set out in Appendix 1, paragraphs 12 to 17. This Strategy was originally approved as part of the Treasury Management Strategy Statement for 2016/17 approved by MOPAC on 17 March 2016 (DMPCD 2016 47).

Non-confidential facts and advice to the Deputy Mayor for Policing and Crime (DMPC)

Introduction and background

The CIPFA TM Code recommends that organisations be updated on treasury management activities regularly (at least a Strategy, Mid-year and Annual performance reports). This report therefore meets these requirements with regard to an annual report, and ensures MOPAC is implementing best practice in accordance with the TM Code. 

The day to day management of the treasury management function is delivered by the GLA Group Treasury team under a shared service arrangement with the GLA. GLA Group Treasury also manages the Group Investment Strategy (GIS), of which the MOPAC Chief Finance Officer is a syndicate director. By being part of the GIS MOPAC’s cash balances are pooled with other funds which allows greater investment options, improves diversification, liquidity and returns. 

The annual report at Appendix 1 has been prepared by GLA Group Treasury, and provides details of performance against the TMSS 2015/16, approved by MOPAC on 26 March 2015 (DMPCD 2015 39). The report provides a review of investment performance for 2015/16, together with a summary of long-term borrowing, set in the context of the general economic conditions prevailing during the year. It also reviews specific Treasury Management prudential indicators defined by the Code and approved by the Authority in the TMSS.

 

Issues for consideration

2015-16 Outturn Performance

Investment

The average return on investment was 0.63%. This compares favourably with the London Interbank BID (LIBID) 3 month rate benchmark of 0.45%. This resulted in additional income of £1m above the budget of £800k due to both a historic budget (now adjusted in the 2016/17 budget), higher cash balances and better returns from utilising the Group Investment Syndicate (GIS). 

Debt Management 

As planned no new borrowing took place in 2015/16, and as scheduled, borrowing reduced by £14.5m from £190.4m at the start of the year to £175.9m at 31 March 2016

The cost of borrowing was below the budget of £9.4m and on track with forecast at £7.2m due to no new long term debt being undertaken.  The weighted average cost of borrowing of all long term loans as at 31 March 2016 was 3.98% (3.84% as at 31 March 2015).

Compliance

All treasury activities met the Treasury indicators set in the TMSS, and borrowing was within the borrowing limits set by the Mayor for MOPAC. MOAPC CFO confirms that, throughout the period, all treasury activities have been conducted within the parameters of the TMSS 2015/16, alongside best practice suggested by the CIPFA TM Code and Central Government, except in respect of the period 28 March 2016 to 12 April 2016.

The GIS counterparty concentration limits for Lloyds Bank were exceeded over the period 28 March 2016 to 12 April 2016. No losses arose from this breach of the TMSS. Details of the sums involved and reasons for the breach are set out in the GLA Group Treasury report at Appendix 1 paragraphs 3 to 11.

Prudential Indicators

Appendix 1 includes the maturity profile for the borrowing portfolio, and performance against the Prudential Indicators set as part of the 2015-16 TM Strategy.  All indicators were met.

GIS Strategy

The GLA Group Treasury report at Appendix 1 also sets out a proposed amendment to the TMSS 2016/17, approved by GIS Syndics. This introduces the Residential Mortgage Bonds sector as part of the MOPAC’s counterparties list for investment purposes. It is intended that the GLA test this revised strategy in their own name before proposing adoption by MOPAC and the GIS.  Any proposed use of this instrument will require DMPC approval prior to implementation.

As noted above, the shared service with the GLA on treasury management, delivered by GLA Group Treasury, has been in place since 2012/13.  Since its introduction the service provided has been developed to broaden the GIS.  The reports provided by GLA Group Treasury to support reporting to Members have also been developed and now all GIS members use a standard report template. 

Member Treasury Management Training

The TM Code states that Members (in the case of MOPAC the DMPC) have a personal responsibility for treasury matters. To support Members in meeting this responsibility, and ensure members are appropriately up to date with treasury matters, a training session has been developed by GLA Group Treasury.  The training sets out key information for Members, allows for a Question and Answer session and has been provided to the DMPC. 

EU Referendum

Following the outcome of the recent EU referendum the UK has lost its top AAA credit rating from ratings agency Standard & Poors (S&P).  S&P had been the only major agency to maintain a AAA rating for the UK. It has now cut its rating by two notches to AA. S&P said that the referendum result could lead to "a deterioration of the UK's economic performance, including its large financial services sector". Rival agency Fitch lowered its rating from AA+ to AA, forecasting an "abrupt slowdown" in growth in the short-term.  Moody’s has since cut the UK's credit rating outlook to negative

This in turn has reduced the GLA’s S&P rating from AA+ to AA. The consequences of this for treasury activity is  being evaluated

Financial Comments

The cost of borrowing and the minimum revenue provision for 2015/16 were £7.2m and £28.5m respectively and within the 2015/16 budget.  Interest received in 2015/16 was £1m above the budget of £0.8m.   The on-going implications of these underspends has been included in the 2016/17 budget.

The impact of the EU referendum, funds for investment, borrowing and cashflow will all be reviewed as part of the Budget Submission.

 

Legal Comments

Under Section 1 of the Local Government Act 2003, MOPAC as local authority defined under s23 of that Act, may borrow money for any purpose relevant to its functions under any enactment, or for the purpose of the prudent management of its financial affairs.

The Mayor is required under s3 of the Local Government Act 2003 to determine how much money the GLA and each functional body (which includes MOPAC) can afford to borrow. In complying with this duty, Regulation 2 of the Local Authorities (Capital Finance and Accounting)(England) Regulations 2003 requires the Mayor to have regard to the Prudential Code for Capital Finance in Local Authorities when determining how much MOPAC can afford.

MOPAC’s scheme of delegation provides that the Chief Finance Officer, as the s127 officer, is responsible for the proper administration of the MOPAC’s financial affairs.

An investment strategy statement must be completed as part of risk management and good governance. The report is submitted in compliance with TMSS and DCLG requirements in this regard

 

Equality Comments

There are no equality or diversity implications arising from this report.