HERTFORDSHIRE COUNTY COUNCIL
COUNTY COUNCIL
FRIDAY 18 FEBRUARY 2011 AT 10.30 AM
Agenda Item No:
6(c)(iii)
MID-YEAR REPORT ON THE TREASURY MANAGEMENT SERVICE AND
PRUDENTIAL INDICATORS 2010/11
Report of the Director of Resources and Performance
[Author: Patrick Towey, Group Manager – Specialist Accounting Tel: 01992 555148]
1.
Purpose of Report
1.1
The mid-year treasury report is a requirement of the CIPFA Prudential Code
and CIPFA Code of Practice for Treasury Management in the Public Sector,
and covers the treasury activity for the first half of 2010/11. This report
reviews the prudential indicators specified in the County Council report of 23
February 2010 in accordance with the requirements of the Prudential Code.
2.
Summary
2.1
This report summarises the treasury activity of the Authority for the first six
months of this financial year up to 30 September 2010.
2.2
The Council earned £0.34m of interest in the period April to September 2010.
The Council’s deposits were placed primarily with the Debt Management
Office in their deposit account facility and with UK approved counterparties
that met the counterparty criteria of the treasury management strategy.
2.3
No long term borrowing was repaid during the period April to September 2010.
This means that the Council remains under borrowed and is effectively funding
capital expenditure from cash balances.
2.4
Ernst & Young, the administrators for Heritable Bank and Kaupthing, Singer &
Friedlander, Icelandic Banks in administration, made dividend distributions
totalling £1.06m to the Council during the period April to September 2010. The
value of the original deposits placed with these individual banks was £11m.
2.5
This report was considered and approved by the Audit Committee on 16
December 2010.
3.
Recommendations
The County Council is invited to note the mid year report on treasury
management activity.
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4.
Background
4.1
The CIPFA Prudential Code requires the Council to set Prudential Indicators
for its capital expenditure and treasury management activities and to report on
them at the end of the financial year and to produce a mid-year report. In
addition the indicators are monitored on a quarterly basis as part of the
quarterly budget monitor report to Cabinet.
4.2
This Council has adopted the CIPFA Code of Practice for Treasury
Management in the Public Sector and operates its treasury management
service in compliance with this Code. The Code requires a mid-year report
reviewing the treasury management activity to be presented to members.
5.
Treasury Management Strategy
5.1
The Council approved the 2010/11 treasury management strategy at its
meeting on 23 February 2010. The Authority’s primary consideration is the
security of the Authority’s funds. The secondary consideration is liquidity i.e.
ensuring that sufficient funds are available to meet Authority’s obligations.
Only once both of these matters have been taken into account will the yield
available be considered. Long term borrowing would only be done when
necessary to avoid a prolonged short term overdraft position.
5.2
The Chief Financial Officer is pleased to report that all treasury management
activity undertaken during the period complied with the approved strategy, the
CIPFA Code of Practice, and the relevant legislative provisions.
5.3
There have been no amendments to the current investment strategy; however,
officers have opened a number of money market funds (MMFs) that provide
instant liquidity, a high credit rating, and a higher rate of return than the Debt
Management Account Deposit Facility.
6.
Economic Review
6.1
The UK economy continued along the road to recovery during the first half of
2010/11, despite two shocks to consumer and business confidence. The Euro
zone sovereign debt crisis caused marked financial market volatility, while the
coalition government’s emergency Budget outlined significant cuts in public
spending.
6.2
GDP expanded by 0.4% in the first quarter and by a healthy 1.2% in the
second quarter of 2010. Manufacturers in particular benefited from the
recovery in the global economy by increasing exports and the competitive rate
of sterling. The recovery was less impressive in the service sector due to
depressed business and consumer confidence. Improved economic conditions
did however help financial institutions to repair some of the damage the
recession caused to their balance sheets.
6.3
Inflation has remained above the Bank of England’s target rate of 2% since
late 2009. The CPI rate peaked in April at 3.7% and eased back over the past
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few months as the effects of a number of temporary factors waned. Despite
inflation remaining over target, the Bank of England has maintained Bank Rate
at 0.5% to avoid the risk of a downturn in economic growth.
7.
Interest Rate Prospects
7.1
Looking ahead, the economic recovery is expected to slow as central
government spending cuts and tax rises dampen demand. The Bank of
England expects this to weigh on inflation, causing CPI to fall below target in
the medium term, suggesting that the MPC is unlikely to increase interest
rates anytime soon. It is therefore very likely that Bank Rate will remain at
0.5% for the remainder of the financial year, with only modest rises in money
market and PWLB1 rates.
Table 1: Interest rate forecast
Bank
Rate
Current 0.50
Q4
0.50
2010
Q1
0.50
2011
Q2
0.50
2011
Q3
0.50
2011
Q4
1.00
2011
H1
2.00
2012
H2
3.00
2012
H1
4.00
2013
1 month
LIBOR2
0.57
0.60
3 month
LIBOR
0.73
0.80
12 month
LIBOR
1.47
1.70
25 year
PWLB
4.10
4.50
50 year
PWLB
4.14
4.50
0.60
0.80
1.80
4.60
4.60
0.60
0.90
2.20
4.70
4.70
0.60
1.00
2.50
4.80
4.80
1.10
1.50
2.75
4.90
4.90
2.10
2.50
3.50
5.00
5.00
3.10
3.50
4.25
5.10
5.10
4.10
4.50
5.00
5.20
5.20
7.2
The Chancellor announced in the Comprehensive Spending Review in
October that PWLB loans will be set on terms to better reflect market
conditions. The PWLB increased rates for new fixed and variable rate loans by
around 0.87% with immediate effect.
8.
Summary of Transactions
1
2
Public Works Loan Board
London Inter-bank Offer Rate
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8.1
During the first half of this financial year 2010 funds were invested with the
Debt Management Account Deposit Facility (DMADF), and call accounts with
RBS, Bank of Scotland, and Blackrock gilt MMF3. In addition, three more MMF
accounts were opened in September with the emphasis on improving the
overall yield earned on the authority’s cash. The new MMF accounts are with
the following institutions: Insight, Ignis, Scottish Widows, and an additional
account with Blackrock.
8.2
The table overleaf shows a summary of the treasury activity in the period April
to September 2010.
Table 2: 2010/11 treasury activity – 01 April to 30 Sept. 10
Measure
Average size of portfolio
Number of deals
189
£7.2m
Weighted average term
9 days
Average rate earned
Interest earned
3
£86.7m
Average size
Number of counterparties used
8.3
April to
September
2010
9
0.81%
£0.34m
The table overleaf shows the investments outstanding on 30 September 2010.
Money Market Fund
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Table 3: Investments at 30th September 2010
Counterparty
Start Date
Northern Rock
29/05/2007 31/05/2011 2.00
6.10
RBS
23/09/2008 26/09/2011 3.00
1.00
Yorkshire
Building
society
17/07/2007 17/07/2012 2.00
6.33
Bank of
Scotland
Call
-
5.00
0.85
Nat West
Call
-
3.90
0.90
Blackrock Gilt
MMF
Call
-
5.00
0.33
Ignis MMF
Call
-
5.00
0.68
SWIP MMF
Call
-
5.00
0.56
Insight MMF
Call
-
5.00
0.63
DMADF
28/09/10
05/10/10
2.90
0.25
DMADF
30/09/10
01/10/10
6.00
0.25
Icelandic
Banks
Various
Various
23.26
n/a
TOTAL
Maturity
Date
Amount
£m
Interest
Rate
%
68.06
8.4
The table demonstrates that funds are being kept on call with the base plus
accounts offered by Bank of Scotland and Nat West and the new money
market funds because they offer an attractive return without any liquidity risk. It
is also a low security risk, as funds can be withdrawn without notice.
8.5
Icelandic deposits – Bevan Brittan who act for the LGA, representing the
interest of affected member authorities, has filed claims against the insolvent
Icelandic banks Landsbanki and Glitnir for preferred creditor status. These
actions will now be determined by the Icelandic Courts with a trial date
expected early in 2011. Heritable and Kaupthing, Singer & Friedlander are
under UK administration and the Council has received in 2010/11 dividend
distributions form the administrators for these two UK administered banks
totalling £1.06m. The table overleaf shows the expected recovery percentages
based on information available at the time of writing.
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Table 4: Icelandic bank deposits
Bank
8.6
Value of
original
deposits
Recovered
as at
30/09/2010
£m
Total expected
distribution
%
Heritable Bank
£7m
2.90
Kaupthing, Singer &
Friedlander
£4m
1.85
84.98
71.00
Glitnir
£7m
0.00
100.00
Landsbanki
£10m
0.00
94.86
The table below show the borrowing outstanding at 30 September 2010 and
the future maturity profile of this borrowing. No new borrowing has yet been
taken in 2010/11.
Table 5: Debt maturity profile
Borrowing at 30 September 2010
Maturing in 2010/11
Maturing in 2011/12
Maturing in 2012/13
Maturing later
Average interest rate
2010/11
£m
290.79
5.01
0.00
0.00
285.78
4.66%
9.
Interim Performance Report
9.1
The average investment balance held was £86.7m and the average rate of
return was 0.81%. The investment income received £0.342m fell short of the
budgeted figure of £0.606m by £0.264m.
9.2
The average debt balance held was £290.79m and the average rate paid was
4.66%. Interest payable of £6.795m was in line with the budgeted interest
figure.
10.
Security, Liquidity and Operational Indicators
10.1
The table overleaf shows the security, liquidity and yield indicators for the
period April to September 2010.
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Table 6: Security, liquidity & yield indicators
Security, Liquidity & Yield Indicators
Security - weighted average credit rating at 30/09/2010
3.4
Liquidity - weighted average maturity of investments at 65 days
30/09/2010
Yield - investment return
0.81%
Yield - 7 day LIBID rate
0.42%
10.2
The above credit rating indicator compares the ratings of the counterparties
used by the authority against a scale from 1 to 10. A rating of 1 is equivalent to
AAA rating derived from one of the credit rating agencies such as Fitch,
Standard & Poors or Moodys; this rating would represent the securest form of
deposit. A rating of AA would represent a score of 4; banks such as HSBC
have this rating. The lowest rating is BBB and non-rated institutions, and this
is equivalent to a score of 10. The lower the credit rating score on the scale
indicates a counterparty that is financially more stable and secure than
counterparty with a higher score.
10.3
The table below shows the operational indicators for the period April to
September 2010. On 27 September, Bankline payment authorisation was not
completed correctly which meant that two transactions totalling £255K were
not processed. The impact was a late payment to a closing school account
and the daily transfer of pension cash did not take place. Both of these
transactions were resolved on 28 September and all Bankline authorisers
were advised of the checking procedures to be carried out to ensure all
payments are fully authorised in future.
Table 7: Operational indicators
Operational Indicators
Breaches in lending policy
Number of transactions
Number of counterparties used
Process errors
None
189
9
2
11.
Treasury Management Prudential Indicators
11.1
Interest rate exposure – this indicator is set to control the Council’s exposure
to interest rate risk. The exposures to fixed and variable rate interest rates
expressed as an amount of net principal borrowed.
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Table 8: Interest rate exposure
Limit
Met
Upper limit on fixed rate exposures
£381.0m 
Upper limit on variable rate £114.3m 
exposures
11.2
Maturity structure of borrowing – this indicator is set to control the Council’s
exposure to refinancing risk. The maturity structure of fixed rate borrowing
was:
Table 9: Maturity structure of borrowing
Upper limit
12 25%
Under
months
12
months
and within 24
months
24
months
and within 5
years
5 years and
within
10
years
10 years and
above
11.3
12
12.1
Lower limit
0%
Met

40%
0%

60%
0%

80%
0%

100%
0%

Principal sums invested for periods longer than 364 days- the purpose of
this indicator is to control the Council’s exposure to the risk of incurring losses
by seeking early repayment of its investments. The total principal sums
invested with a maturity date greater than or equal to 364 days was £11.15m
at 30th September 2010.4 Investments to Icelandic banks represent 82%
(£9.154m) of this total including distributions received from the administrators
for Heritable and Kaupthing, Singer & Friedlander.
Hertfordshire Police Authority – Treasury Management
The Police Authority contracts with Hertfordshire County Council to deliver its
Treasury Management services. This contractual arrangement allows for the
Police Authority to receive Treasury Management services at a low cost
(£10,000 per annum).
4
This total represents investments with more than 365 days to run after 30 the September 2009 and Icelandic
investments originally placed for more than 365 days.
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12.2
A separate treasury management strategy is maintained for the Police
Authority. Police Authority officers provide data concerning the Police
Authority’s cash flow to Council Officers and Council Officers invest any
surplus cash in accordance with the investment criteria outlined in the treasury
management strategy. The cash flow and investment portfolio is maintained
separately from the Council’s funds. The Police Authority has an overnight
balance with the Council and this is reflected in the balance sheet of the
financial accounts under Current Liabilities: Amounts owed to HPA and in note
33 to the accounts. The Council also undertakes any borrowing that the Police
Authority may require for its capital programme; any charges/commission
incurred are paid by the Police Authority.
12.3
The reporting arrangements for the Police Authority are similar to the Council.
The Police Authority will receive an annual treasury management strategy
before the start of each financial year. The Police Authority will also receive an
annual report on the previous financial year’s treasury management activity as
well a mid-year report on treasury management activity for the current
financial year. Quarterly reports are sent to the Police Authority’s Resources
Committee: this Committee has the prime responsibility for scrutinising the
treasury management policy.
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