Annual Treasury Report Review of 2002/2003

BOROUGH OF POOLE

CABINET

9 SEPTEMBER 2003

ANNUAL TREASURY REPORT – REVIEW OF 2002/2003

PART OF THE PUBLISHED FORWARD PLAN –Yes

STATUS – STRATEGIC POLICY

1.Purpose and Policy Content

1.1In compliance with the Council’s Treasury Policy Statement, this Annual Treasury Report sets out the activity and performance of the Council’s Treasury Management Function for 2002/03.

2.Decision Required

2.1To approve the reported activity of the Treasury Management Function for the financial year 2002/2003.

3.Background

3.1Treasury management in local government is regulated by the CIPFA Code of Practice on Treasury Management in Local Authorities. The Council complies with this, and its Treasury Management Policy was approved by Executive on 27 March 2002.

3.2A requirement of the Council’s Treasury Management Policy is the reporting to Members of both the expected treasury activity for the forthcoming financial year (the Annual Treasury Strategy Statement) and subsequently the results of the Council’s treasury management activities in that year (the Annual Treasury Report).

3.3Treasury Management in this context is defined as:

“The management of the local authority’s cash flows, its borrowings and its investments, the management of the associated risks, and the pursuit of the optimum performance or return consistent with those risks”.

4.2002/2003 Investment and Borrowing

Investments

4.1During 2002/2003 the Council has maintained its core holding of £5m with its external fund managers UBS Global Asset Management. Additional cash surpluses were invested on the Money Markets for periods up to one year, using a range of Brokers and deposits with Barclays Bank Plc. In addition, two Money Market Funds (Barclays Global International and Fidelity Investments) were opened and used during March 2003. Money is also invested with Barclays Bank Plc on a daily basis (call and overnight). Information regarding interest earned on these investments is given in the table below.

Investment Activity Breakdown

*Only used for March 2003 when rates had fallen in comparison to early part of the year.

4.2The overall return earned by the Council in 2002/2003 for its combined investments was 4.06%. The average Bank of England’s Base Rate for 2002/03 was 3.96%.

4.3In comparison to the CIPFA Benchmark based on all Authorities, the Council earned 0.13% below the average. To put this in context, the average investment value of the Council was £18.6m, compared to the average of £60m invested by other Councils included in the CIPFA benchmark exercise. The return earned by the Council is therefore considered reasonable in the light of the comparatively small sums invested and the relatively risk averse lending list the Council works within.

Borrowing

4.4During 2002/03 the Council repaid £3.97m of PWLB short term borrowing and took up £11.427m of longer term supported borrowing from PWLB in order to fund the capital programme. The average interest paid by the Council on external debt in 2002/03 was 4.1% (£172,000) compared to the CIPFA average of 6.7%.

Benchmark Rates

4.5The Benchmark rates are derived from theoretically available money market rates on the following basis:

ActivityRate

Money Market-7-day LIBID (uncompounded)

Barclays-Barclays Call Rate

UBS and Money Market Funds-7-day LIBID (compounded)

4.6The CIPFA Average Rates are average interest rates achieved by Local Authorities during the year 2002/2003, as reported via the benchmarking group for Treasury Management.

5.Investment Strategy

5.1The Authority managed its cash surpluses by investing for periods from overnight to 364 days, dependent on the Authority’s cash flows and interest rates on offer.

5.2All investments were undertaken in accordance with the Council’s Treasury Management Policy and in line with the approved lending list. The lending list is compromised of UK and International Financial Institutions and is compiled by the Council’s Treasury Management Advisors using a Credit Rating Agency. The value and length of each investment is determined by the financial stability of the institution the Council may invest with.

5.3Money Market Funds which are pooled investment funds were used for the first time in March 2003. The funds offer same day liquidity, triple AAA security and a return above bank call rates. These funds will eventually replace the need to use the bank for very short term deposits and subsequently improve our return .

5.4The Authority employs UBS Global Asset Management Ltd to manage £5m. Restrictions set out in the fund manager’s contract limit the investments to ‘Approved Investments’ as defined by LGHA 1989 (Cap fin) (App Inv) Reg 1990. Other restrictions include the requirement for the fund to be capable of being liquidated within 7 days. UBS Global Asset Management Ltd use gilts and certificates of deposit as part of our investment portfolio both of which have outperformed our fixed term cash investments.

5.5In order to ensure that we have the flexibility to exploit the better returns in this market the Head of Financial Services will consider increasing sums placed with UBS Global Asset Management Ltd during 2003/04 up to a maximum of £15m. There will be no increased risk as UBS Global Asset Management Ltd are contracted to work within our Approved Treasury Management Policy and only to make investments with institutions that fit the credit rating criteria contained within it. There will be a potential increase in fees from £12,000 to £24,500 but this will be covered by the increase in return if their performance continues to be 0.5% above internal performance.

6.FutureBorrowing Strategy

6.1The Council will continue to take up its supported borrowing option in 2003/04 to support the capital programme, the timing of which will be determined by PWLB rates. Future borrowing decisions will be influenced by the Prudential Code which forms part of the Local Government Bill. Details of how future borrowing will be supported has not yet been clarified and until this is done the Council will not make any firm decisions on the level of borrowing for 2004/05.

R L JACKSON

HEAD OF FINANCIAL SERVICES

Background Papers

CIPFA Benchmarking Data

Officer Contact

Ian Milner 01202-633131

11 August 2003

CabinetAnnual Treasury Rep - Review02-03.doc

Glossary of Terms

CIPFA - Chartered Institute of Public Finance and Accountancy

UBS Global Asset Management -UBS was formed through the merger of Union Bank of Switzerland and the Swiss Bank Corporation in 1998. In July 2000, the merger also culminated in the integration of the investment management teams of the asset management businesses – UBS Asset Management, Brinson Partners and Phillips & Drew. In April 2002, with the integration completed, the business group was re-branded as UBS Global Asset Management.

PWLB -The Public Works Loan Board is an independent and unpaid statutory body.

The functions of the Commissioners, derived chiefly from the Public Works Loans Act 1875 and the National Loans Act 1968, are to consider loan applications from local authorities and other prescribed bodies and, where loans are made, to collect the repayments. At present nearly all borrowers are local authorities requiring loans for capital purposes authorised by Government departments.

Moneys are provided by Act of Parliament, drawn from the National Loans Fund and rates of interest are determined by the Treasury.

LIBID -London Interbank Bid Rate. Banks in the City of London tend to lend and borrow money from one another in the wholesale money markets. LIBID is the interest rate at which banks in London are prepared to accept short-term deposits.

Uncompounded - Interest only calculated on the principal sum invested.

Compounded -Interest calculated not only on the principal sum invested but also on the interest earned.

LGHA 1989 -Local Government and Housing Act 1989.

Bonds -A bond is a debt investment whereby the investor loans money to an entity (company or government) that needs funds for a defined period of time at a specified interest rate. In exchange for your money, the entity will issue you a certificate, or bond, that states the interest rate (coupon rate) you are to be paid and when your loaned funds are to be returned (maturity date). Interest on bonds is usually paid every six months.

Gilts -Risk-free bonds issued by the British government.

Certificate of Deposit -A savings certificate entitling the bearer to receive interest. A CD bears a maturity date and a specified interest rate. CDs are generally issued by commercial banks.