REPORT BY THE TREASURER TO THE POLICE AND CRIME COMMISSIONER. To provide an update to the Committee on Treasury Management activities.

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1 AGENDA NO: 7 JOINT INDEPENDENT AUDIT COMMITTEE - 3 DECEMBER 2015 TREASURY MANAGEMENT MID-YEAR UPDATE REPORT BY THE TREASURER TO THE POLICE AND CRIME COMMISSIONER PURPOSE OF THE REPORT To provide an update to the Committee on Treasury Management activities. 1. INTRODUCTION 1.1 The Police and Crime Commissioner (PCC) has adopted the CIPFA Code of Practice for Treasury Management in the Public Sector and operates its Treasury Management function in compliance with this Code. This requires that the primary objective of the Treasury Management function is the effective management of risk, and that its borrowing activities are undertaken on a prudent, affordable and sustainable basis. 1.2 The code requires the regular reporting of Treasury Management activities to include, as a minimum: a forecast of the likely activity for the forthcoming year (the Treasury Management Strategy for 2015/16 was agreed by the PCC 27 March 2015); a mid-year update on treasury management activity (this report) and an annual review of the actual activity for the preceding year. 2. CAPITAL PROGRAMME 2.1 The Capital Programme is financed in full through revenue and capital resources without the need to borrow. The PCC does not have any long term borrowings as it has been the strategy to date and for the foreseeable future not to borrow to fund capital investment decisions. The latest projection for capital expenditure in the year is 9.8M. 3. INVESTMENTS 3.1 As at 9 November 2015, the PCC held 25.8M in investments, of which 16.0M was held in fixed term deposits, 0.3M in call accounts, and 9.5M in Money Market Funds. See Appendix A for full details. 4. ICELANDIC BANKS 4.1 Between 26 June and 3 September 2008, Dorset Police Authority made three temporary loans to two Icelandic banks, Landsbanki, (two loans totalling 5 Million) and Heritable (a UK subsidiary, one loan of 2 Million), totalling 7 Million. At the time these loans were 1

2 made, both banks met the criteria set by the Treasury Management Policy. These loans subsequently transferred to the PCC. 4.2 The Heritable claim was for 2,035,104, of which 1,994,403 has been repaid to date, 98% of the claim. Legal proceedings are still on-going and if successful it is possible that close to 100% could be returned. 4.3 The Landsbanki claim was for 5,065,899, of which 4,599,932 has been repaid, 91% of the claim. The PCC sold its outstanding claim to Deutsche Bank in October 2014, so no further payments will be received. A sum of around 50,000 is still held in in Icelandic krona which is anticipated to be returned once currency restrictions are lifted. 5. ECONOMIC OUTLOOK AND PROSPECTS FOR INTEREST RATES 5.1 The Treasury Management Strategy agreed in February predicted that Investment returns are likely to remain very low during 2015/16 and beyond. This has proved to be the case for the financial year to date, and is expected to continue for the remainder of 2015/16 and beyond. 6. RISK/THREAT ASSESSMENT 6.1 Financial/Resource/Value for Money Implications No risk issues arise directly from this report. However, the Treasury Management policy agreed each year carefully balances the acceptance and spread of borrower risk against the requirement to maximise returns. In addition, a potential budget risk exists if there is a shortfall against budget of interest earnings as a result of lower interest rates and balances. 6.2 Legal implications The Police and Crime Commissioner have adopted the CIPFA Code of Practice for Treasury Management in the Public Sector and operates its Treasury Management function in compliance with this Code. This requires that the prime objective of the Treasury Management function is the effective management of risk, and that its borrowing activities are undertaken on a prudent, affordable and sustainable basis. 6.3 Equality There are no equality implications raised from this report. 7. RECOMMENDATIONS 7.1 That the committee note and comment upon the report. RICHARD BATES Treasurer to the Police and Crime Commissioner November 2015 Appendices: Appendix A: Investments outstanding with analysis of current limits If you have any queries on this report please contact Richard Bates, Treasurer on (01305) or r.m.bates@dorsetcc.gov.uk 2

3 APPENDIX A Portfolio of investments as at 9 November 2015 Lender/ Borrower Amount '000 Rate % Start Date End Date Long Term Rating at Date of Loan * Current Counterparty Rating ** Sovereign Loans Lloyds Banking Group 2, /11/ /11/2015 A A+ UK Santander UK Plc 3, /07/ /07/2016 A A UK Goldman Sachs International Bank 3, /07/ /04/2016 A A UK Nationw ide Building Society 2, /07/ /01/2016 A A UK Coventry Building Society 3, /07/ /12/2015 A A UK Royal Bank of Scotland 3, /07/ /02/2016 BBB+ BBB+ UK Icelandic Banks Heritable Bank /06/ /12/2008 A BBB+ Iceland *** Call Accounts National Westminster Bank /11/ /11/2015 BBB+ BBB+ UK Money Market Funds BNP Paribas MMF 3, /11/ /11/2015 AAA AAA UK Standard Life MMF 3, /11/ /11/2015 AAA AAA UK Federated Prime Rate MMF 3, /11/ /11/2015 AAA AAA UK Deutsche MMF /11/ /11/2015 AAA AAA UK Total Cash 25,834 Weighted Average Yield 0.69% * This is the Fitch Long Term Rating at the Start Date of the Loan. ** This is the minimum current Long Term Rating across the three ratings agencies. *** Fitch Long Term Sovereign rating of Iceland Compliance with Sovereign Limits The following charts show the Authority s compliance with the limits set out below. The Authority will only lend to counterparties in countries with a Sovereign Credit Rating of AAA. The maximum that can be deposited with banks in any one sovereign is 6 Million, with the exception of the United Kingdom which is unlimited. 3

4 All loans are with counterparties from AAA rated countries with the exception of the Icelandic Bank Loans which were made prior to this policy being introduced. Use of Sovereign Limits With the exception of the UK, and Iceland where loans were made before this policy was introduced, a maximum of 6 Million can be invested with institutions in any one AAA rated Sovereign. Compliance with Counterparty Rating Limits The following charts show the PCC s compliance with the limits set out below. A lowest common denominator method is used to select counterparties, which involves applying the lowest rating given by the ratings agencies to a counterparty. Minimum credit ratings for counterparties set out below are complied with. Category Credit Rating Limit M Any local authority N/A 5.0 Five Major UK Banks N/A 6.0 Other Banks and Building Societies Short F1, Long A 3.0 Money Market Funds (individual) AAA 3.0 Money Market Funds (in total) AAA Unlimited 4

5 A breakdown of current investments by Counterparty Limit is shown below. All investments with the exception of Icelandic Bank Loans are with Counterparties rated A and above. Breakdown by Counterparty Limit Counterparties Rated BBB+ 3.3M Counterparties Rated A+ 2.0M Counterparties Rated A 11.0M Counterparties Rated AAA 9.5M Compliance with Group Limits The following charts show the Authority s compliance with the limits set out below. Where a counterparty is part of a larger group, the authority s overall exposure to the group will be limited to the individual limit of the highest rated body in that group Breakdown by Group (excluding non-group investments and Iceland) There are currently six fixed term deposits for PCC as at 9 November 2015, 3M each with Santander UK Plc, Goldman Sachs International Bank Plc, Coventry Building Society and the Royal Bank of Scotland and 2M with Lloyds Banking Group and Nationwide Building Society. There is currently 0.328M deposited with the Royal Bank of Scotland through deposits in the Authority s NatWest Interest Bearing Account. There is 9.5M in four Money Market Funds with 3M each in BNP Paribas MMF, Standard Life MMF and Federated Prime Rate MMF and 0.5M with Deutsche MMF. There is 0.006M with Icelandic Banks. 5

6 Compliance with Term Limits The following chart shows the Authority s compliance with the limit that a minimum of 10% of total investments will be kept as notice money (short term) at all times. 38.1% of the PCC s investments are currently held in call accounts and Money Market Funds. 27.1% are invested over 1-3 months, 23.2% are invested over 3-6 months and 11.6% of the PCC s investments are invested over 6-9 months. The remaining 8.9% of the PCC s investments are currently held in Icelandic banks. Following the global financial crisis, the majority of the PCC s investments had been held short term. More normality is now returning to the portfolio, and this has previously been reflected in the return to investments of periods over three months. There are currently no loans invested for purely cash-flow purposes. For this reason, an investment with Santander UK Plc was undertaken in July 2015 for 364 days, achieving an interest rate of 0.92%. Overnight Call Accounts 0.3M Overnight Money Market Funds 9.5M 1 3 Months 7.0M 3 6 Months 6.0M 6 9 Months 3.0M Icelandic Banks 0.0M 6