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Hampshire Police Authority

Finance Committee                                 Item: 7

16 June 2010

Treasury management

Report of the Treasurer


Contact:    Anthony Dodridge
            Direct line: 01962 847407

1     Summary

1.1   The Hampshire Police Authority adopts the key recommendations of
      CIPFA’s Treasury Management in the Public Services: Code of
      Practice (the Treasury Management Code), which includes an annual
      report on the treasury management strategy and plan before the start
      of the year, a mid-year review and an annual report after its close.

1.2   This report summarises the activities of the Treasurer in managing the
      Authority’s investments and debt management strategy, and provides
      treasury management and prudential indicator actual values for
      2009/10.

1.3   The treasury management strategy and prudential code approved by
      the Authority in February 2009 was followed throughout the year.

2     Recommendation
      This report recommends that:
2.1   The Authority's treasury management annual report for 2009/10 be
      approved.

3     Borrowing

3.1   Total Authority’s balances fluctuated between £13m and £53m during
      2009/10. Average balances at just under £34m were £14m higher than
      in 2008/09. This changed position with regards to cash balances can
      be accounted for by a combination of a number of factors:-
           There was an underspend on the revenue account which was
            reported throughout the year, culminating in an underspend at
            year-end of £7.9m. In addition to this, there were contributions
            towards reserves in the year of £3.4m more than the original




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             budget, with £2.3m of this being required to support the 2010/11
             budget;
            The grant received in respect of the police pensions top-up (i.e.
             to fund the difference between the employer’s and employees’
             contributions and the payments to pensioners) was received
             more timely than the previous year due to more accurate
             forecasting of the Force’s requirements;
            The capital programme underspent on the updated programme
             for 2009/10 by £12.9m and by £10.0m on the capital programme
             which was assumed in last year’s report;
            Capital receipts were £1.7m in 2009/10. In the original budget
             this was anticipated at nil;
            Balances held at the year-end on behalf of other services
             facilitated by the Authority, such as ACRO and CBRN, were
             £3.8m;
            There were balances held in other cash-backed reserves at 31
             March 2009: namely, the capital receipts reserve (£1.8m) and
             the capital (revenue contributions) reserve (£5.0m).

3.2   At the Finance Committee’s meeting on 9 February 2009, it was agreed
      that long-term fixed-rate borrowing should only be considered if it was
      available at rates of 4.2% or less, or if long-term rates began to rise
      significantly above the rates prevailing at the time of the meeting and it
      proved timely to lock into low interest rates.

3.3   Since the Police Authority was established in April 1995, a number of
      long-term fixed-rate loans totalling £20.2m have been taken from the
      Public Works Loan Board (PWLB) in line with the strategy previously
      agreed.

      Date                   Amount      Rate          Year of maturity
                                £         %
      July 1995              500,000     8.5           2015/16
      March 1998             350,000     6.0           2023/24
      September 1998         350,000     4.875         2024/25
      January 2006         2,000,000     3.85          2035/36
      October 2008         2,000,000     4.48          2033/34
      October 2008         2,000,000     4.41          2038/39
      December 2008        2,000,000     4.46          2033/34
      December 2008        2,000,000     4.15          2034/35
      December 2008        2,000,000     4.15          2032/33
      December 2008        2,000,000     4.05          2031/32
      March 2009           2,000,000     3.97          2032/33
      August 2009          2,000,000     4.40          2034/35
      August 2009          1,000,000     4.23          2035/36




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3.4   The major accommodation capital project in Southampton costing an
      estimated £38m largely profiled into 2009/10 and 2010/11 has
      generated a need for significant long-term borrowing on a scale not
      previously experienced.

3.5   Long-term borrowing rates for loans of a 25-year duration fluctuated
      between 4.0% and 4.8% during 2009/10. In line with the Authority’s
      established policy of taking loans in small tranches, three new fixed-
      rate loans totalling £5m with an average duration of 25 years have
      been taken out from the PWLB since March 2009. The fixed rates
      ranged between 3.97% and 4.40%, averaging 4.19%.

      Date                   Amount       Rate          Year of maturity
                                £          %
      18 March 2009        2,000,000      3.97          2032/33
      18 August 2009       2,000,000      4.40          2034/35
      20 August 2009       1,000,000      4.23          2035/36

3.6   The taking out of external borrowing has been understandably cautious
      given the sharp falls in short-term variable interest rates and differential
      cost associated with taking out external borrowing ahead of using
      internal balances in the first instance. The continuing high level of
      balances meant that the Authority could afford to monitor long-term
      rates and take the borrowing finance out at preferential interest rates.

3.7   The Authority’s £20.2m fixed-rate debt has been secured at an average
      of 4.36% (see paragraph 3.3). This may prove to be a good legacy on
      an historic basis with the prospect of higher inflation and yields from
      2011 onwards.

4     Investment of balances

4.1   The Base Rate had remained unchanged at 0.5% since it was last
      reduced in March 2009, its lowest level since the Bank of England was
      formed in 1694.

4.2   The Authority has taken a cautious approach in respect of which
      counterparties to lend monies to. The “credit crunch” and general lack
      of confidence in the banking sector in particular added to an even
      greater focus on capital security over investment return than would
      have normally been the case.

4.3   As at 31 March 2010, cash investments stood at £15.1m and were
      deposited as follows:

          NatWest                         £5.0m         Fixed term deposit
          Lloyds TSB                      £2.5m         Fixed term deposit
          Hampshire County Council        £7.6m         Instant access




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4.4   Overall the weighted average interest rate earned on the Police
      Authority’s balances was 0.54% in 2009/10. Total cash investment
      interest of £180,000 was substantially lower than the previous year’s
      figure of £799,000, reflecting the unprecedented circumstances
      outlined above.

5     Treasury management indicators

      Medium term borrowing not to exceed capital financing
      requirement

5.1   The Prudential Code requires that, as a key indicator of prudence, net
      borrowing over the medium term should not exceed the total of the
      capital financing requirement in the preceding year plus the estimates
      of any additional capital financing requirement for the current and next
      two years. The Treasurer is required to ensure that this limit is not
      breached.

      Actual external debt

5.2   Actual external debt at 31 March 2010 was £20.2m.

      Authorised limits for external debt

5.3   The Code also requires authorities to monitor against their authorised
      limits for external debt, defined as the sum of external borrowing and
      other long-term liabilities. These recommended limits are based on the
      estimated capital financing requirements in order to enable these to be
      financed entirely from external borrowing should the Authority’s internal
      reserves become depleted. Given that the Authority’s authorised limit
      for 2009/10 was £62.7m, the actual level of external debt of £20.2m
      was comfortably below this figure.

      Operational boundaries for external debt

5.4   The Authority also needs to monitor its operational boundary for
      external debt. This should reflect the most likely scenario and be
      consistent with the Authority’s capital plans and treasury management
      strategy. Temporary breaches of the 2009/10 operational boundary
      can take place for cash flow reasons, but any sustained breach will
      lead to further investigation. Given that the Authority’s operational
      boundary for 2009/10 was £52.7m, the actual level of external debt of
      £20.2m was again well within this figure.

      Upper limit on its fixed interest rate borrowing

5.5   The Authority must set an upper limit on its fixed interest rate exposure.
      This is expressed in terms of the maximum long-term fixed-rate
      principal sums which can be outstanding on any day in each year.
      Whilst this limit for 2009/10 was set at £52.6m, the maximum long-term


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      fixed-rate principal borrowing sum outstanding during 2009/10 was
      £20.2m.

      Upper limit on its variable interest rate borrowing

5.6   The Authority also has to set a limit on its variable interest rate
      exposure. Whilst this limit for 2009/10 was set at £26.3m, the actual
      level of variable interest rate exposure was nil.

      Upper and lower percentage limits on the maturity structure of
      long-term fixed-rate borrowing

5.7   The Code also requires the Authority to set upper and lower
      percentage limits on the maturity structure of its long-term fixed-rate
      borrowing during 2009/10.

      Upper limits

                                          Upper limit (%)         Actual (%)
        Under 12 months                                  0                      0
        12 to 24 months                                 30                      0
        24 months to 5 years                            30                      0
        5 years to 10 years                             30                      2
        10 years and beyond                            100                 98


      Lower limits

                                          Lower limit (%)         Actual (%)
        Under 12 months                                  0                      0
        12 to 24 months                                  0                      0
        24 months to 5 years                             0                      0
        5 years to 10 years                              0                      2
        10 years and beyond                             50                 98




      Upper limits on investments with maturities longer than one year

5.8   The Authority’s Annual Investment Strategy sets a maximum lending
      term of 364 days. Therefore, the upper limit on investments with
      maturities longer than one year was set at nil for 2009/10. In
      accordance with this policy, no investments made during 2009/10
      exceeded a period of longer than one year.




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6     Prudential indicator for affordability

6.1   The Prudential Code prescribes an indicator of the affordability of
      borrowing for capital purposes.

      Ratio of financing costs to net revenue stream

6.2   The ratio of financing costs to the net revenue stream shows the
      annual revenue costs of borrowing (net interest payable on debt, the
      minimum revenue provision for repaying the debt together with the
      costs of depreciation), as a percentage of the amount in the draft
      revenue budget to be met from central government grants and local
      taxpayers. Estimated and actual figures for 2009/10 are set out in the
      table below.

                                  2009/10      2009/10
                                 Estimate       Actual
                                     £000         £000
         Financing costs             1,792       1,359

         Net revenue stream        304,700     304,700

         Ratio                      0.59%       0.45%

6.3   The ratio in 2009/10 is lower than the estimated 0.45% largely because
      interest gained on cash balances was greater than anticipated (up
      £25,000 or 17%) and interest on external loans was £377,000 (or 30%)
      less than forecast due to a reduced borrowing requirement in the year.

7     Other implications

AUTHORITY AREA          IMPLICATION

Statutory Duty/Good The proposals are considered to be fully compliant.
Practice

Equality, Diversity     Equality, Diversity and Human Rights are not
and Human Rights        considered to be adversely affected by the proposals in
                        this report.

Vulnerable People       Vulnerable People and Every Child Matters are not
and Every Child         considered to be adversely affected by the proposals in
Matters                 this report.

Environmental           No specific impact.
Impact




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AUTHORITY AREA         IMPLICATION

Trust and              No specific impact.
Confidence

Partnership and        No specific impact.
Collaboration

Strategic              No specific impact.
Documents




Section 100D (Local Government Act 1972) background papers

The following documents disclose facts or matters on which this report, or an
important part of it, is based and has been relied upon to a material extent in
the preparation of this report.
NB the list excludes:
1. published works; and,
2. documents that disclose exempt or confidential information as defined in
     the Act.
Title                      Location
None                       None




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