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Item 7 Police and Crime Commissioner for Devon and Cornwall 17 November 2014 Open for the purposes of FOI Report of the Treasurer

Treasury Management Report as at 30 September 2014

1 2 RECOMMENDATIONS: (i) That the treasury management performance be noted; (ii) The negotiations are started with a view to extending the current banking contract for a further year to cover the period 1 April 2015 to 31 March 2016; (iii) That consideration be given to whether new external borrowing is required.

1 This report contains the following Information:

 Section 1 - Market Information  Section 2 - Overall Performance and Budgetary Impact  Section 3 - Benchmarking of Investment Performance  Section 4 – Investment Portfolio  Section 5 - External Borrowing and Debt Rescheduling  Section 6 - Borrowing Strategy  Section 7 - Compliance with Treasury and Prudential Limits  Section 8 - Banking Contract  Appendix 1 - Investment Portfolio – schedule of holdings  Appendix 2 - Prudential Indicators

Section 1 - Market Information

2 The market background for the first six months of 2014-15 is as follows:

 Bank Rate: No change (remained at 0.5%)  Market rates (for investments): The London Interbank Bid (LIBID) rates indicate that shorter duration rates (overnight to 3 months) have been almost static over the period 1.4.2014 to 30.9.2014, longer duration rates (6 to 12 months) have increased marginally.  Public Works Loan Board (PWLB) rates (for borrowing): PWLB rates particularly over the longer duration have fallen since the start of the year with the 25 year rate falling from 4.29% as at 1 April 2014 to 3.77% as at 30 October 2014.

3 The Council’s treasury advisor, Capita Asset Services, has provided the following commentary and forecast for future market activity:

1 Capita Asset Services undertook a review of its interest rate forecasts on 24 October. During September and October, a further rise in geopolitical concerns, principally over Ukraine but also over the Middle East, plus fears around Ebola and an accumulation of dismal growth news in most of the ten largest economies of the world and also on the growing risk of deflation in the Eurozone, had sparked a flight from equities into safe havens like gilts and depressed PWLB rates. However, there is much volatility in rates as news ebbs and flows in negative or positive ways. This latest forecast includes a first increase in Bank Rate in quarter 2 of 2015.

The PWLB rate forecasts are based around a balance of risk. Capita conclude that while there are some upside risks the number of downside risks are greater.

Section 2 - Overall Performance and Budgetary Impact

4 Table 1 presents the forecast year-end position.

Table 1 Budget Forecast Variance £000 Outturn £000 £000 Interest receipts PCC Investment Fund (153) (370) (217) Short Term Deposits (172) (171) 1 Interest earned/paid (325) (541) (216) Cost of Borrowing for Capital Investment 1,344 1,308 (36) Minimum Revenue Provision 1,421 1,395 (26) Total Capital Financing 2,440 2,162 (278)

5 The forecast for interest earned on investments is £216k more than the budget. Once the under-spending on the budget for the Minimum Revenue Provision for the repayment of debt is taken into account the total forecast under-spending on the budget is £279k.

6 The reasons that the investment income is higher than expected are as follows:

 Cash balances are higher than forecast for a number of reasons including higher than forecast revenue reserves as at 31 March 2014, revenue budget underspending in 2014-15 and delay to the Job Evaluation project 2  Higher cash balances and market conditions have meant that a higher portion of the cash balances have been invested in longer durartion deposits, thus yielding higher returns than forecast in the budget  The interest rates achieved on investments are marginally higher than forecast in the budget.

Section 3 - Benchmarking of Performance

7 The Police and Crime Commissioner uses the 3 month LIBID rate to benchmark performance. In addition information is available from the Capita Benchmarking Service on the performance of the other bodies that subscribe to the service. The results in table 2 below show that the performance for the PCC was above the agreed benchmark of 3 month LIBID by 44 and 29 basis points in quarters 1 and 2 respectively. This equated with approximately £110k additional interest income. The performance of the PCC was also above the police and the overall averages for the Capita Benchmarking Service.

Table 2

Benchmarking Data for Quarters 1 & 2 2014-15 Return Return Weighted Q1 Q2 average credit % % risk Q2 3 month LIBID 0.41 0.44 -

PCC for Devon and Cornwall Police 0.85 0.77 4.3 (14 in sample group) - 0.56 3.3 All (206 in sample group) - 0.68 3.4

8 The weighted average credit risk is above the average for comparator groups, this is partly due to the downgrading of Ulster Bank (a subsidiary of Nat West) this holding will mature on 19 November 2014 and the funds will be reinvested with other counter parties at which point the weighted average credit risk for the PCC should decline. Returns are broadly in-line with that expected for the risk level and the overall level of risk is within Capita recommended limits.

Section 4 - Investment Portfolio as at 30 September 2014

9 The holdings as at 30 September are provided at Appendix 1. All holdings are within the limits and thresholds as set out in the Annual Treasury Management Strategy.

10 Appendix 1 shows that as at 30 September 2014 the PCC had a holding of UK government gilts with a nominal value of £1,810k and with a market value of £1,780k as at 31 March 2014. This investment was taken on when the fund managed by the external investment manager was wound up in January 2014. As was agreed when the investment was transferred, the price for this gilt has been monitored on a daily basis so that a decision to dispose of the holding could be made should an appropriate price be

3 reached. In mid October gilt prices rose to a point not seen for 12 months and a portion of the holding (nominal value £1,310k) was sold for a value of £1,315k. The price of gilt continues to be monitored so that the remaining holding can be sold should a suitable price be achieved.

Section 5 - PCC External Borrowing and Debt Rescheduling

11 External borrowing consists of loans arranged to fund the capital programme. The former Police Authority changed its policy with regard to external borrowing in 2011/12 and the last loan was taken out in October 2010. The table below shows the borrowing position based on the assumption that no new borrowing is undertaken in 2014/15 (see section 6 below).

Table 3 PCC External Borrowing Period Outstanding Amount as at Term Maturity Date Borrowed 31/3/2015 Years £ Years

PWLB 8 02/11/2016 4,500,000 0.60 PWLB 15 01/10/2025 2,000,000 10.52 PWLB 26 03/05/2029 1,697,070 14.10 PWLB 26 03/05/2029 168,930 14.10 PWLB 26 03/05/2029 461,600 14.10 PWLB 26 03/11/2029 2,000,000 14.61 PWLB 20 01/10/2030 2,000,000 15.52 PWLB 26 23/11/2030 2,500,000 15.66 PWLB 25 16/12/2034 2,500,000 19.73 PWLB 31 03/05/2036 6,200,000 21.11 PWLB 31 23/11/2036 2,000,000 21.67 PWLB 30 03/05/2037 4,750,000 22.11 30,777,600

12 Opportunities for debt rescheduling or repayment are regularly reviewed. At present the levels of premiums to be paid mean that rescheduling would not deliver budget savings.

Section 6 - Borrowing Strategy

13 The 2014/15 Treasury Management Strategy assumes new external borrowing of £2.0m in 2014/15 and £3.0m 2016-17. This external borrowing was included in the Treasury Management Strategy to provide flexibility so that such borrowing could be undertaken if it was felt to be appropriate. External borrowing has been avoided for a number of years because the margin between the costs of long term borrowing (in broad terms approximately 4% per annum) and the rate that can be obtained from short term lending (in broad terms 1% or below) has meant that it is cheaper to use internal resources (internal borrowing) whilst the revenue reserves are available. This approach is feasible

4 whilst the revenue reserves are sufficient to cover the level of internal borrowing required to finance the capital expenditure in the programme.

14 The forecast for long term interest rates (see table 4 below) means that it is necessary to revisit the current approach of internal borrowing if it cannot be sustained over the long term. This is because modelling indicates that it would be cheaper over the life of a loan to borrow now than it would be to borrow the same amount in twelve months time. It should be noted however that the relative savings are not realised until the later years of a loan.

Table 4 Interest rates for 25 Year Maturity Loans Actual Actual Actual Forecast Forecast Date 1/4/14 31/8/14 31/10/14 Mar 15 Mar 16 Rate 4.29% 3.75% 3.77% 4.0% 4.5%

15 The need to borrow is not however clear cut; table 5 shows the level of internal borrowing with and without new external borrowing based on the current capital programme.

Table 5 2014-15 2015-16 2016-17 2017-18 2018-19 £m £m £m £m £m New external Borrowing in 2.0 3.0 current strategy Internal borrowing per current 9.4 3.0 3.7 3.6 4.2 strategy Internal borrowing if no new external 11.4 5.0 8.7 8.6 9.2 borrowing

16 The level of internal borrowing in 2017/18 and 2018/19 (if no new external borrowing is undertaken) does not exceed the current forecast for general balances and earmarked reserves and in the period 2017/18 to 2018/19. This suggests external borrowing could be avoided, provided that there are no other calls on general balances and capital expenditure in future years remains at the level as set out in the 2014/15 Capital Programme. Both of these assumptions are uncertain, particularly the assumption with regard to capital expenditure. The preparation of the 2015/16 Capital Programme is not complete but early indications are that there will be an increased requirement for capital finance for one or more of the following reasons:

 Increased costs of planned projects  Reduced capital receipts  New investment in technology required to facilitate force developments

17 For the reasons outlined above consideration should be given as to whether external borrowing should be undertaken. Modelling has shown that up to £4.0m of additional 5 borrowing could be undertaken without risk of breaching the Prudential Limits in the current years and the following 3 years of the MTFS.

Section 7 - Compliance with Treasury and Prudential Limits

18 During the first six months of the financial year the PCC has operated within the treasury and prudential indicators included in the Prudential Indicators Statement as set out in Appendix 2.

Section 8 - Banking Contract

19 The Commissioner’s bankers are Barclays Plc and the current contract was extended for 1 year as from 1 April 2014. Consideration has been given to a regional banking contract for the five South West Forces; however, due to the low value of the contract the South West Police Procurement Department has not prioritised this project.

20 The current contract is below the threshold whereby a formal procurement process is required. This means that informal quotations should be sought from alternative suppliers wherever possible, and where economically beneficial.

21 A change of banking contract would have a significant overhead for the PCC as processes and paperwork would need to be updated. Furthermore the process of seeking alternative quotations and evaluating the outcomes also has a cost. When these costs are compared with the annual cost of the contract it calls into question the feasibility of entering into a competitive process.

22 It is proposed that negotiations are started with Barclays to extend the current contract once again.

Section 9 - Conclusion

23 Treasury Managment activities for the period 1/4/2014 to 30/9/2014 have operated within the Treasury Mnanagement Policies and Strategy of the PCC. In addition performnance has been above the benchmark level and compares well with other public bodies in the Capita Benchmarking Group. Consideration needs to be given as to whether the new external borrowing should be undertaken.

6 TOTAL HOLDINGS: Appendix 1 Short Term PCC Investment Fund Investments

Counter Party Counterparty Type Maturity Deposit Type Deposit Total Limits Date 30/09/2014 30/09/2014 £ £ £ £ UK Government Gilts (see Note 1 Below) FIS 22/07/2018 1,780,054 Total Holding UK Government 1,780,054 1,780,054 12,000,000 Lloyds FTD 31/10/2014 2,000,000 Lloyds FTD 13/02/2015 5,000,000 Lloyds FTD 31/03/2015 5,000,000 Total Holding Lloyds 12,000,000 12,000,000 12,000,000 Ulster Bank Belfast (RBS) FTD 19/11/2014 7,000,000 Natwest OC 5,000,000 Total Holding Royal Bank of Scotland Group 7,000,000 5,000,000 12,000,000 12,000,000 Total Holding Goldman Sachs FTD 17/10/2014 8,000,000 8,000,000 10,000,000 Total Holding Bleanau Gwent FTD 12/10/2015 5,000,000 5,000,000 5,000,000 Total Holding Greater London Authority FTD 01/10/2015 5,000,000 5,000,000 10,000,000 Total Holding Santander FTD 10/10/2014 12,000,000 12,000,000 12,000,000 Standard Chartered CD 05/01/2015 10,000,000 Standard Chartered IF 06/02/2015 2,000,000 Total Holding Standard Chartered 12,000,000 12,000,000 12,000,000 Total Holding Svenska Handelsbanken OC 4,035,000 4,035,000 12,000,000 Total Holding IGNIS Money Market MMF 740,000 5,760 740,000 10,000,000 Total Holding Barclays OC 12,000,000 12,000,000 12,000,000 62,780,054 21,775,000 84,555,054

CD Certificates of Deposit FTD Fixed Term Deposit Note 1 OC On Call UK Government holding value as at 31 March 2014 TB Treasury Bills FIS Fixed Interest Security MMF Money Market Funds

7 8 Appendix 2 Prudential Indicators Set as Part of the 2014/15 Budget - Comparisons with Forecast Actuals

1 Estimated capital financing costs as % of net revenue stream How much of the revenue budget has been spent on capital financing?

Budget Forecast Outturn 2014/15 2014/15 £000 £000 Interest Received (325) (541) Interest Payable 1,344 1,308 Minimum Revenue Provision (MRP) 1,421 1,395 Capital Financing Costs (A) 2,440 2,162

Net Revenue Stream (B) 284,491 284,491

(A) as percentage of (B) % 0.86% 0.76%

2 Net External Borrowing and the Capital Financing Requirement Under the Prudential Code, net external borrowing for any purpose should not exceed the total "capital financing requirement (CFR)". The capital financing requirement indicates the underlying need to borrow for a capital purpose. The CFR is calculated from total capital expenditure less capital receipts and grants actually applied less minimum revenue provision. It equals the capital expenditure which has not been financed from any specific financing source other than borrowing and hence it represents the underlying need to borrow. It should be noted that borrowing may not necessarily take place externally. Revised Budget Estimate 2014/15 2014/15 £000 £000 Cumulative CFR 1 April 2014 42,144 42,059

Capital expenditure 2014/15 10,353 10,615

Financing (8,398) (8,660) Minimum revenue provision (1,421) (1,395) Increase (decrease) in CFR this year 534 560

Cumulative CFR 31 March 2013 42,678 42,619

Net External Borrowing 33,203 33,203

Internal Borrowing 9,475 9,416

External borrowing is below the capital financing requrement, the PCC has therefore met the prudential indicator requirement that borrowing should only be for a capital purpose.

9 4 Estimate of authorised limit and operational boundary for external debt Has the Police and Crime Commissioner kept within his limits for borrowing? The Operational Boundary is the maximum level of debt expected in the budget (but this may be exceeded occasionally through cash flow fluctuations). The Authorised Limit is legally binding.

Revised Budget Estimate 2014/15 2014/15 £000 £000 Cumulative Long Term Borrowing 42,678 42,678 Lease Finance 590 425 Cash Flow Deficit (maximum) 10,000 10,000

Operational Boundary 53,268 53,103

Safety Net 2,410 2,410

Authorised Limit 55,678 55,513

5 Upper limit on fixed and variable interest rate exposures This is the limit set by the Police and Crime Commissioner on the risk of interest rate changes affecting the cost of its borrowing.

Upper limit on fixed rate exposures for 2014/15 100 % Upper limit on variable rate exposures for 2014/15 30 % (This means at least 80% of loans taken out must be at fixed rates.) The level of internal borrowing means that the forecast level of variable rate debt for 2014-15 is 23% of total debt

6 Upper and lower limits for maturity structure of borrowing This shows how much of the Police and Crime Commissioner's borrowing needs to be repaid within 10 years. Amount of projected borrowing that is fixed rate and maturing in 10 years or above: Upper Limit(%) Upper limit 100 Lower limit 67

Forecast actual for the year 2014/15 - all borrowing to be at fixed rate and as at 31 March 2014 80% of borrowing matures in 10 years or more.

10 7 Upper limit for principal sums invested for periods of over 364 days This limits how much of the Police and Crime Commissioner's short-term deposits can be invested for more than a year. The limits set for investments to mature beyond: Forecast Limit Actual 31-Mar-13 £m £m 31 March 2015 20.0 10 31 March 2016 10.0 0.5 31 March 2017 1.8 0.5