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Waverley Borough Council Committee System - Committee Document

Meeting of the Executive held on 05/02/2008
Prudential Code for Capital Finance



APPENDIX G
WAVERLEY BOROUGH COUNCIL

EXECUTIVE – 5TH FEBRUARY 2008

Title:
PRUDENTIAL CODE FOR CAPITAL FINANCE
[Portfolio Holder for Finance: Cllr M H W Band]
[Wards Affected: N/A]
Summary and Purpose

The purpose of this report is to seek the Executive’s approval for the capital finance prudential indicators, as required by the Chartered Institute of Public Finance and Accountancy’s (CIPFA’s) Prudential Code. This report must be considered in conjunction with the budget setting report and the Treasury Management Policy report also on this agenda.

Social/Community implications:

There are no direct social/community implications associated with this report.

Environmental Implications:

There are no direct environmental implications associated with this report.

E-Government Implications:

There are no direct e-government implications associated with this report.

Resource and Legal Implications:

There are no direct resource implications associated with this report. However, the Prudential Code is referred to in Waverley’s Financial Strategy as an opportunity for providing funding for the capital programme in the longer-term.

Prudential Indicators

1. To fulfill the requirements of the Code, the Council must produce and maintain the following set of specified ‘Prudential Indicators’. In setting and revising these indicators, and more importantly in any decision on borrowing, the Council must take into account affordability, e.g. implications for Council Tax and housing rents and; prudence and sustainability, e.g. implications for external borrowing. An explanation of the indicators is included at Annexe 1. Additional indicators are included in the treasury management policy report.

2. The prudential indicators are there to support decision making and are not designed to be comparative performance indicators. The indicators which require future forecasts are rolling scenarios, not fixed for the 3 year period. They can be reviewed at any time by the S151 Officer, subject to Council approval. The S151 Officer must monitor performance against each indicator during the year.

3. Also on this agenda is a report on options for delivering capital improvement schemes at the Council’s leisure facilities. Potentially, this will require Waverley to borrow up to 5million. Where appropriate, the impact of this decision on the prudential indicators, assuming borrowing of 5million, is shown in this report. The Housing SIG is also considering options for providing affordable housing in the Borough and in future years may result in a request to consider borrowing for capital investment. However, a comprehensive business model will be required before this can be considered. Other financial options to be considered first would include sales of land and S106 contributions. The prudential indicators and the Medium Term Financial Strategy will reviewed as this work develops.

Indicator 1 - Estimates of capital expenditure

2006-07
000
Actual
2007-08
000
Estimate
2008-09
000
Estimate
2009-10
000
Estimate
2010-11
000
Estimate
General Fund
3,167
3,809
4,598
4,806
1,595
HRA
5,360
7,317
8,859
5,769
4,619
Total
8,527
11,126
13,457
10,575
6,214
Total with additional 5m leisure capital spend
-
11,126
15,957
13,075
6,214

Indicator 2 - Estimates of the ratio of financing costs to net revenue stream

2006-07
000
Actual
2007-08
000
Estimate
2008-09
000
Estimate
2009-10
000
Estimate
2010-11
000
Estimate
General Fund
-6.2%
-6.0%
-5.1%
-3.6%
-2.9%
GF total with additional 5m leisure capital spend
-5.1%
-0.3%
-0.3%
HRA
0.5%
0.4%
0.3%
0.3%
0.2%

5. The estimates of financing costs include current commitments and the proposals in the budget report. At 1 April 2007, investments totaling 32million were held, some of which represent balances and reserves, with the balance being held for cash flow purposes. The projected reduction in the General Fund ratio reflects estimates of the overall draw on capital receipts to fund the capital programme. However, the ratios show a prudent position with Waverley’s net investment position contributing towards the General Fund revenue budget. The HRA figures are determined by Regulations.


Indicator 3 -Capital financing requirement

2006-07
000
Actual
2007-08
000
Estimate
2008-09
000
Estimate
2009-10
000
Estimate
2010-11
000
Estimate
General Fund
-4,423
-4,423
-4,423
-3,973
-3,973
HRA
3,444
3,374
3,374
3,374
3,374
Total
-979
-1,049
-1,049
-599
-599
Total with additional 5m leisure capital spend
-979
-1,049
-1,049
-1,473
1,027

6. This indicator is a measure of the underlying need to borrow for capital purpose, it is not the level of actual borrowing held or required. Waverley is currently debt-free and intends to finance most of its routine capital programme from existing resources in the medium term, so this indicator is showing a prudent position. Other than the potential to borrow to deliver the leisure strategy, it is the intention to review the programme as part of each year’s general Fund budget setting process to match planned expenditure to the level of resources available.

Indicator 4 - Authorised limit for external debt

2007-08
Estimate
2008-09
Estimate
2009-10
Estimate
2010-11
Estimate
General Fund
5million
5million
5million
5million
HRA
nil
nil
nil
nil
Total
5million
5million
5million
5million
Total with additional 5m leisure capital spend
5million
10million
10million
5million

7. Whilst cash flows are currently managed using the investment portfolio, it is possible that short-term borrowing may be necessary. As the indicators in this report show, other than potential borrowing for leisure improvements, a significant amount of borrowing for capital purposes is not currently expected to be necessary in the short term. However, it is sensible to have in place an authorised borrowing limit at the current prudent level to enable treasury activity if necessary. Actual external debt at the 31st March 2007 was zero. In approving this limit, the Council is approving the limit as required under section 3(1) of the Local Government Act 2003.

Indicator 5 - Operational boundary for external debt

2007-08
Estimate
2008-09
Estimate
2009-10
Estimate
2010-11
Estimate
General Fund
5million
5million
5million
5million
HRA
nil
nil
nil
nil
Total
5million
5million
5million
5million
Total with additional 5m leisure capital spend
5million
10million
10million
5million

8. As the authorised limit for external debt is currently intended to cover mainly cash flow movements and only a limited amount of capital expenditure, it is not necessary to set the operational boundary at a lower level. If a greater degree of borrowing for capital purposes is required in the future, both indicators will be reviewed.

Indicator 6 - Incremental impact of current capital investment decisions

2008-09
Estimate
2009-10
Estimate
2010-11
Estimate
For Band D Council Tax
Nil
Nil
Nil
For average weekly housing rents
Nil
Nil
Nil
Total Band D Council Tax with additional 5m leisure capital spend
Nil
1.45
2.91

9. If the Council decides to borrow 5million to finance leisure improvements, it is assumed at this stage that 2.5m will be borrowed in 2009/10 with a further 2.5million early in 2010/11. The full repayment cost of this borrowing is partly offset by savings in the management fees that the Council pays to run its leisure facilities. It is the net cost that is used to calculate the above indicators. The precise timing of the capital expenditure and revenue savings will be known as the contract develops during 2008. It is important for Members to note that this calculation is purely an indicator based on a mathematical calculation of the estimated impact of the borrowing decision on Waverley’s council taxpayer. In reality, it would not be the intention to increase council tax to pay for the net costs of the leisure capital spend and this cost would be met from savings in other budgets.

10. The draft Capital Programme also includes the development of the car park at Weyhill, Haslemere. If this scheme goes ahead, it is intended that it would be financed from borrowing and the ongoing revenue costs will be offset by additional income, therefore, the impact on the council tax of this decision will be nil or negative.

11. The capital funding position may change each year during the annual budget-setting process and factors such as government funding, changes to regulations, availability of capital receipts and political priorities will have an impact. The Financial Strategy and the prudential indicators will be reviewed accordingly. As a guide, borrowing 1million over 15 years will currently cost approximately 100,000 per year to repay the principal and interest. This is an incremental indicator so it will aggregate year-on-year the impact on rents or council tax of further decisions to borrow for capital.

Risks

12. In terms of the capital programme, there is a risk of increased capital costs or capital receipts falling short of estimate. The Financial Regulations and regular budget monitoring should reduce the risk of unknown variations and enable early action to be taken if necessary.

Conclusion

13. The forward-looking prudential indicators shown above are best estimates taking into account the Financial Strategy, current budget projections and the current level of reserves, balances and capital receipts. The budget considerations for 2008-09 currently identify a potential need for limited external borrowing for capital purposes with all of the revenue costs being offset by additional income. However, a separate report is being considered on leisure investment and the potential impact on the prudential indicators are included in this report.

14. There are other major decisions for the Council in the next few years that may have a significant impact on capital financing decisions, such as the East Street development and further appraisal of options for affordable housing in the borough. As these details become available, the indicators will be reviewed and, if necessary, reconsidered by Members.

Recommendation

It is recommended that the Executive approves the above Prudential Indicators 1 to 6, as amended if necessary following the decisions taken in approving a draft General Fund budget and the leisure capital improvements.

CONTACT OFFICERS:

Name: Paul Wenham Telephone: 01483 523238
Name: Graeme Clark Telephone: 01483 523236 Comms/exec/2007-08/223 EXPLANATION OF PRUDENTIAL INDICATORS

Indicator 1 - Estimates of capital expenditure

These estimates are as included in the capital programme report and, in the case of the previous year’s actuals, as shown in the Statement of Accounts. The risks section of this report is relevant when considering this indicator.

Indicator 2 - Estimates of the ratio of financing costs to net revenue stream

The net revenue stream is the net amount to be met from Government grant and local taxpayers or, in the case of the HRA, the net amount to be met from housing subsidy and rent income.

Financing costs are the net of any interest on borrowing, interest earned on investments and any amounts made as revenue provision to repay debt.

Indicator 3 -Capital financing requirement
The capital financing requirement measures the underlying need to borrow for a capital purpose. The requirement increases as capital expenditure is incurred or planned, and reduces when financing from capital receipts, grants or revenue is applied.

The code requires councils to ensure that, to demonstrate prudence, in the medium term net borrowing must not exceed the total of capital financing requirement in the preceding year plus the estimates of any additional requirement for the current and next two financial years. Net borrowing is defined in the code as total external borrowing less investments less/plus cash held/overdrawn.

For debt-free councils, the capital financing requirement is likely to be zero or negative. If capital programmes are fully funded from sources other than borrowing, the capital financing requirement will not increase significantly over time.

Indicator 4 - Authorised limit for external debt

In accordance with best professional practice, Waverley does not associate its treasury management activities with particular items or types of expenditure. At any point in time, the Council has a number of cash flows both positive and negative and it manages its treasury position in accordance with its approved treasury management strategy. The authorised external debt limit replaces the old statutory borrowing limit that Waverley has been required to set in the past, despite being debt-free.

Indicator 5 - Operational boundary for external debt

The operational boundary for external debt is the most likely, prudent but not worst-case scenario, without the additional headroom allowed for in the authorised limit to allow for unusual cash movements.


Indicator 6 - Incremental impact of capital investment decisions

This shows the impact of the capital investment decisions on the Council Tax and rent levels. It allows the totality of the Council’s plans to be considered at budget setting time. Whilst this is an indicator that Members must consider when taking decisions on borrowing, it doesn’t necessarily follow that council tax has actually been increased by the amount shown in the indicator. In reality, due to the pressures on Waverley’s budget, any net cost of borrowing will have to be offset by savings in other budgets, therefore the impact on the council taxpayer in cash terms would be zero. This is the intention with the net borrowing costs of the leisure improvement capital works currently being considered by Members.



Comms/exec/2007-08/223