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Waverley Borough Council Committee System - Committee Document

Meeting of the Executive held on 07/02/2006
PRUDENTIAL CODE FOR CAPITAL FINANCE IN LOCAL AUTHORITIES



Summary & Purpose
The purpose of this report is to seek the Executive’s approval of 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. Decisions taken by the Executive on the budget setting report may impact on the Prudential Indicators presented in this report.

APPENDIX D
WAVERLEY BOROUGH COUNCIL

EXECUTIVE – 7TH FEBRUARY 2006
______________________________________________________________________
Title:
PRUDENTIAL CODE FOR CAPITAL FINANCE IN LOCAL AUTHORITIES
[Wards Affected: N/A]
________________________________________________________________________
Summary and Purpose

The purpose of this report is to seek the Executive’s approval of 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. Decisions taken by the Executive on the budget setting report may impact on the Prudential Indicators presented in this report.

Social/Community implications:

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

E-Government Implications

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

Resource 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.
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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, the Council must take into account affordability, eg implications for Council Tax and housing rents and prudence and sustainability, eg 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 Director of Finance, subject to Council approval. The Director of Finance must monitor performance against each indicator during the year.


Indicator 1 - Estimates of capital expenditure
2004-05
000
Actual
2005-06
000
Estimate
2006-07
000
Estimate
2007-08
000
Estimate
2008-09
000
Estimate
General Fund2,2783,7904,4184,0962,328
HRA10,2077,2625,3495,3495,349
Total12,48511,0529,7679,4457,677

Indicator 2 - Estimates of the ratio of financing costs to net revenue stream
2004-05
000
Actual
2005-06
000
Estimate
2006-07
000
Estimate
2007-08
000
Estimate
2008-09
000
Estimate
General Fund-3.5%-3.7%-4.0%-3.1%-2.3%
HRA0.9% 0.9%0.8%0.9%0.9%

3. The estimates of financing costs include current commitments and the proposals in the budget report. At 1st April 2005, investments totaling 27million 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
2004-05
000
Actual
2005-06
000
Estimate
2006-07
000
Estimate
2007-08
000
Estimate
2008-09
000
Estimate
General Fund -4,423-4,423-3,973-3,973-3,973
HRA3,5853,5133,4443,3773,312
Total-838-910-529-596-661

4. 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 capital programme from existing resources in the medium term, with potentially only a limited amount of borrowing necessary so this indicator is showing a prudent position. Whilst the current draft capital programme indicates an increasing level of ‘unfinanced’ General Fund capital expenditure in future years, which increases the underlying need to borrow, it is the intention to review the programme as part of each year’s budget setting process to match planned expenditure to the level of resources available.

Indicator 4 - Authorised limit for external debt
2005-06
Estimate
2006-07
Estimate
2007-08
Estimate
2008-09
Estimate
Borrowing5million5million5million5million
Other long-term liabilitiesnilnilnilNil
Total5million5million5million5million

5. 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, 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 31st March 2005 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
2005-06
Estimate
2006-07
Estimate
2007-08
Estimate
2008-09
Estimate
Borrowing5million5million5million5million
Other long-term liabilitiesnilnilnilNil
Total5million5million5million5million

6. 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
2006-07
Estimate
2007-08
Estimate
2008-09
Estimate
For Band D Council Tax *NilNilNil
For average weekly housing rentsNilNilNil

* It is possible that the capital investment decisions approved as part of the 2005-06 budget setting may have an impact on the council tax, over and above any capital investment decisions that have previously been taken by the Council. If this is the case and borrowing is used as part of the budget setting options, the indicators can be calculated and agreed at the meeting. The impact on the Band D council tax will be approximately 18 pence per 100,000 borrowed, from 2006-07 for the duration of the loan.

7. The budget report refers to the development of the car park at Weyhill, Haslemere. It is intended that borrowing will be used to finance this 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.

8. This 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 25 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 decisions to borrow for capital.

Risks

9. 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

10. 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 2006-07 currently identify a potential need for limited external borrowing for capital purposes with all of the revenue costs being offset by additional income.

11. There are 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, further appraisal of housing options and the proposed development of leisure facilities 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.

CONTACT OFFICER:

Name: Paul Wenham Telephone: 01483 523238
E-mail: pwenham@waverley.gov.uk

Graeme Clark Telephone: 01483 523236

Comms/exec/2005-06/270
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 2004-05 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 starting point was calculated at 1st April 2003 from the Council’s balance sheet.

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 actual 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.