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Waverley Borough Council Committee System - Committee Document

Meeting of the Executive held on 03/02/2004
APPENDIX G - 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. The detailed requirements of the Code were reported to the Executive in January. This report must be considered in conjunction with the budget setting report and the treasury management policy report also on this agenda.

Quality of Life Implications
Natural Resource Use
Pollution Prevention and Control
Biodiversity and Nature
Local Environment
Social Inclusion
Safe Communities
Local Economy
Natural
Resource Use
Pollution
Prevention and Control
Biodiversity
and Nature
Local
Environment
Social
Inclusion
Safe, Healthy
and Active
Communities
Local
Economy
N/A
N/A
N/A
N/A
N/A
N/A
N/A


APPENDIX G
WAVERLEY BOROUGH COUNCIL

EXECUTIVE – 3RD FEBRUARY 2004
_________________________________________________________________________
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. The detailed requirements of the Code were reported to the Executive in January. This report must be considered in conjunction with the budget setting report and the treasury management policy report also on this agenda.

Quality of life implications – social, environmental & economic (sustainable development):

Natural Resource Use
Pollution Prevention and Control
Biodiversity and Nature
Local Environment
Social Inclusion
Safe, Healthy and Active Communities
Local Economy
N/A
N/A
N/A
N/A
N/A
N/A
N/A

There are no direct quality of life 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 could have a significant impact on Waverley’s Financial Strategy 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, 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

2002-03
000
Actual
2003-04
000
Estimate
2004-05
000
Estimate
2005-06
000
Estimate
2006-07
000
Estimate
General Fund
4,363
2,732
4,690
4,261
3,622
HRA
4,500
9,285
9,446
7,126
7,170
Total
8,863
12,017
14,136
11,387
10,792

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

2002-03
Actual
2003-04
Estimate
2004-05
Estimate
2005-06
Estimate
2006-07
Estimate
General Fund
-3.7%
-3.9%
-3.5%
-3%
-2.5%
HRA
0.3%
0.6%
0.5%
0.5%
0.5%

The estimates of financing costs include current commitments and the proposals in the budget report. At 1st April 2003, investments totaling 26million 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 draw on capital receipts and the effect of interest rate changes. However, the ratios show a prudent position with Waverley’s net investment position contributing towards the General Fund revenue budget. The new regulations for apportioning investment income to the HRA are still awaited so the old method has been used above on the Item 8 basis, hence the small positive figure.

Indicator 3 -Capital financing requirement

2002-03
000
Actual
2003-04
000
Estimate
2004-05
000
Estimate
2005-06
000
Estimate
2006-07
000
Estimate
General Fund and HRA
-618
-618
-618
-618
-618

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 is budgeting to fully finance its capital programme in the medium term so this indicator is showing a prudent position. The new regulations for apportioning these figures between the general fund and the HRA are still awaited so a total figure has been calculated at this time.

Indicator 4 - Authorised limit for external debt

2003-04
Estimate
2004-05
Estimate
2005-06
Estimate
2006-07
Estimate
Borrowing
5million
5million
5million
5million
Other long-term liabilities
nil
nil
nil
Nil
Total
5million
5million
5million
5million

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, 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 2003 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

2003-04
Estimate
2004-05
Estimate
2005-06
Estimate
2006-07
Estimate
Borrowing
5million
5million
5million
5million
Other long-term liabilities
nil
nil
nil
Nil
Total
5million
5million
5million
5million

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

Indicator 6 - Incremental impact of current capital investment decisions

2004-05
Estimate
2005-06
Estimate
2006-07
Estimate
For Band D Council Tax
nil
nil
Nil
For average weekly housing rents
nil
nil
Nil

The capital investment decisions included in the 2004-05 budget reports do not have a direct impact on the council tax or rent levels, over and above any capital investment decisions that have previously been taken by the Council. However, 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 medium-term 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

3. 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. Many external factors are mentioned in this report and officers will endeavor to assess their impact as soon as possible and review the financial strategy and prudential indicators.

Conclusions

4. The forward-looking prudential indicators shown above are best estimates taking into account the Medium-Term Financial Strategy, current budget projections and the current level of reserves, balances and capital receipts. None of these factors currently identify a need to borrow externally for capital purposes in the short-term.

5. However, 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, housing options appraisal and the proposed development of leisure facilities in the Borough. There are also still some unknown factors that will impact on these indicators and as these details become available, the indicators will be reviewed and, if necessary, reconsidered by members. These include the Government’s plans to support the revenue effect of borrowing for capital.

Recommendation

That the Executive approves the Prudential Indicators 1 to 6 as outlined above.

CONTACT OFFICER:

Name: Paul Wenham Telephone: 01483 523238
Graeme Clark 01483 523238
comms/exec/03-04/435