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Waverley Borough Council Committee System - Committee Document

Meeting of the Executive held on 06/02/2007
APPENIDX D - 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 – 6TH FEBRUARY 2007

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.

Environmental Implications:

There are no direct environmental implications associated with 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.

Prudential Indicators

1. To fulfil 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, 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 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

2005-06
£000
Actual
2006-07
£000
Estimate
2007-08
£000
Estimate
2008-09
£000
Estimate
2009-10
£000
Estimate
General Fund
4,517
6,532
4,915
3,814
3,129
HRA
7,360
6,014
6,482
6,142
4,131
Total
11,877
12,546
11,397
9,956
7,260

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

2005-06
£000
Actual
2006-07
£000
Estimate
2007-08
£000
Estimate
2008-09
£000
Estimate
2009-10
£000
Estimate
General Fund
-7.5%
-4.1%
-6.0%
-5.1%
-3.6%
HRA
0.7%
0.8%
0.4%
0.3%
0.3%

The estimates of financing costs include current commitments and the proposals in the budget report. At 1st April 2006, investments totalling £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

2005-06
£000
Actual
2006-07
£000
Estimate
2007-08
£000
Estimate
2008-09
£000
Estimate
2009-10
£000
Estimate
General Fund
-4,423
-4,423
-4,223
-3,973
-3,773
HRA
3,513
3,444
3,444
3,444
3,444
Total
-910
-979
-779
-329
-329

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 a fully financed General Fund capital position in the next few years, it may be necessary to borrow as part of delivering the Leisure Centre Procurement Strategy. The impact of this investment would be the subject of detailed reports which consider the other financial implications of the new contracts. Other than this item, 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

2006-07
Estimate
2007-08
Estimate
2008-09
Estimate
2009-10
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, 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 2006 was zero. In approving this limit, the Council is approving the limit as required under Section 3(1) of the Local Government Act 2003. This limit will be reviewed if significant levels of borrowing are required to deliver the investment in Waverley’s leisure centres.

Indicator 5 - Operational boundary for external debt

2006-07
Estimate
2007-08
Estimate
2008-09
Estimate
2009-10
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 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

2007-08
Estimate
2008-09
Estimate
2009-10
Estimate
For Band D Council Tax *
Nil
Nil
Nil
For average weekly housing rents
Nil
Nil
Nil

* It is possible that the capital investment decisions approved as part of the 2007-08 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 2007-08 for the duration of the loan.

The draft Capital Programme includes 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. The Draft Capital Programme also identifies borrowing to finance an element of the refurbishment works at the Godalming Leisure Centre. This will be considered as part of the wider investment options currently being reviewed as part of the Leisure Centre Procurement Strategy.

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

4. 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.

Conclusions

5. 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 2007-08 currently identify a potential need for limited external borrowing for capital purposes with all of the revenue costs being offset by additional income.

6. 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 Prudential Indicators 1 to 6, as amended if necessary following the decisions taken in approving a draft General Fund budget.

CONTACT OFFICERS:

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

Name: Graeme Clark Telephone: 01483 523236

Comms/exec/2006-07/272