ANNEX 9

PRUDENTIAL GUIDELINES – PRUDENTIAL INDICATORS

1.	This paper sets out some of the Prudential Indicators that it is recommended that the Council should adopt as part of its budget setting in February 2004.  The Council has also to set further indicators in relation to Treasury Management and these will be brought forward for approval in the Treasury Management Strategy Report for 2004/05 to the Executive on 17 February 2004.  The indicators have been developed by CIPFA.

2.	Having simplified the capital finance system and given authorities more freedom in determining their capital programmes, there is a system of self regulation being introduced through the Prudential Guidelines.  The recommended indicators are set out below:

	Estimates of Capital Expenditure

3.	This indicator requires the Council to make reasonable estimates on the total of capital expenditure that we plan to incur during 2004/05 to 2006/07.  The Council must also approve actual expenditure for 2002/03 and revised expenditure for 2003/04.

4.	It is proposed that the total capital programme for 2004/05 be £99m, for 2005/06 £86m and for 2006/07 £69m.  This programme will be funded as follows:

		Estimates	
	Actual
2002/03	
2003/04	
2004/05	
2005/06	
2006/07	

Government Supporting Borrowing
Grants/contributions
Capital Receipts
Revenue 
Reserves/Balances 
Prudential Borrowing
PSA Borrowing
Less City Schools Reserve	£m

35.9
33.0
19.6
3.1
9.5

0
	£m

40.7
35.8
28.6
1.4

0
0
-4.9
	£m

53.8
30.8
10.3
1.5

2.0
0.6	£m

53.8
15.9
12.4
1.5

2.0
0.4	£m

51.1
11.6
4.3
0

2.0
	
	101.1	101.6	99.0	86.0	69.0	

5.	The indicators have been based on the January 2004 capital programme booklet with a reasonable assessment of new Government authorised borrowing for future years, addition of items recommended in the January report in 2004/05 with equivalent figures for future years, and assumptions on additional developer funded schemes that may come forward. 

6.	The Council must not exceed the total spending set as the indicator for the year.

7.	We will be able to set revised capital programme totals for 2005/06, in twelve months’ time.

Estimates of the ratio of financing costs to the Net Revenue Stream

8.	Estimates of the ratio of financing costs to the net revenue stream for the current and future years, and the actual figures for 2002/03 are:

2002/03 Actual		4.57%
2003/04 Estimate	4.53%
2004/05 Estimate	4.72%
2005/06 Estimate	5.09%
2006/07 Estimate	5.43%

9.	The estimates of financing costs include current commitments and the proposals in the budget report.

	Estimates of the Capital Financing Requirement

10.	Estimates of the end of year Capital Financing Requirement for the Authority for the current and future years and the actual Capital Financing Requirement at 31 March 2003 that are recommended for approval are:
2002/03 Actual		£225.152m
2003/04 Estimate	£256.319m
2004/05 Estimate	£297.313m
2005/06 Estimate	£336.854m
2006/07 Estimate	£372.494m

11.	The Capital Financing Requirement measures the authority’s underlying need to borrow for a capital purpose.  In accordance with best professional practice the County Council does not associate borrowing with particular items or types of expenditure.  The authority has an integrated Treasury Management Strategy and has adopted the CIPFA Code of Practice for Treasury Management in the Public Services.  The Council has, at any point in time, a number of cashflows both positive and negative, and manages its treasury position in terms of its borrowings and investments in accordance with its approved treasury management strategy and practices.  In day to day cash management, no distinction can be made between revenue cash and capital cash.  External borrowing arises as a consequence of all the financial transactions of the authority and not simply those arising from capital spending.  In contrast, the capital financing requirement reflects the authority’s underlying need to borrow for a capital purpose.

12.	CIPFA’s Prudential Code for Capital Finance in Local Authorities includes the following as a key indicator of prudence:
“In order to ensure that over the medium term net borrowing will only be for a capital purpose, the local authority should ensure that net external borrowing does not, except in the short term, exceed the total of capital financing requirement in the preceding year plus the estimates of any additional capital financing requirement for the current and next two financial years”.
The Head of Finance reports that the authority had no difficulty meeting this requirement in 2002/03, nor are any difficulties envisaged for the current or future years.  This view takes into account current commitments, existing plans, and the proposals in the budget report.

The Authorised Limit for External Debt

13.	In respect of its external debt, it is recommended that the Council approves the following authorised limits for its total external debt gross of investments for the next three financial years, and for the current year.  These limits separately identify borrowing from other long term liabilities such as finance leases.  The Council is asked to approve these limits and to delegate authority to the Head of Finance, within the total limit for any individual year, to effect movement between the separately agreed limits for borrowing and other long term liabilities, in accordance with option appraisal and best value for money for the authority.  

External Debt
Revenue Borrowing
Long Term Liabilities
	2004/05	2005/06	2006/07	
	£m

297.313
15.000
7.021	£m

336.854
15.000
7.021	£m

372,494
15.000
7.021	
	319.334	358.875	394.515	

14.	The Head of Finance reports that these authorised limits are consistent with the authority’s current commitments, existing plans and the proposals in the budget report for capital expenditure and financing, and with its approved treasury management policy statement and practices.  The Head of Finance confirms that they are based on the estimate of most likely, prudent but not worst case scenario, with in addition sufficient headroom over and above this to allow for operational management, for example unusual cash movements.  Risk analysis and risk management strategies have been taken into account; as have plans for capital expenditure, estimates of the capital financing requirement and estimates of cashflow requirements for all purposes.

	Operational Limit for External Debt

15.	The Council is also asked to approve the following operational boundary for external debt for the same time period.  The proposed operational boundary for external debt is based on the same estimates as the authorised limit but reflects directly the Head of Finance’s estimate of the most likely, prudent but not worst case scenario, without the additional headroom included within the authorised limit to allow for example for unusual cash movements, and equates to the maximum of external debt projected by this estimate.  The operational boundary represents a key management tool for in year monitoring by the Head of Finance.  Within the operational boundary, figures for borrowing and other long term liabilities are separately identified.  The Council is also asked to delegate authority to the Head of Finance, within the total operational boundary for any individual year, to effect movement between the separately agreed figures for borrowing and other long term liabilities, in a similar fashion to the authorised limit.  

External Debt
Revenue Borrowing
Long Term Liabilities
	2004/05	2005/06	2006/07	
	£m

297.313
5.000
7.021	£m

336.854
5.000
7.021	£m

372.494
5.000
7.021	
	309.334	348.875	384.515	

16.	The Council’s actual external debt at 31 March 2003 was £215.0m, comprising £208.0m borrowing and £7.0m other long term liabilities.  It should be noted that actual external debt is not directly comparable to the authorised limit and operational boundary, since the actual external debt reflects the position at one point in time.

17.	In taking its decisions on this budget report, the Council is asked to note that the authorised limit determined for 2004/05 (see paragraph 18 above) will be the statutory limit determined under section 3(1) of the Local Government Act 2003.

The estimate of the incremental impact of capital investment decisions

18.	The estimate of the incremental impact of capital investment decisions proposed in this budget report, over and above capital investment decisions that have previously been taken by the Council are, for the Band D Council Tax:
	2004/05	2005/06	2006/07
	£0.35		£1.28		£1.94

Consideration of options for the capital programme

19.	This is based on the budget impact of borrowing £2m per annum through Prudential Guidelines and £1.1m capital investment through the Public Service Agreement, both of which do not attract revenue support from the Government.

20.	In considering its programme for capital investment, the Council is required within the Prudential Code to have regard to:
•	Affordability, e.g. implications for Council Tax
•	Prudence and sustainability, e.g. implications for external borrowing
•	Value for money, e.g. option appraisal
•	Stewardship of assets, e.g. asset management planning
•	Service objectives, e.g. strategic planning for the authority
•	Practicality, e.g. achievability of the forward plan

21.	A key measure of affordability is the incremental impact on the Council Tax, and the Council could consider different options for its capital investment programme in relation to their differential impact on the Council Tax.

CHRIS GRAY
Head of Finance 	January 2004