REPORT OF:
/ HEAD OF FINANCE & PROCUREMENTAUTHOR: /
GRAHAM FRIDAY
TELEPHONE: /01737 276556
E-MAIL: / TO: /EXECUTIVE
DATE: /18TH MARCH 2004
EXECUTIVE MEMBER: /COUNCILLOR J V LYNDON MORGAN
AGENDA ITEM NO: / 7 /KEY DECISION REQUIRED:
/ YESWARD(S) AFFECTED: / ALL
SUBJECT: /
APPROVAL OF THE ANNUAL TREASURY MANAGEMENT STRATEGY AND NEW PRUDENTIAL INDICATORS
PURPOSE OF THE REPORT: / This report explains the impact of the new Local Government Act will have on the council’s Treasury Management activity. The report also includes for approval the new Performance Indicators that Council’s are now required to have in place under the Act.RECOMMENDATIONS:
1. Adopt the Prudential Indicators and limits set out at Annex A.
2. Approve the Treasury Management Strategy 2004/05.
The above recommendations are subject to adoption by Council.
Background
1. The Treasury Management Strategy covers the operation of the treasury function and its likely activities for the forthcoming year. The report incorporates the impact of the CIPFA Prudential Code for Capital Finance in Local Authorities, which will be implemented from 1st April 2004.
The Prudential Code
2. The Chartered Institute of Public Finance and Accountancy (CIPFA) and the Office of the Deputy Prime Minister (ODPM) have for a number of years been discussing the possibility of releasing Councils from restrictions on capital spending. The result of these discussions has been the publication of the Prudential Code for Capital Finance in Local Authorities (the Code). This is a professional Code that sets out a framework for self-regulation of capital spending, in effect allowing Councils to invest in capital projects without any limit as long as the projects are affordable, prudent and sustainable. The Code comes into force for 2004/05 and the Council is now allowed to determine the appropriate level of capital investment to properly deliver quality public services, subject to affordability.
3. The Code derives from section 3 of the Local Government Act 2003, which itself repeals all previous legislation and regulations that governed a Council’s ‘capital’ activity.
4. The primary change is that the current credit approvals system, will be abolished and there will be no restriction on capital investment, subject to Government reserve powers to restrict borrowing for national economic reasons. With the abolition of the credit approval framework, capital investment will be supported through the Supported Capital Expenditure (Revenue) element of the Revenue Support Grant mechanism.
5. Members’ involvement through the process is essential in order that the Council can demonstrate that capital expenditure plans are affordable, external borrowing is prudent and sustainable and that treasury decisions are taken in accordance with good practice. The structure and content of this report has been drafted to comply with the Code.
6. To facilitate the decision making process and support capital investment decisions the Prudential Code requires the Council to agree and monitor a minimum number of Prudential Indicators. These Indicators are mandatory, but can be supplemented with local Indicators if this aids interpretation and many will cover three years forward. The Indicators cover affordability, prudence, capital expenditure, external debt and treasury management. These Indicators will be incorporated into the Council’s performance management procedure.
7. The Indicators are purely for internal use by the Council and are not to be used as comparators between Councils, as any comparisons will be meaningless. In addition the Indicators should not be taken individually; rather the benefit from monitoring will arise from following the movement in Indicators over time and the year on year changes.
8. The rest of this report covers the establishment of the different Prudential Indicators that are required under the Code. These Indicators are:
· Capital Financing Requirement
· Borrowing Limits (both Authorised and Operational)
· Affordability indicators
§ Ratio of financing costs to net revenue stream.
§ Incremental impact of capital investment decision on the Council Tax.
· Treasury Management Strategy
9. The need for the Indicators are set out within the text of the report, with the quantified indicators being set out at Annex A.
Capital Financing Requirement
10. A change introduced by the Code is the calculation of the Capital Financing Requirement (CFR). This figure represents the Council’s underlying need to borrow for a capital purpose, and the change year on year will be influenced by the capital expenditure in the year.
11. The expected movement in the CFR over the next three years is dependent upon the level of capital expenditure decisions taken during the process of setting the annual revenue budget. There are two main limiting factors on the Council’s ability to undertake capital expenditure: -
· Whether the revenue resource is available to support in full the implications of capital expenditure, both borrowing costs and running costs. In other words can the Council afford the implications of the capital expenditure?
· The Governments use of a long stop control to ensure that either the total of all Councils’ plans do not jeopardise national economic policies, or in the event of an assessment by Central Government that local plans are unaffordable at a Council, it may implement a specific control to limit its capital expenditure plans. Details of these controls have yet to be announced.
12. The Council’s expectations for the CFR in the next three years are shown in the table below, with the associated expectation for funding for the movement. This information reflects the 2004/05 budget report, agreed by the Executive on the 29th January.
13. The table forms the first of the required Prudential Indicators. The table is mandatory and analyses the related capital expenditure figure for each year, and compares it to the expected external debt for each year.
02/03Actual
£’000 / 03/04
Budget
£’000 / 04/05
Budget
£’000 / 05/06
Estimated
£’000 / 06/07
Estimated
£’000
Capital Expenditure
Total Spend / 11,435 / 7,113 / 7,099 / 3,967 / 3,928
Financed by:
Borrowing / 0 / 0 / 0 / 0 / 0
Capital Receipts / 3,242 / 6,445 / 6,315 / 3,778 / 3,739
Capital Grants / 8,193 / 653 / 784 / 189 / 189
Revenue / 0 / 15 / 0 / 0 / 0
Capital Financing Requirement
Total CFR / 0 / 0 / 0 / 0 / 0
Net Movement in CFR / 0 / 0 / 0 / 0 / 0
External Debt
Borrowing / 0 / 0 / 0 / 0 / 0
Other Long Term Liabilities / 0 / 0 / 0 / 0 / 0
Total Debt as at 31 March / 0 / 0 / 0 / 0 / 0
14. Given that the Council is debt free and does not have a borrowing requirement the CFR is therefore “zero”.
Breakdown of Capital Expenditure by Service
Actual
£’000 / 03/04
Budget
£’000 / 04/05
Budget
£’000 / 05/06
Estimate
£’000 / 06/07
Estimate
£’000
Democratic / 45 / 120 / 25 / 20 / 20
Leisure / 378 / 665 / 1,279 / 808 / 958
Customer Services / 19 / 20 / 10 / 10 / 10
Engineering / 450 / 176 / 658 / 621 / 892
Neighbourhood / 264 / 943 / 1,728 / 334 / 54
Housing / 8,258 / 575 / 554 / 495 / 495
Policy & Community Initiatives / 45 / 181 / 0 / 0 / 0
Environmental Health / 0 / 260 / 126 / 15 / 15
Building & Development / 0 / 702 / 119 / 121 / 0
Business Solutions (inc E-Gov) / 1,143 / 1,779 / 1,147 / 855 / 350
Legal & Property / 833 / 1,692 / 1,453 / 688 / 1,134
Total / 11,435 / 7,113 / 7,099 / 3,967 / 3,928
Borrowing Limits
15. The next key control over the Council’s activity is to ensure that over the medium term net borrowing will only be for a capital purpose. Councils needs to 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 2004/05 and the next two financial years. This allows flexibility over the actual time of when the borrowing can take place.
16. In the case of a ‘debt-free’ authority, there is no ‘net’ borrowing requirements as all capital expenditure will have been, or will be, financed from the Council’s own resources. This means that in effect the Council does not need to set for monitoring purposes this specific Prudential indicator.
17. The Code, is a professional code, and therefore places a requirement on the Section 151 Officer to seek Council approval to any potential future borrowing requirement that will lead to the establishment of a long term borrowing requirement.
18. Short-term borrowing (i.e. less then 365 days) is still required as a key element to enable the Council to manage day-to-day cash flow requirements.
19. To manage the Council’s overall borrowing requirement two further Prudential Indicators have been introduced. These mirror the old regulations and place managerial controls on the overall levels of borrowing which a Council can incur. These are:-
The Authorised Limit – This represents the limit beyond which borrowing is prohibited, and needs to be set and revised by Members. It reflects the level of borrowing which, while not desired, could be afforded in the short term. It is the expected maximum borrowing need, allowing some headroom for any unexpected requirements. This is the statutory limit determined under Section 3(1) of the Local Government Act 2003 (for England and Wales).
The Operational Boundary – This indicator is based on the probable external debt during the course of the year; it is not an absolute limit and actual borrowing could vary around this boundary for short times during the year. It should act as an overall indicator to ensure the authorised limit is not breached.
20. The recommended limits are set out as Indicators 3 & 4 at Annex A.
21. Another professional requirement placed upon the Section 151 Officer, is to ensure that the Council as part of its day-to-day treasury operations does not ‘On Lend’ i.e. incur borrowings for the purpose of then lending the money back out to make financial gain.
Affordability Indicators
22. The previous sections cover the overall capital and control of borrowing Prudential Indicators, but within the framework Prudential Indicators are required to assess the “affordability” of the capital investment plans. These provide an indicator of the impact of the capital investment plans on the overall Council finances. The Council is required to approve the following Indicators: -
23. Actual and Estimates of the Ratio of Financing Costs to Net Revenue Stream – This indicator identifies the trend in the cost of capital (borrowing costs net of interest and investment income) against the net revenue stream.
24. The purpose of this indicator is to demonstrate the proportion of revenue budget committed to supporting long-term borrowing and how this moves over time.
25. As a Debt Free authority the Council does not incur financing costs, so the calculation of this indicator will produce a “negative” figure which will not provide any benefit to the management and monitoring of the Council’s activities.
26. The Council does incur costs in the general management of its cash flow and investment activities, but they are accounted for in accordance with the Accounting Code of Practice, which nets them off against the interest and investment income.
27. Estimates of the Incremental impact of Capital Investment Decisions on the Council Tax – This indicator identifies the trend in the cost of proposed changes in the next three year capital programme, as recommended in this year’s budget report compared to the Council’s existing commitments and current plans.
28. The impact is set out as Indicator 6 at Annex A. The calculations are based upon the loss of investment interest that will occur once the Council’s capital receipts have been consumed by the expenditure approved within the capital programme
29. What cannot be built into this calculation are the intangible benefits that the spending of the capital will provide to the Council, especially arising from the effective maintenance of the Council’s properties. In addition, other elements of the capital programme are investment to save initiatives that will generate “savings”, but these have not yet been quantified and would reduce the incremental impact of the increase.
Treasury Management Strategy
30. Council has already adopted the Treasury Management Policy Statement (Council Minute 90). No changes are being sought to this Policy Statement.
31. The Annual Treasury Strategy (set out as Annex B to this report) is the final Prudential Indicator. Normally it is approved by the Executive. However, the new Prudential Code requires the Indicators to be approved by Council. This is because the Indicators are linked to the budget and the Code requires them to be approved by the same body that approved the budget.
32. It is therefore recommended that the Executive approve the Annual Treasury Strategy for consideration by Council.
CONCLUSIONS
33. The Local Government Act places the Council with a statutory requirement to adopt the Prudential Code, and its associated Indicators, with effect from the 2004/05 financial year.
34. As the Council is debt free and wishes to maintain that status, there is very limited impact upon the Council of it adopting the Code and its Indicators.
35. The Indicators have been set in line with the Council’s Treasury Management Policy, which was adopted last year. Where there are corresponding Indicators to last year, there is no recommendation for change.
36. Due to the potential impact of the Prudential Code on “with debt” Authorities in particular Council approval is required for the Indicators.
Background Papers:ANNEX A
PRUDENTIAL INDICATORS SUMMARY
Indicator / Unit / 2003/04 / 2004/05 / 2005/06 / 2006/071 / Capital Financing Requirement / £’000 / 0 / 0 / 0 / 0
2 / Capital Expenditure/Estimate / £’000 / 7,113 / 7,099 / 3,967 / 3,928
3 / Authorised Limit for External Borrowing/Budget / £’000 / 45,000 / 45,000 / 45,000 / 45,000 ) *
4 / Operational Boundary for External Borrowing / £’000 / 40,000 / 40,000 / 40,000 / 40,000 ) *
5. / Actual & Estimates for the Ratio of Financing Costs to Net Revenue Stream / Not calculated due to Debt Free Status
6 / Estimates of the Incremental Impact of Capital Investment decisions on Council Tax / Year by Year £ Per Band D Equivalent / - / £5.97 / £3.68 / £3.73
Accumulative Impact on £ Per Band % / - / 2.36% / 2.34% / 8.68%
* This means there is no change recommended between years