Download (Attachment: 3)PI 2005 - Council

AGENDA ITEM: 4
COUNCIL
9TH MARCH 2005
PRUDENTIAL INDICATORS 2005/06
PAUL SLOCOMBE – DIRECTOR OF RESOURCES
PURPOSE OF REPORT
1. To present to Members for approval the Prudential Indicators for 2005/2006
BACKGROUND & EXTERNAL CONSULTATION
2. The key objectives of the Prudential Code are to ensure, within a clear framework,
that the Council's Capital Programme is affordable, prudent and sustainable and that
treasury management decisions are taken in accordance with good professional
practice and in a manner that supports affordability, prudence and sustainability.
3. To demonstrate that the Council has fulfilled these objectives, the Prudential Code
sets out indicators that must be used, and the factors that must be taken into account.
4. As part of the fundamental change to capital financing which the Prudential Code
represents, the Office of the Deputy Prime Minister has introduced guidance
regarding the way in which surplus funds are invested. This guidance requires that an
Annual Investment Strategy is approved by Council.
MATTERS REQUIRED TO BE TAKEN INTO ACCOUNT
5 In setting or revising the prudential indicators, the Council must have regard to the
following matters:

affordability, e.g. implications for Council Tax and Council housing rents

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.
6 When making a decision to invest in capital assets, the Council must now do more
than simply determine whether it can afford the immediate cost. In order to ensure
long term affordability, the decisions have also to be prudent and, in the long term,
sustainable.
7 The Prudential Code also requires the Council to have regard to wider management
processes (option appraisal, asset management planning, strategic planning and
achievability) in accordance with good professional practice.
AFFORDABILITY
8 The fundamental objective in considering the affordability of the Council’s capital
plans is to ensure that the total capital investment of the authority remains within
sustainable limits and, in particular, to consider its impact on the local authority's
"bottom line" Council Tax. Affordability is ultimately determined by a judgement about
acceptable Council Tax levels and, in the case of the Housing Revenue Account,
acceptable rent levels.
9 In considering the affordability of its capital plans, the Council must consider all of the
resources currently available to it and estimated for the future, together with the
totality of its capital plans, revenue income and revenue expenditure forecasts for the
forthcoming year and the following two years. The authority is also required to
consider known significant variations beyond this timeframe. This requires the
maintenance of three year revenue forecasts and three year forward estimates of
Council Tax as well as three year capital expenditure plans. These are rolling
scenarios, not fixed for three years.
10. The following prudential indicators are the key indicators of affordability:
Looking ahead for a three year period:

estimates of the ratio of financing costs to net revenue stream

estimates of the Council Tax that would result from the totality of the authority’s
plans.
After the year end:

actual ratio of financing costs to net revenue stream.
11 The Council has to carry out separate calculations for the HRA and non HRA
elements and for the estimated impact on rents as well as Council Tax.
12 Other prudential indicators that relate to affordability are:
Looking ahead for a three year period:

estimates of capital expenditure

estimates of capital financing requirement (underlying need to borrow for a capital
purpose)

operational boundary for external debt (see paragraph 14 below).

authorised limit for external debt (see paragraph 15 below)
After the year end:

actual capital expenditure

actual capital financing requirement

actual external debt.
13 Both the authorised limit and operational boundary for external debt need to be
consistent with the Council's plans for capital expenditure and financing and with its
treasury management policy and practices.
14 The operational boundary will be based on the Director of Resources' estimate of the
most likely, (i.e. prudent, but not worst case) scenario and should equate to the
maximum level of external debt projected by this estimate. The operational boundary
is a key management tool for in-year monitoring.
15. The authorised limit will be set a level which provides headroom over and above the
operational boundary, sufficient for example to cope with unusual cash movements.
PRUDENCE
16. In order to ensure that over the medium term net borrowing will only be for a capital
purpose, the Council must ensure that net external borrowing does not, except in the
short term, exceed the total of the capital financing requirement in the preceding year
plus the estimates of any additional capital financing requirement for the current and
next two financial years. This is a key indicator of prudence.
17. It is also prudent that treasury management is carried out in accordance with good
professional practice. The Prudential Code includes the following as required
indicators in respect of treasury management:

compliance with the CIPFA Code of Practice for Treasury Management in the
Public Services

upper limits on fixed interest rate and variable interest rate exposures

upper and lower limits for the maturity structure of borrowings

upper limit for principal sums invested for periods longer than 364 days.
OVERVIEW & COMMENT
18 A soundly formulated capital programme must be driven by the desire to provide high
quality, value for money public services. The Prudential Code requires that in
making its capital investment decisions the Council must have explicit regard to
option appraisal, asset management planning, strategic planning for the authority
and achievability of the forward plan.
OPTION APPRAISAL/RISK ASSESSMENT
19 When considering affordability, the Council must pay due regard to risk and
uncertainty. Risk analysis and risk management strategies should be taken into
account.
FINANCIAL, LEGAL AND WARD IMPLICATIONS
20. There are none arising directly out of this report.
RECOMMENDATIONS
21. Members are asked to
a) Approve the range of Prudential Indicators contained within the Statement
(Appendix A)
b) Delegate responsibility to the Director of Resources for monitoring and reporting
on the Council’s position on the range of Prudential Indicators contained within
the Statement.
c)
Approve the Annual Investment Strategy set out in Appendix B
REASONS
22 The Local Government Act 2003 created a new legal framework for capital
investment from April 2004 and Local; Authorities are now required by law to follow
the CIPFA Prudential Code.
BACKGROUND PAPERS
The following papers were used in the preparation of the report: -
 CIPFA Prudential Code for Capital Finance in Local Authorities

CIPFA Prudential Code Interim Guidance Notes

Middlesbrough Council Treasury Management Policy Statement
AUTHOR: Paul Slocombe, Director Of Resources
Tel No:
(01642) 729032
Address:
Strategic Resources, PO Box 99, Civic Centre, Middlesbrough, TS1 2QQ
Website:
www.middlesbrough.gov.uk
APPENDIX A
PRUDENTIAL INDICATOR STATEMENT 2005/06
AFFORDABILITY
1. The actual capital expenditure that was incurred in 2003/04 and the estimates of
capital expenditure to be incurred for the current and future years that are
recommended for approval are:
Capital Expenditure
2003/04
£000
Actual
2004/05
2005/06
2006/07
2007/08
£000
£000
£000
£000
Estimate Estimate Estimate Estimate
Education Services
Social Services
Regeneration Services
Corporate Services
Environment Services
11,044
1,211
5,480
2,452
10,372
16,958
2,073
14,826
12,854
13,438
5,188
1,048
18,004
1,083
9,905
2,050
0
3,349
882
4,831
2,064
0
3,060
800
4,267
Total non-HRA
HRA
30,559
9,110
______
60,149
7,164
______
35,228
0
______
11,112
0
______
10,191
0
______
Total
39,669
______
67,313
______
35,228
______
11,112
______
10,191
______
2. Estimates of the ratio of financing costs to net revenue stream for the current and
future years, and the actual figures for 2003/04 are:
Ratio of financing costs to net revenue stream
2003/04
Actual
Non-HRA
HRA
5.60%
42.02%
2004/05
Estimate
2005/06
Estimate
2006/07
Estimate
2007/08
Estimate
5.93%
38.83%
5.05%
5.02%
5.05%
3. The estimates of financing costs include current commitments and the proposals
consistent with the capital strategy.
4. Estimates of the end of year capital financing requirement for the authority for the
current and future years and the actual requirement at 31 March 2005 are:
Capital financing requirement
31/03/04
£000
Actual
Non-HRA
HRA
117,712
84,225
31/03/05
£000
Estimate
31/03/06
£000
Estimate
31/03/07
£000
Estimate
31/03/08
£000
Estimate
88,184
0
96,335
0
100,447
0
104,370
0
5. The capital financing requirement measures the authority’s underlying need to borrow
for a capital purpose. In accordance with best professional practice, Middlesbrough
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.
6. Middlesbrough Council has, at any point in time, a number of cash flows 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.
7. 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.”
8. The authority had no difficulty meeting this requirement in 2003/04, nor are any
difficulties envisaged for the current or future years. This view takes into account
current commitments, existing plans, and the proposals in this budget report.
Net Borrowing
Net Borrowing
31/03/04
£000
Actual
31/03/05
£000
Estimate
31/03/06
£000
Estimate
31/03/07
£000
Estimate
31/03/08
£000
Estimate
182,293
69,000
77,000
81,000
85,000
9. In respect of its external debt, it is recommended that the Council approves the
following authorised limits for its total external debt net of investments for the next
three financial years, and agrees the continuation of the previously agreed limit for the
current year since no change to this is necessary. 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 Director of Resources,
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. Any such changes
made will be reported to the Council.
Authorised limit for external debt
2004/05
£000
2005/06
£000
2006/07
£000
2007/08
£000
Net Borrowing
Other long term
liabilities
236,838
5,000
______
126,100
2,900
______
133,600
5,400
______
143,500
7,900
______
Total
241,838
______
129,000
______
139,000
______
151,400
______
The Director of Resources, and those officers with delegated responsibility under the
agreed Treasury Management Practices, can arrange new long-term loans up to the
following limits:
Required Financing
2004/05
£000
Estimate
2005/06
£000
Estimate
2006/07
£000
Estimate
2007/08
£000
Estimate
Long-term Borrowing
Restructuring
9,000
60,000
______
10,000
60,000
______
12,500
30,000
______
12,500
30,000
______
Total
69,000
______
70,000
______
42,500
______
42,500
______
10. These 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 Director of
Resources 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.
11. 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
Director of Resources' 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.
12. The operational boundary represents a key management tool for in year monitoring
by the Director of Resources. 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 Chief Finance Officer, 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.
Any such changes will be reported to the Council at its next meeting following the
change.
Operational boundary for external debt
2004/05
£000
2005/06
£000
2006/07
£000
2007/08
£000
Net Borrowing
Other long term
liabilities
216,966
5,000
______
102,000
2,900
______
108,700
5,400
______
118,000
7,900
______
Total
221,966
______
104,900
______
114,100
______
125,900
______
13. The Council’s actual external debt at 31 March 2004 was £189.2 million, comprising
long term borrowing. 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.
14. In taking its decisions on this budget report, the Council is asked to note that the
authorised limit determined for 2005/06 (see paragraph 6 above) will be the statutory
limit determined under [clause] 3(1) of the Local Government [Bill].
15. The 2005/06 estimate in terms of the incremental effect on Band D council tax of
capital expenditure decisions in 2005/06 is £2.57.
16. Forward estimates for 2006/07 and 2007/08 of the incremental effects on Band D
council tax of estimated capital expenditure in 2005/06 and 2006/07 are £4.32 and
£0.00 respectively. These forward estimates are not fixed and do not commit the
Council. They are based on the Council’s existing commitments, current plans and
the totality of the capital and revenue plans recommended in the budget report.
There are no known significant variations beyond this timeframe that would result
from past events and decisions or the proposals in this budget report.
PRUDENCE
17. Middlesbrough Council has adopted the CIPFA Code of Practice for Treasury
Management in the Public Services.
18. It is recommended that the Council sets an upper limit on its fixed interest rate
exposures for 2005/06, 2006/07 and 2007/08 of 100% of its gross outstanding
principal sums.
19. It is further recommended that the Council sets an upper limit on its variable interest
rate exposures for 2005/06, 2006/07 and 2007/08 of 25% of its net outstanding
principal sums.
20. This means that the Director of Resources will manage fixed interest rate exposures
within the range 75% to 100% and variable interest rate exposures within the range
0% to 25%. This is a continuation of current practice.
21. It is recommended that the Council sets upper and lower limits for the maturity
structure of its borrowings as follows.
Amount of projected borrowing that is fixed rate maturing in each period as a
percentage of total projected borrowing that is fixed rate at the start of the period:
under 12 months
12 months and within 24 months
24 months and within 5 years
5 years and within 10 years
10 years and above
Upper limit
Lower limit
15%
20%
50%
75%
95%
0%
0%
0%
5%
25%
22. There are no proposals for the Council to invest sums for periods longer than 2 years,
such period to begin from the date a deal is arranged.
APPENDIX B
ANNUAL INVESTMENT STRATEGY 2005/06
The way in which local authorities invest surplus funds is regulated by the Local
Authorities (Capital Finance) (Approved Investments) Regulations 1990, made under
Part 4 of the Local Government and Housing Act 1989. The whole of Part 4 was repealed
on 1 April 2004 and replaced by Part 1 of the Local Government Act 2003, which also
introduced the Prudential Code. The 2003 Act requires that a local authority must have
regard to such guidance as the Secretary of State issues relating to prudent investment
practice.
In accordance with guidance from the Office of the Deputy Prime Minister (ODPM) a local
authority must prepare and publish an Annual Investment Strategy which must be
approved by full Council before the start of the financial year to which it relates. That is
the purpose of this document.
The ODPM guidance offers authorities greater freedom in the way in which it invests
monies, providing that prior approval is received from Members by approving the Annual
Investment Strategy.
The general policy objective contained in the guidance is that local authorities should
invest prudently the short-term cash surpluses held on behalf of their communities. The
guidance emphasises that priority should be given to security and liquidity rather than
yield. Within that framework the authority must determine a category of borrowers
classified as Specified Investments, with whom it can invest surplus cash with minimal
procedural formalities and further identify a category of borrowers classified as NonSpecified Investments, with whom it can also invest but subject to prescribed limits.
Although the guidance definition of Non-Specified Investments is "one not meeting the
definition of a Specified Investment", the authority is required to identify which categories
of investments are identified as prudent to use and the limits on any such investment
either individually or in total. It is because some organisations do not subscribe to credit
rating agencies that they have to be included as Non-Specified Investments, rather than
any concern over their creditworthiness.
The guidance defines investment in such a way as to exclude pension fund and trust
fund investments. In practice Middlesbrough Council, in its role as Administering
Authority for the Teesside Pension Fund, follows the same procedures as approved by
Members as part of compliance with the CIPFA Code of Practice, albeit with different
limits.
The proposed Annual Investment Strategy for 2005/06 is:
LIMITS & DEFINITION OF SPECIFIED INVESTMENTS
The investment is made with the UK Government or a local authority (as defined in
the Local Government Act 2003)
The investment is made with a Money Market Fund which, at the time the
investment is made, has a rating of AAA.
The investment is made with one of the bodies listed in section 4 of Schedule 1E
of the current version of the Treasury Management Practices document. which, at
the time the investment is made, has a short-term "investment grade" rating with
either Standard & Poors, Moody's Investors Search Ltd or Fitch Ratings Ltd.
Where ratings awarded differ between the rating agencies any one award below
investment grade will prevent the investment being categorised as a Specified
Investment. The rating of all listed bodies must be monitored on a monthly basis.
Where officers become aware of a downward revision of rating, that moves the
body out of the "investment grade" category, between such monthly checks, the
body should be removed from the list of Specified Investments and, where
possible, the investment should be recalled.
All Specified Investments must be denominated in sterling and must be one where
the authority may require it to be repaid or redeemed within 12 months of the date
on which the investment is made. The investment must not constitute the
acquisition of share capital or loan capital in any body corporate.



The minimum % of the total of all investments which must
be Specified Investments, at the time the investment is
made, is 70%
The maximum investment with any one counterparty is £8
million
The maximum investment in any one group (ie a bank and
its wholly-owned subsidiaries) is 20% of the total invested
(which limit shall include investments made on behalf of
the Teesside Pension Fund)
LIMITS & DEFINITION OF NON-SPECIFIED INVESTMENTS
The investment is made with one of the bodies listed in section 4 of Schedule 1E
of the current version of the Treasury Management Practices document. which is
not a Specified Investment.
The investment is for a period of one year or longer.
All Non-Specified Investments must be denominated in sterling. The investment
must not constitute the acquisition of share capital or loan capital in any body
corporate.



The maximum investment with any one counterparty is £8
million
The maximum investment in any one group (ie a bank and
its wholly-owned subsidiaries) is 20% of the total invested
(which limit shall include investments made on behalf of
the Teesside Pension Fund)
The maximum % of the total of all investments for a period
of one year or longer, at the time the investment is made,
is 10%.
GENERAL
The maximum period for which an investment can be made is two years from the
time the deal is agreed.