CABINET
TUESDAY 21 FEBRUARY 2006 AT 2.00 P.M.
COUNTY COUNCIL
MONDAY 27 FEBRUARY 2005 AT 10.30 A.M. / Agenda Item No:
Cabinet
9
County Council
8B
TREASURY MANAGEMENT STRATEGY & THE PRUDENTIAL CODE FOR CAPITAL FINANCE
Report of the Finance Director
Executive Member: David Beatty
Authors: Andrew Nightingale (Tel: 01992 555331) and
Nicola Webb (Tel: 01992 555394)
1. Purpose of Report
To set out the requirements of the CIPFA Prudential Code for Capital Finance in Local Authorities and to recommend a treasury management strategy for 2006/07 in accordance with the CIPFA Code of Practice for Treasury Management in the Public Services and the ODPM’s Investment Guidelines for Local Authorities.
This report will also need to be considered by the Council on 27th February and Members are asked to bring this report with them to that meeting.
2. Summary
This budgetary cycle provides for the third full year of operation of the CIPFA Prudential Code. To facilitate the decision making process and support capital spending decisions, the Prudential Code requires the Council to agree and monitor a number of prudential indicators. The indicators cover affordability, prudence, capital expenditure, external debt and treasury management. These indicators also form the basis of in year monitoring.
The indicators are purely for internal use by the Council and are not to be used as comparators between councils, as differing investment histories and local circumstances mean that such comparisons would be meaningless. The benefit from monitoring will arise from following the movement in indicators over time and looking at year on year changes.
The prudential indicators that the Council need to consider and approve to comply with the Prudential Code are:
· Estimates of total planned capital expenditure
· The Capital financing requirement (underlying need to borrow for a capital purpose)
· Authorised limit for external debt
· Operational Boundary for external debt
· The ratio of financing costs to the net revenue stream
· The incremental impact of capital spending decisions on the Council Tax
Capital expenditure has a clear impact on the Council’s treasury management activity and therefore there are further Prudential indicators for treasury management that the Council need to consider:
· Limits on fixed and variable interest rate exposure
· Maturity structure of borrowing
· The maximum principal sums to be invested for more than 364 days
In addition the CIPFA Code of Practice for Treasury Management and the ODPM’s investment guidelines require that the Council approve an Investment Strategy and Borrowing Strategy.
A full schedule of prudential indicators that will require council approval is shown in Appendix A.
3. Conclusions
This report needs to be considered in conjunction with the budget report elsewhere on this agenda.
The Cabinet need to consider the prudential indicators set out in this report and summarised in Appendix A and the Treasury Management strategy set out in section 6 and Appendix B and to make recommendations to the Council in respect of these indicators.
4. Background
4.1 This budgetary cycle provides for the third full year of operation of the CIPFA Prudential Code. The Prudential Code is underpinned by the provision of prudential indicators which highlight particular aspects of capital expenditure planning. Each indicator provided during the 2005/06 budget process has been updated and provided for the next three years. These are shown below. This is in accordance with the Prudential Code which requires that Council approves certain mandatory prudential indicators.
4.2 The purpose of the indicators is to provide a framework for capital expenditure decision making. It highlights through the prudential indicators the level of capital expenditure, the impact on borrowing and lending levels and the overall controls in place to ensure the activity remains affordable, prudent and sustainable.
4.3 Within this overall capital expenditure framework there is a clear impact on the Council’s treasury management activity, either through increased borrowing levels or the application of lending balances. As a consequence the treasury management strategy for 2006/07 is included in the report to draw out the expected treasury management activity. This report also includes the treasury prudential indicators. The production of the treasury management strategy is a requirement of the CIPFA Code of Practice on Treasury Management.
4.4 In addition, part of the treasury strategy requirements is the formulation of an investment strategy. Investment guidance issued by the ODPM during March 2004 overlaps into the Code of Practice requirements. The reporting requirements of the ODPM guidance have therefore been incorporated into the treasury management strategy, with the detailed criteria included in Appendix B.
5. Capital Expenditure and the Capital Financing Requirement
5.1 The capital expenditure plans will be partially financed by resources such as capital receipts and capital grants. The remaining element which can not be immediately financed from other sources will impact on the Council’s underlying need to borrow (the Capital Financing Requirement, or CFR). The summary capital expenditure, financing and the impact on the CFR are shown in the table below. This forms one of the required prudential indicators.
5.2 A certain level of capital expenditure will be supported by the Government; anything above this level will be unsupported and will need to be financed from the Council’s own resources.
5.3 There are two main limiting factors on the Council’s ability to undertake unsupported capital expenditure:
· Whether the revenue resource is available to support in full the implications of capital expenditure, both borrowing costs and running costs. Can the implications of the unsupported capital expenditure be afforded?
· The Government may use 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. No such control was implemented during 2005/06.
5.4 A key risk of the plan is that the level of government support has been estimated and is therefore subject to change. Similarly some of estimates for other sources of funding, particularly capital receipts, may also be subject to change over this timescale.
5.5 The Council is asked to approve the capital expenditure projections below that reflect the recommended capital programme:
Table 1: Capital Expenditure
2004/05Actual
£000s / 2005/06
Revised
£000s / 2006/07
Estimated
£000s / 2007/08
Estimated
£000s / 2008/09
Estimated
£000s
Total expenditure / 130,460 / 174 ,924 / 215,160 / 134,568 / 83,662
Financed by:
Capital receipts / 24,983 / 27,739 / 27,783 / 6,332 / 2,550
Capital grants / 39,213 / 47,237 / 51,012 / 39,617 / 5,018
Revenue / 19,910 / 28,287 / 23,023 / 25,634 / 26,800
Net capital requirement / 46,354 / 71,661 / 113,342 / 62,985 / 49,294
5.6 The net capital expenditure will impact directly on the CFR. The Council is asked to approve the capital expenditure and CFR projections below that support the recommended capital programme:
Table 2: Capital Financing Requirement
Actual
£000s / 2005/06
Revised
£000s / 2006/07
Estimated
£000s / 2007/08
Estimated
£000s / 2008/09
Estimated
£000s
Total CFR / 303,963 / 363,116 / 461,584 / 505,756 / 534,470
Net movement in CFR / + 59,153 / + 98,468 / + 44,172 / + 28,714
Movement in CFR represented by:
Net capital requirement / 71,661 / 113,342 / 62,985 / 49,294
less MRP* / (12,508) / (14,874) / (18,813) / (20,580)
Total Movement / + 59,153 / + 98,468 / + 44,172 / + 28,714
* MRP is the minimum revenue provision, which represents the revenue charge for the repayment of debt
5.7 The expected impact of the capital expenditure decisions on the Council’s debt and lending position are shown below.
Table 3: Treasury Position
2004/05Actual
£000s / 2005/06
Revised
£000s / 2006/07
Estimated
£000s / 2007/08
Estimated
£000s / 2008/09
Estimated
£000s
External Debt
Borrowing / 233,020 / 345,000 / 443,000 / 487,000 / 516,000
Other long term liabilities / 0 / 5,000 / 5,000 / 5,000 / 5,000
Total Debt at
31 March / 233,020 / 350,000 / 448,000 / 492,000 / 521,000
Lending
Total lending at 31 March / 158,710 / 200,000 / 210,000 / 220,000 / 220,000
5.8 The Council needs to ensure that net external borrowing does not, except in the short term, exceed the total of the CFR in the preceding year plus the estimates of any additional CFR for 2006/07 and next two financial years. This allows some flexibility for limited early borrowing for future years.
Table 4: Limits to Borrowing Activity
Comparator
£000s / 2005/06
Estimate
£000s / 2006/07
Estimate
£000s / 2007/08
Estimate
£000s / 2008/09
Estimate
£000s
Gross Borrowing / 233,020 / 345,000 / 443,000 / 487,000 / 516,000
Lending / 158,170 / 200,000 / 210,000 / 220,000 / 220,000
Net Borrowing / 74,850 / 145,000 / 233,000 / 267,000 / 296,000
CFR / 303,963 / 363,116 / 461,584 / 505,756 / 534,470
5.9 The Finance Director reports that the Council complied with the prudential indicator requirement to keep net borrowing below the relevant CFR in 2004/05, and no difficulties are envisaged for the current or future years. This view takes into account current commitments, existing plans, and the proposals in this budget report.
5.10 A further two prudential indicators control the overall level of borrowing. 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, but is not sustainable. It is the expected maximum borrowing need with some headroom for unexpected movements. This is the statutory limit determined under section 3 (1) of the Local Government Act 2003.
· The operational boundary –This indicator is based on the probable external debt during the course of the year; it is not a limit and actual borrowing could vary around this boundary for short times during the year. It should act as an indicator to ensure the authorised limit is not breached.
5.11 The Council is asked to approve the following authorised and operational limits:
Table 5: Authorised & Operational Limits
Authorised limit for external debt / 2005/06£000
Comparator / 2006/07
£000
Estimate / 2007/08
£000
Estimate / 2008/09
£000
Estimate
Borrowing / 378,000 / 472,000 / 494,000 / 518,000
Other long term liabilities / 10,000 / 10,000 / 10,000 / 10,000
Total / 388,000 / 482,000 / 504,000 / 528,000
Operational boundary for external debt / 2005/06
£000
Comparator / 2006/07
£000
Estimate / 2007/08
£000
Estimate / 2008/09
£000
Estimate
Borrowing / 345,000 / 443,000 / 487,000 / 516,000
Other long term liabilities / 5,000 / 5,000 / 5,000 / 5,000
Total / 350,000 / 448,000 / 492,000 / 521,000
5.12 The previous sections cover the overall capital and control of borrowing prudential indicators, but within this framework prudential indicators are required to assess the affordability of the capital spending plans. These provide an indication of the impact of the capital spending plans on the overall Council finances. The Council is asked to approve the following indicators:
· 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 lending income) against the net revenue stream.
Table 6: Ratio of financing costs to net revenue stream
2004/05Actual / 2005/06
Comparator / 2006/07
Estimate / 2007/08
Estimate / 2008/09
Estimate
Ratio / 0.24% / 0.30% / 1.20% / 1.45% / 1.55%
5.13 The estimates of financing costs include current commitments and the proposals in this budget report. The ratios have increased from 2006/07, as the Council’s bottom line budget requirement has been reduced, as the dedicated schools budget amounts are now provided in the form of a specific grant, which therefore reduces the reported budget requirement.
· Estimates of the incremental impact of capital spending decisions on the Council Tax – This indicator identifies the trend in the cost of proposed changes in the three year capital programme recommended in this budget report compared to the Council’s existing commitments and current plans. The forward projections are based on the assumptions included in the budget, but will invariably include some areas, such as the level of government support, which is not published over a three year period.
Table 7: Incremental impact of capital spending decisions on the Band D Council Tax
Proposed Budget2006/07 / Forward Projection
2007/08 / Forward Projection
2008/09
Council Tax Impact - Band D / £11.67 / £13.86 / £44.88
6. Treasury Management Strategy 2006/07 – 2008/09
6.1 The treasury management service is an important part of the overall financial management of the Council’s affairs. Its importance has increased as a result of the freedoms provided by the Prudential Code. Whilst the prudential indicators above consider the affordability and impact of capital expenditure decisions, the treasury service covers the effective funding of these decisions. There are also specific treasury prudential indicators.
6.2 The Council’s activities are strictly regulated by statutory requirements and a professional code of practice (the CIPFA Code of Practice on Treasury Management). This Council adopted the Code of Practice on Treasury Management on 14th February 2002, and adopted a treasury management policy statement at the same meeting. This adoption complies with one of the requirements of the Code.
6.3 The Code requires that an annual strategy be reported to the County Council outlining the expected treasury activity for the forthcoming 3 years. A further report is produced after the year-end to report on actual activity for the year.
6.4 A key requirement of this report is to explain both the risks, and the management of the risks, associated with the treasury service.
6.5 Table 3 in section 5.7 highlights both the current treasury position and the expected movement borrowing and lending levels over the next three years. The borrowing is expected to rise to cover the costs of the capital programme and lending is expected to rise slightly, but generally be fairly stable.