Appendix E
PRUDENTIAL INDICATORS 2012/13 – 2014/15
1.
Introduction
1.1
The Local Government Act 2003 requires all Local Authorities to consider the
CIPFA Prudential Code for Capital Finance in Local Authorities (the Code) to
ensure that capital investment plans are affordable, prudent and sustainable.
The code requires each Local Authority to set and approve a range of
prudential indicators for three years in line with the budget and treasury
management strategy (both also included on this agenda).
1.2
In accordance with the code, Local Authorities can enter into borrowing to
support capital expenditure as long as they can demonstrate affordability,
prudence and sustainability.
1.3
The indicators are required to be reported and approved annually to the same
decision making body that sets the budget, i.e. Full Council. Indicators must
be set for the period covering the current year plus three subsequent years.
For the 2012/13 budget setting period this covers the current year’s updated
estimates plus 2012/13 to 2014/15. During 2011/12 the current prudential
indicators have been monitored as part of the budget monitoring process and
updates included within the budget monitoring reports.
1.4
This appendix also includes the Council’s Treasury Management Indicators
which are relevant to the Treasury Management Strategy Statement.
2.
Prudential Code
2.1
Under the provision of the Local Government Act 2003 local authorities are
required to operate within the guidance of the Prudential Code with regard to
capital investment decisions.
2.2
The objective of the Code is to provide a framework for local authority capital
finance which will ensure the following:
a)
b)
c)
d)
2.3
Capital expenditure plans are affordable
All external borrowing and other long term liabilities are within prudent
and sustainable levels
Treasury management decisions are taken in accordance with
professional good practice
In taking decisions in relation to the above the local authority is
accountable, by providing a clear and transparent framework.
Furthermore the framework established by the Code should be consistent
with and support:
a)
b)
c)
Local strategic planning
Local Asset management planning
Proper option appraisal
3.
Prudential Indicators
3.1
The Code sets out a number of prudential indicators to be set and approved
each year, it also outlines the factors which should be taken into account
when calculating them but does not suggest indicative limits or ratios. The
Appendix E
indicators are not designed to be used for comparative purposes but to
support and record local decision making.
3.2
When revising and setting the prudential indicators the Council is required to
have regard for the following:
a)
b)
c)
d)
e)
f)
Affordability, e.g. implications to Council Tax levels
Prudence and sustainability, e.g. implications for external debt and
whole life costing
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. affordability of the forward plan.
3.3
The code distinguishes between indicators for affordability, prudence, capital
expenditure, external debt and treasury management and where applicable
should be reported separately for Housing Revenue Account (HRA) and non
HRA (i.e. General Fund). For NNDC following the closure of the HRA on
31March 2007 only the General Fund indicators are now applicable and are
being set.
3.4
All of the prudential indicators for the period 2012/13 to 2014/15 have been
calculated based on the Council’s existing commitments, current plans for
revenue and capital as recommended in the 2012/13 budget report included
elsewhere on this agenda which is due for approval by Full Council on 22
February 2012.
A
AFFORDABILITY
A1
Ratio of financing costs to net revenue stream
The actual for 2010/11 and estimates for 2011/12 to 2014/15 for the ratio of financing
costs to net revenue stream are as follows:
2010/11
2011/12
2012/13
2013/14
2014/15
Actual
Estimate (P9)
Estimate
Estimate
Estimate
%
%
%
%
%
(3.38)
(3.21)
(1.95)
(1.75)
(1.73)
The reduction in this indicator represents the reduced investment returns that the
Council is anticipating over the next 3 years. However as this ratio is negative it still
represents a very healthy position for the Council as it reflects the fact that interest
receivable exceeds interest payable.
A2
Estimates of the impact of capital investment decision on Council Tax
The code requires the impact of alternative capital investment decisions on Council
Tax to be calculated, and reflects the incremental impact of new capital decisions
proposed over and above the capital investment decisions that have already been
taken in the past by the Council, and therefore relates only to the new resources to
be committed. These indicators take into consideration the effects of self-financing
and the effects of government support, along with any associated impact on interest
receivable/due as a consequence of the financing methods used. They also reflect
Appendix E
the revenue implications of capital schemes other than financing costs, such as
additional support contracts for new computer systems. The table below indicates
the incremental impact of the capital investment decisions proposed for the period
2012/13 to 2014/15 based on a Band D property. This is a purely notional calculation
designed to show the effect of changes in capital investment decisions.
2012/13 to 2014/15
Estimate
£
£2.71
Band D
A3
Estimates of the impact of capital investment decision on Housing
Rents
Not applicable as the Council no longer operate a Housing Revenue Account.
A4
Affordable Borrowing Limit
Section 3 of the Local Government Act 2003 requires the Council to determine and
keep under review how much it can afford to borrow. The amount determined is
termed the “Affordable Borrowing Limit”.
The Council must ensure when setting this limit that its capital investment plans
remain within sustainable limits, and that the impact upon its future council tax levels
is acceptable. The Council is proposing that the limit is set at the Authorised
Borrowing Limit (D1), which reflects a continuation of current practice.
The limit includes both external borrowing and other forms of liability, such as credit
arrangements, and must be set for the forthcoming financial year and two successive
years.
Affordable Borrowing Limit
2012/13
2013/14
2014/15
Estimate
Estimate
Estimate
£,000
£,000
£,000
9,556
9,792
10,034
B
PRUDENCE
B1
Net debt and the Capital Financing Requirement
The capital financing requirement measures the Council’s underlying need to borrow
for a capital purpose. The Code states the following as an indicator for prudence:
“In order to ensure that over the medium term net debt will only
be for a capital purpose, the local authority should ensure that
net debt 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 Council met this indicator for 2008/09. It should be noted that, following the
repayment of the council’s borrowing, the CFR has been reduced to zero.
Appendix E
C
CAPITAL EXPENDITURE
C1
Capital Expenditure
The actual capital expenditure for 2010/11 and the estimates for current and future
years take into account current plans and future commitments as set out within the
budget report included elsewhere on this agenda.
Non HRA
C2
2010/11
2011/12
2012/13
2013/14
2014/15
Actual
Estimate (P9)
Estimate
Estimate
Estimate
£,000
£,000
£,000
£,000
£,000
2,765
8,041
10,438
6,755
2,098
Capital Financing Requirement
Non HRA
2010/11
2011/12
2012/13
2013/14
2014/15
Actual
Estimate (P9)
Estimate
Estimate
Estimate
£,000
£,000
£,000
£,000
£,000
0
0
0
0
0
The estimated capital financing requirement takes into account capital expenditure,
the application of useable capital receipts, direct charges to revenue for capital
expenditure, the application of capital grants and the use of third party contributions
towards project costs. In summary, an increase in the capital financing requirement
will reflect capital expenditure which is not resourced immediately representing an
increase in the underlying need to borrow for capital purposes. Likewise a reduction
in the capital financing requirement will reflect future applications of capital receipts
or grants and contributions or future charges to revenue.
The repayment of Councils debt in 2006/07 resulted in the Capital Financing
Requirement being reduced to nil.
D
EXTERNAL DEBT
D1
External Debt – Authorised Limit
It is recommended that the Council approve the following limits for its total external
debt gross of investments. The estimates are based on assumed actual borrowing,
new supported debt, maturing and replacement debt. In addition headroom for
temporary borrowing and borrowing in advance of need has been incorporated.
Authorised
Limit
D2
2010/11
2011/12
2012/13
2013/14
2014/15
Actual
Estimate (P9)
Estimate
Estimate
Estimate
£,000
£,000
£,000
£,000
£,000
9,100
9,325
9,556
9,792
10,034
External Debt – Operational Boundary
Appendix E
The operational boundary is based on the same estimates as the authorised limit but
reflects a more prudent additional headroom figure.
Operational
Boundary
D3
2010/11
2011/12
2012/13
2013/14
2014/15
Actual
Estimate (P9)
Estimate
Estimate
Estimate
£,000
£,000
£,000
£,000
£,000
5,100
5,328
5,458
5,592
5,792
Actual External Debt
The Council’s actual external debt at 31 March 2010 was nil. This reflects the
position at one point in time and is therefore not directly comparable to the authorised
limit and operational boundary.
D4
Gross and net debt
The purpose of this treasury indicator is to highlight a situation where the Authority is
planning to borrow in advance of need, however as the authority has no borrowing
this indicator is not relevant at the current time.
Upper limit on
Net Debt
compared to
Gross Debt
Outstanding
Borrowing (at
nominal value)
Other
Longterm Liabilities
(at
nominal
value)
Gross Debt
Less:
Investments
Net Debt
2011/12
Estimate (P9)
2012/13
Estimate
2013/14
Estimate
2014/15
Estimate
£,000
£,000
£,000
£,000
0
0
0
0
0
0
0
0
0
(26,200)
0
(26,000)
0
(25,000)
0
(24,000)
(26,200)
(26,000)
(25,000)
(24,000)
N.B. CIPFA has acknowledged that the upper limit does not work as was
intended and is working on a revised indicator. This indicator will be amended
once revised guidance has been received from CIPFA.
E
TREASURY MANAGEMENT
E1
Adopt the CIPFA Code of Practice for Treasury Management
The Council has adopted the CIPFA Code of Practice for Treasury Management in
the Public Services.
E2
Interest Rate Exposure – Variable Rates
Appendix E
It is recommended that the Council set an upper limit on its variable interest rate
exposures for 2012/13, 2013/14 and 2014/15 of 100% of its net outstanding principal
sums. However, the Council is not at present considering entering into any new
long-term debt.
E3
Interest Rate Exposure – Fixed Rates
It is recommended that the Council set an upper limit on fixed rate exposures for
2012/13, 2013/14 and 2014/15 of 100% of its net outstanding principal sums. This is
a continuation of current practice enabling all investments (and any new debt) to
remain at fixed rates, and, coupled with the adjusted limit for E2 above, will give the
Council maximum flexibility over the forthcoming years. However as with E2 above
this indicator is not relevant at the current time whilst the Council remains debt free.
E4
Maturity Structure of Borrowing
It is recommended that the Council set 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
Upper Limit
Lower Limit
Under 12 months
100%
0%
12 months and within 24 months
100%
0%
24 months and within 5 years
100%
0%
5 years and within 10 years
100%
0%
10 years and above
100%
0%
The upper limits recommended above have again been set to allow the Council
maximum flexibility. However this indicator is not currently relevant due to the
Councils debt free status.
E5
Total principal sum invested for period longer than 1 year.
The indicator for the upper limit for longer-term investments is recommended to be
£15 million for 2012/13 onwards, which is a continuation of current practice.
E6
Credit Risk
The Authority considers security, liquidity and yield, in that order, when making
investment decisions. Credit ratings remain an important element of assessing credit
risk, but they are not a sole feature in the Authority’s assessment of counterparty
credit risk.
The Authority also considers alternative assessments of credit strength, and
information on corporate developments of and market sentiment towards
counterparties. The following key tools are used to assess credit risk:
ƒ
ƒ
ƒ
ƒ
Published credit ratings of the financial institution (minimum A- or
equivalent) and its sovereign (minimum AA+ or equivalent for non-UK
sovereigns);
Sovereign support mechanisms;
Credit default swaps (where quoted);
Share prices (where available);
Appendix E
ƒ
ƒ
ƒ
Economic fundamentals, such as a country’s net debt as a percentage
of its GDP);
Corporate developments, news, articles, markets sentiment and
momentum;
Subjective judgement (or put more simply – common sense).
The only indicators with prescriptive values remain to be credit ratings. Other
indicators of creditworthiness are considered in relative rather than absolute terms.
Conclusions
The prudential indicators for the period 2012/13 to 2014/15 for approval are shown
above and will continue to form part of the overall budget monitoring process for
2012/13.
The ratio of financing costs to net revenue expenditure remains at acceptable levels
with the forecasts showing that investment income still exceeds borrowing costs
(hence the negative ratio shown for the General Fund financing costs under indicator
A1 above).
A number of the treasury management indicators reflect the fact the Council is
currently debt free and assumes no plans to undertake any long term borrowing.
The capital programme remains both affordable and manageable. The Authorised
Limit provides a realistic and prudent limit which the Council must ensure
is
not
exceeded, whilst the Operational Boundary gives the Council the flexibility to borrow
to finance future capital schemes if required.