CIPFA Prudential Code
for
Capital Finance in Local Authorities
CIPFA Prudential Code
Contents
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current status
why it is necessary
requirements of the Local Government Bill
principles of the Code
prudential indicators
conclusions
CIPFA Prudential Code
current status
• 2nd exposure draft prepared by CIPFA
• follows
- 1st draft Dec 01
- over 100 consultation responses March 02
- road testing by 35 LAs in May & Nov 02
• seeks consultation responses by 15/5/03
• implementation 1/4/04 subject to legislation
CIPFA Prudential Code
why it is necessary
Constraints with the present system
• annual borrowing limits constrain freedom &
flexibility
• inhibits efficient planning, purchasing, financial
management
• little local accountability
• decision making shifted to central Government
CIPFA Prudential Code
key requirements of the Local Government Bill
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a new local prudential regime
each LA to set its own prudential borrowing limits
affordability test - when, how, period
LA consultation on investment and borrowing plans
Government reserve powers
Government capital support will continue (but
currently unclear how)
• credit approvals will be abolished
CIPFA Prudential Code
principles of the Code (1)
Objectives
• capital plans are affordable, prudent & sustainable
• treasury management decisions follow good
professional practice
• consistency with, and supports, local strategic
planning, asset management planning and proper
option appraisal
• supports local decision making
CIPFA Prudential Code
principles of the Code (2)
Governance
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setting & revising indicators by full Council
3-year indicators set prior to the forthcoming year
revised at any time via Council
current year reviewed when setting forward indicators
treasury management indicators considered with
strategy and annual report
• CFO to establish monitoring and reporting procedures
CIPFA Prudential Code
principles of the Code (3)
Affordability
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impact of borrowing on Council Tax and rents
consider all resources and spending plans
3 year rolling forecasts
consider risk and uncertainty
key financing cost, debt and capital expenditure ratios
estimates and actuals
separate tests for General Fund and HRA
CIPFA Prudential Code
principles of the Code (4)
Prudence
• limit on net external borrowing for capital purposes
• treasury management is consistent with good practice
CIPFA Prudential Code
principles of the Code (5)
Decision making on capital investment
• LAs should have regard to
- option appraisal
- asset management planning
- strategic planning
- achievability
• the Code will not be prescriptive on these factors
• LAs free to determine additional indicators to aid
decision making
CIPFA Prudential Code
prudential indicators (1)
Indicators of Affordability
• Ratio of financing costs to net revenue stream
- for General Fund and HRA
- estimates for years 1,2 & 3
- actual for current year after year-end
• Impact of revenue & capital spending plans
- on Council Tax for General Fund
- on rents for HRA
- estimates for years 1,2 & 3
- actual for current year after year-end
CIPFA Prudential Code
prudential indicators (2)
Indicators of Prudence
• External debt indicator must relate to affordability
• net external borrowing does not exceed total
capital financing requirement for preceding,
current and next two financial years
CIPFA Prudential Code
prudential indicators (3)
Indicators for Capital Expenditure
• Total capital expenditure (to be) incurred
- for General Fund and HRA
- estimates for years 1,2 & 3
- actual for current year after year-end
• Capital financing requirement
- for General Fund and HRA
- estimates for years 1,2 & 3
- actual for current year after year-end
CIPFA Prudential Code
prudential indicators (4)
Indicators for External Debt
• Authorised limit
- for borrowing + other long-term liabilities
- for years 1,2 & 3
• Operational boundary (the most likely requirement)
- for borrowing + other long-term liabilities
- for years 1,2 & 3
• Actual debt (year-end position)
- for borrowing + other long-term liabilities
CIPFA Prudential Code
prudential indicators (5)
Indicators for Treasury Management
• Interest rate exposure
- upper limits on exposure to fixed/variable rates
- on borrowing net of investments
- for years 1, 2 & 3
• Maturity profile of borrowing
- upper & lower limits across 5 periods
• Total investments greater than 364 days
- upper limit for each forward year
CIPFA Prudential Code
Conclusions (1)
Consultation Response
• necessity for treasury management indicators when
already in TM Policy & Strategy statement ?
• necessity for Council approval when revising limits ?
(accept need when setting initial forward limits) - why
not Cabinet ? or a Committee ?
CIPFA Prudential Code
Conclusions (2)
Changes to Working Practices
• Financial planning
- align revenue and capital plans
- capital planning over 3 years
• Reporting arrangements
- annual budget report
- arrangements for reviewing/monitoring limits
• Day-to-day monitoring
- monitoring of cash flow
CIPFA Prudential Code
Conclusions (3)
How might it benefit us ?
• Funding “invest to save” type projects
• Flexibility to iron out timing delays with capital
receipts or grant approvals
• Funding previously unaffordable projects because
of capital funding constraints
but must be able to afford financing costs
• Facilitates longer-term capital investment planning
• May become an alternative to leasing and PFI/PPP