Appendix 6

Prudential indicators

1 Introduction

1.1 At its meeting on 24 November 2003, the Cabinet noted that the new prudential system for capital finance was to take effect from 1 April 2004 and approved a policy framework for the County Council. The new system is underpinned by a Prudential Code published by the Chartered Institute of Public Finance and Accountancy (CIPFA).

1.2 The Code provides a framework for local authority capital finance designed to ensure that:

· Capital programmes are affordable

· External borrowing and other long-term liabilities are within prudent and sustainable levels

· Treasury management decisions are taken in line with professional good practice.

1.3 At its meeting on 11 February 2005, the Cabinet recommended to the County Council a schedule of the prudential indicators prescribed by the Code. These were based on the revised and forward revenue budgets and capital programme submitted to the Cabinet.

1.4 This report summarises any changes to the approved indicators. In particular, it updates those previously based on the estimated position as at 31 March 2005 where actuals are now available, as required by the Code.

2 Prudential indicators

Actual and estimated capital expenditure

2.1 Actual capital expenditure incurred in 2003/04 and 2004/05, and estimated capital expenditure in the years to March 2008 are set out in the table below.

2.2 The actual capital expenditure in 2004/05 of £208.4m is £5.3m higher than the revised estimate reported in February of £203.1m. These estimates will be the subject of close monitoring during the year.

Capital financing requirement

2.3 The capital financing requirement represents capital expenditure other than that met directly from capital receipts, the revenue budget, capital grants or contributions. This can be financed from external borrowing or by borrowing from internal balances. The variation from year to year in the capital financing requirement represents the impact of new capital expenditure financed by borrowing offset by the provision made in the revenue budget and the use of capital receipts to repay debt. The actual capital financing requirements at 31 March 2004 and 2005 and adjusted estimates for 31 March 2006, 2007, and 2008 are set out in the table below.

2.4 The changes to the estimates approved in February are relatively small over the period as a whole. Unsupported borrowing for the nursing care project at £19.1m in 2004/05 was much higher than the £4.4m originally expected. This will be offset by lower borrowing in the years to March 2008, and results from the restructuring of the financing of the project approved by the Cabinet in March.

2.5 The unsupported borrowing included in the capital financing requirement relates to the following projects:

Ratio of capital financing costs to net revenue stream

2.6 The ratio of financing costs to the net revenue stream shows the estimated annual revenue costs of borrowing (interest payable on debt plus the minimum revenue provision for repaying the principal less interest on balances) as a percentage of the amount in the draft revenue budget to be met from central government grant and by local taxpayers. Actual figures for 2003/04 and 2004/05 are set out in the table below, along with adjusted estimates for 2005/06, 2006/07 and 2007/08.

2.7 The ratio in 2004/05 is lower than the estimated 3.11% because of lower net financing costs due to higher interest on balances. The ratio in 2005/06 is very marginally higher than originally forecast as a result of the financing costs arising from additional unsupported borrowing in 2004/05. The basis of the indicator changes fundamentally in 2006/07 when schools funding ceases to be included in the net revenue stream, although the County Council will continue to be responsible for funding capital investment in schools.

Actual external debt

2.8 Actual external debt at 31 March 2005 was £380.1m. Total external borrowing rose by £62.9m during 2004/05. However, this was partially offset by a rise of £42.8m in the level of temporary investments. The reasons for the increase in external borrowing of £20.1m over the year are set out in paragraph 2 of Appendix 5 to this report. The operational boundary for 2004/05 was £400m and actual external debt did not exceed this level during the year.

Operational boundaries for external debt

2.9 The operational boundaries for external debt should reflect the most likely scenario and be consistent with the Council's capital plans and treasury management strategy. The Cabinet is asked to approve the following increased operational boundaries for 2005/06, 2006/07 and 2007/08.

2.10 These figures are approximately £50m higher than those previously approved by the Cabinet in February. They reflect higher long-term fixed-rate borrowing than expected towards the end of 2004/05 and 2005/06, to take advantage of unexpectedly low long-term interest rates. Temporary borrowing has not fallen to compensate, as virtually all of this is `enforced' borrowing of deposits held on call with the County Council by the Police Authority and Pension Fund. Thus the increase in these operational limits does not mean that the Council's net borrowing ( gross borrowing less temporary investments) is increasing as a result. The increases in the indicative boundaries for 2006/07 and 2007/08 reflect the rises in the predicted capital financing requirement in those two years.

Recommendation

1 That the Cabinet approve the updated prudential indicators set out in this report.