Appendix 6

Prudential and Financial Health indicators

A 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 9 February 2007, 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 2007 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 2005/06 and 2006/07, and estimated capital expenditure in the years to March 2010 are set out in the table below.

2.2 The actual capital expenditure in 2006/07 of £173.2m is £18.9m lower than the adjusted revised estimate of £192.1m. These estimates will be subject to revision 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 2006 and 2007 and estimates for 31 March 2008, 2009, and 2010 are set out in the table below.

2.4 The capital financing requirement at 31 March 2007 at £574.2m is £6.5m less than the revised estimate approved in February, due to a smaller increase in unsupported borrowing (£3.7m) and the carry forward of supported borrowing to 2007/08 (£2.8m). The estimates for later years are unchanged from February, as the impact of the 2006/07 outturn and other changes to the capital programme in the meantime are not material.

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 2005/06 and 2006/07 are set out in the table below, along with estimates for 2007/08, 2008/09 and 2009/10.

2.7 The ratio in 2006/07 is lower than the estimated 6.67% because of lower net financing costs due to higher interest on balances.

Actual external debt

2.8 Actual external debt at 31 March 2007 was £393.5m. Total external borrowing fell by £12.3m during 2006/07. However, this was accompanied by a fall of £25.9m in the level of temporary investments. The reasons for the increase in net external borrowing of £13.6m over the year are set out in paragraph 2 of Appendix 5 to this report. The operational boundary for 2006/07 was £490m and actual external debt did not exceed this level during the year.

B Financial Health indicators

3 Introduction

3.1 The Cabinet in May 2007 approved a medium term financial strategy which incorporated a set of Financial Health indicators, with the intention that they should be monitored on a quarterly basis as one element of the County Council's regular budget monitoring. A number of the indicators are prudential indicators which are commented on in the previous section of this report. The indicators are included in the attached Annex.

4 Financial Health indicators

4.1 The budget variance indicators are more favourable than estimated and the underspending against the revised budget results in balances at 31 March 2007 being higher than forecast.

4.2 The capital programme management indicators reflect the higher level of scheme carry forward in 2006/07 than in recent years for the reasons set out in paragraph 3 of Appendix 10. The lower level of capital payments than forecast in 2006/07 resulted in third party receipts not being required in full to finance capital expenditure in 2006/07, which affects the relevant indicators.

4.3 External debt was contained both within the operational and authorised limits throughout 2006/07, while the income collection indicators are within the levels set for 2007/08 to 2009/10.