Chartered Institute of Public Finance and Accountancy

Minutes

Committee PRUDENTIAL CODE STEERING GROUP
Date 8 July 2003
Venue Thistle Hotel, Charing Cross, Strand, London, WC2N 5HX

1 MEMBERSHIP
  Rita Patel representing H M Treasury, was welcomed to the Steering Group.
2 APOLOGIES
  Apologies were received from Peter Derrick, Martin Easton, Will Godfrey, Richard Harbord, Ronnie Hinds, James Hynd, Ian Jackson, Howard James, Lyn James, Ross Proudfoot and Mike Weaver. Ben Taylor attended for Paul Mayers.
3 MINUTES
  The minutes of the meeting held on 24 February 2003 were approved as a correct record.
4 MATTERS ARISING
  An update was requested with respect to minute 3.6. Pam Williams reported that the ODPM would be collecting information in the single capital pot submissions that were due later in July on the likely take up of additional capital expenditure in the prudential system. If the system goes ahead in 1 April 2004, information would next be collected early in the new year.
5 SIR HARRY PAGE MERIT AWARD
5.1 The Chairman reported that the Prudential Code Steering Group had been awarded the Sir Harry Page Merit Award for technical excellence in 2003 for their work on the development of the Prudential Code. He congratulated the members of the Steering Group. He had collected the award on behalf of the Group at the President's dinner at the annual CIPFA Conference.
5.2 The award, a figurine of an owl, was displayed at the meeting. Any member of the Steering Group who wishes to hold the award at their establishment for a period of time during the year should inform the Secretary.
6 UPDATE ON WIDER PRUDENTIAL FRAMEWORK

(a) ODPM - Pam Williams
6.1 Pam Williams reported that it was clear that the Local Government Bill would not complete the House of Lords stage before the Parliamentary recess. Ministers would decide, given this circumstance, whether or not to go out to consultation on draft regulations over the summer. If they do not do so, it will not be possible to complete the legislative process and give effect to the regulations in time for a 1 April 2004 start date. If they do consult over the summer then this would be before the primary legislation was finalised, would not guarantee a 2004 start date but would make possible a 1 April 2004 start date subject to the Parliamentary timetable.
6.2 Pam Williams further reported that, following representation from CIPFA and support from the LGA, an amendment has been introduced within the Bill that will allow group accounting to apply when new accounting arrangements are brought in; and that goes wider, and will allow the Secretary of State to replace any statutory provision with one that would comply with accounting practices.
6.3 The Steering Group expressed support for the early issue of draft regulations, and stressed that local authorities need to prepare now for the new system, whether the start date is 1 April 2004 or is delayed.

(b) NAW - Lisa James
6.4 Lisa James reported that the position in Wales is similar but that secondary legislation can take somewhat longer in Wales than in England. They are aiming for a start date of 1 April 2004 if this is possible.

(c) Scottish Executive - Mary Newman
6.5 Mary Newman reported that there is firm commitment for a start date of 1 April 2004 for Scotland. The primary legislation is in place and consideration is being given with respect to the need for any secondary legislation. It is important that local authorities prepare for the prudential framework now.

(d) HM Treasury - Rita Patel
6.6 Rita Patel reported that the Treasury is supportive of a 1 April 2004 date if it is possible. It will be helpful to this if the Prudential Code is finalised and approved to timetable and if local authorities are prepared for the new system.
6.7

With respect to the timetable for the CIPFA Prudential Code, Peter Martin reported that if the Prudential Code Steering Group made recommendations for the finalisation of the Code at that day's meeting, these would be taken to the July meetings of the Treasury Management Panel and of the Public Finance and Management Board and, if endorsed there, to the meeting of the CIPFA Council on 11 September 2003.

NB Subsequent to the PCSG meeting, the recommendations of the PCSG for the finalisation of the Prudential Code have been agreed by the Treasury Management Panel and the Public Finance and Management Board for submission to the CIPFA Council in September for approval.
6.8 It was agreed that encouragement and publicity about the need for local authorities to prepare for the prudential framework from all groups represented at the PCSG would be helpful.
7.0 DRAFT PRUDENTIAL CODE
7.1 The Chairman introduced this item. The Steering Group had before them:

  • the summary analysis prepared by the Secretary of the comments received on the second exposure draft of the Code and suggested responses to these
  • a revised draft Code with suggested amendments for consideration highlighted
  • the previously circulated full copies of all comments received on the second exposure draft.
    • 7.2 The Chairman gave an overview of four main points arising from the consultation.

  • There is strong support for the proposed prudential framework and for a 1 April 2004 start date.
  • Respondents welcome the improvements that have been made between the first and second exposure drafts.
  • There are issues around the proposed Council Tax indicator, which would be addressed later in the meeting.
  • Respondents would like to see information on the secondary legislation and method of government support for capital investment. These are matters for the ODPM and devolved administrations to address rather than the Steering Group.
    • 7.3 The Secretary introduced the summary analysis report, which the Steering Group discussed section by section. The following changes were agreed to the second exposure draft of the Prudential Code for the finalisation of the Code.

  • The amendments proposed in the revised draft, headed CIPFA Prudential Code for Capital Finance in Local Authorities Draft June 2003 and included with Paper PCSG 2 02/03, were agreed.
  • The entire text of the Code should be given a final check for consistency with the amended text in paragraph 26 of the Code.
  • In respect of the indicators for the impact on Council Tax/housing rents, the Steering Group agreed option 5. More details on this are given in minutes 7.5 - 7.12 below.
  • In paragraph 74 of the Code, maturity structure of borrowing, the following amendment will be made.

    "…. shall be calculated as follows: Amount of projected borrowing that is fixed rate maturing in each period
    Expressed as a percentage of Total projected borrowing that is fixed rate at the start of the period.
    • 7.4 No other amendments were made to the Code. It was noted and agreed that it will be necessary to change the legislative references in the Code (eg from Bill to Act) when the legislation is finalised. It was suggested that if, when the legislative framework is published for consultation, local authorities have grave reservations about how this impacts on the Code, representations be made through the treasurers' societies to the Chairman and the CIPFA Secretariat so that these matters can be reported to the CIPFA Council on 11 September.
    7.5 In respect of the indicators for the impact on Council Tax/housing rents, the Steering Group considered in depth the responses received to the consultation and various options for the way forward.
    7.6 In taking their decision, they also reviewed the history of the inclusion of these indicators within the Prudential Code. Initially, indicators for the incremental impact of capital decisions were sought and, in a draft considered by PCSG prior to the publication of the second exposure draft, indicators based on the impact of financing costs on the Council Tax/housing rents were proposed. These were rejected by the Steering Group because they would not take account of the differential impact on the bottom line of the effects of self financing and government support.
    7.7 It was decided instead to include projections of total Council Tax/housing rents as proposed indicators for the second exposure draft. However, many respondents would prefer an indicator related directly to the impact of capital investment decisions and further work has led to the development of an incremental indicator that will take account of the differential impact on the bottom line of the effects of self financing and government support (option 5 in the paper).
    7.8 The Steering Group considered and rejected as inadequate the options of having no prudential indicator for impact on the Council Tax/housing rents; and of requiring such an indicator but not specifying a particular method.
    7.9 The Steering Group agreed with commentators that an incremental indicator for the impact of capital investment decisions was more appropriate to the Prudential Code for Capital Finance. Some authorities may wish additionally to publish indicators in respect of total Council Tax/housing rents.
    7.10 The Steering Group had previously rejected pro-rating the financing costs onto the Council Tax/housing rents.
    7.11 Option 5 was considered in detail. This would:

    "require a specific methodology that addresses the incremental impact of new capital investment decisions on the Council Tax/housing rents, ie:

    (i) forecast the total budgetary (or housing rent) requirements for the authority based on no changes to the existing capital programme
    (ii) forecast the total budgetary (or housing rent) requirements for the authority with the changes proposed to the capital programme included in the calculation
    (iii) take the difference between (i) and (ii) and calculate the addition or reduction to Council Tax (or housing rents) that would result.

    The time frame for the forecasts would be 3 years, or longer if required to capture the full year effects of capital investment decisions.

    The prudential indicator would thus be the incremental impact of the new capital investment decisions on the Council Tax or housing rents."

    This would require that three year forecasts for total budgetary requirements are undertaken but would not require these to be taken further for projections of Council Tax/housing rents. It provides for a clear calculation of the impact of changes proposed to the capital programme on the Council Tax/housing rents. It was queried whether local authorities would be able to record zero or reduced impact of the capital programme on the Council Tax/housing rents in reliance on unspecified revenue savings and it was agreed that this would not be the case. It was queried whether local authorities would be able to record zero or reduced impact of the capital programme on the Council Tax/housing rents in reliance on income expectations directly related to the capital programme. It was agreed that this would be the case. The Code requires that a prudential approach be adopted with respect to such estimates. Additional explanatory wording should be included with these indicators to the affect that financial forecasts should be made on the basis of best information available at the time and making reasonable assumptions where there is a significant element of uncertainty.
    7.12 Option 5 will be included within the Prudential Code with this additional explanatory text.
    8 NEXT STEPS
    8.1 It was agreed that the recommendations of the Steering Group for the finalisation of the Prudential Code would be submitted to the Treasury Management Panel in July for consideration for onward submission to the Public Finance and Management Board in July and the CIPFA Council in September 2003.
    8.2 It was agreed that there is no need for the Steering Group to meet again, having successfully completed its task. The clear recommendations of the Steering Group for the finalisation of the Code will be given effect by the Secretariat in consultation with the Chairmen of the Steering Group and of the Treasury Management Panel and subject to the final approval of the CIPFA Council.
    8.3 The future overview of the Prudential Code rests with the CIPFA Treasury Management Panel.
    9 CONCLUSION
      On behalf of CIPFA, the Chairman expressed thanks to everyone who has contributed to the development of the Prudential Code. This had been a very intensive exercise over a three year period and credit was due to all who had participated. CIPFA has given explicit recognition to the work through the awarding of the Sir Harry Page Merit Award.