Chartered Institute of Public Finance and Accountancy

Minutes

Committee PRUDENTIAL CODE STEERING GROUP
Date 16 January 2003
Venue Council Chamber, CIPFA, 3 Robert Street, London, WC2N 6RL

1 MEMBERSHIP
1.1 New members were welcomed to the Steering Group.
2 APOLOGIES
2.1 Apologies were received from Paul Bannister, Peter Derrick, Frances Houston, Lyn James, Peter Swaby and Norie Williamson. Joyce Gegan attended the meeting for the Scottish Executive.
3 MINUTES AND MATTERS ARISING
3.1 The minutes of the meeting held on 16 October 2002 were approved as a correct record.
3.2 In relation to minute 4.8, it was queried how the view there expressed, that 'premiums relate to revenue rather than capital expenditure' interfaces with the advice published by the then DETR that, in their unofficial view, premiums on the repayment of PWLB debt may be charged to the PCL. Graham Fletcher responded that this advice was based on the precise wording within the 1989 Local Government and Housing Act, and that there is no carry over of this precise wording, or indeed of the PCL, within the proposed new legislation.
4

UPDATE ON THE WIDER PRUDENTIAL FRAMEWORK

(a) ODPM - Pam Williams
4.1 Pam Williams reported that the Local Government Bill had been published in November 2002. The full text of the Bill can be found on the House of Commons website. The Bill received its second reading in the House of Commons on 7 January 2003 and would be entering the Committee stage in the House of Commons on 28 January. The Committee has agreed to take the Bill in clause order, therefore by the time the Steering Group meets again in February it will be able to take into account anything arising at the Committee with respect to primary legislation and the prudential framework. In order to assist the Committee, it has been provided with a copy of the latest draft of the Prudential Code (the draft being considered by this meeting of the Steering Group). It has been made clear to the Committee that this is work in progress. The Committee has also been given information about proposed secondary legislation. The future timetabling of legislation, and the date the system becomes operational, is with Parliament.
4.2 It was queried when the information on secondary legislation would be made public. Pam Williams replied that she would like to make this public as soon as possible but that it is currently private to the Committee.
4.3

The Secretary requested that any developments on secondary legislation that could potentially affect the Prudential Code be conveyed to her as soon as possible.

(b) NAW - Lisa James
4.4 Lisa James reported that there would be Welsh MPs on the House of Commons Committee and that Don Touhig of the Wales Office would be supporting Nick Raynsford. Information about secondary legislation in Wales has not been provided to the Committee and may be different from, and proceed at a different timetable to, secondary legislation in England.
4.5 There are Assembly elections in May.
4.6

The Secretary again requested that any developments in secondary legislation that could potentially affect the Prudential Code be conveyed to her as soon as possible.

(c) Scottish Executive - Joyce Gegan
4.7 Joyce Gegan reported that the Local Government in Scotland Bill had been passed by the Scottish Parliament on 8 January. Work is progressing on secondary legislation. There is a strong ministerial preference in Scotland for an implementation date of April 2004 and for the early issue of the Prudential Code.
4.8 Pam Williams suggested that Ministers in Scotland could write to the UK Parliament to record their interest in this matter.
4.9

The Secretary requested that any developments on secondary legislation that could potentially affect the Prudential Code be conveyed to her as soon as possible.

(d) HM Treasury - Liz Corrin
4.10 Liz Corrin reported that there is nothing specific to report at this stage from HM Treasury.
4.11 Liz Corrin will provide the note on depreciation agreed in minute 6.2 of the October meeting of the PCSG.
5 FUTURE TIMETABLE
5.1 The Secretary introduced Paper PCSG 26 02/03. She had been tasked at the October meeting of the PCSG with considering what would be the latest date for publication of the second exposure draft of the Prudential Code consistent with its being taken to the September 2003 meeting of the Institute Council for finalisation of the approved Code. As the report demonstrates, in order to be consistent with taking the final Prudential Code to the September meeting of the Institute Council, the meeting of the PCSG arranged for 24 February and the meeting of the Treasury Management Panel arranged for 26 February would need to be in a position to recommend to the Public Finance and Management Board on 27 February for approval, and the Board to approve for publication, the second exposure draft of the Prudential Code for consultation.
5.2 The Chairman stated that this would mean, subject to the necessary approvals, the publication of the second exposure draft for consultation in March. The results of the consultation would then need to be considered by the PCSG and a final code recommended to the Treasury Management Panel, then to the July meeting of the Public Finance and Management Board and the September meeting of the Institute Council.
5.3 The alternative would be to take the exposure draft for consultation to the May meeting of the Public Finance and Management Board and the final Code to the December meeting of the Institute Council.
5.4 The PCSG expressed the view that if the final Code is not approved until December, this would be too late for a start date of April 2004. It was the strong view of the Steering Group that, notwithstanding the fact that the timing of legislation to commence the framework is uncertain, it is important that the Code is ready for a possible start date of 1 April 2004. The Chairman of the Treasury Management Panel stressed that it was important for CIPFA to achieve this.
5.5 It was agreed to aim for approval of the second exposure draft of the Prudential Code for publication for consultation at the February meetings of the PCSG, the Treasury Management Panel and the Public Finance and Management Board.
6 DRAFT PRUDENTIAL CODE
6.1

The Chairman introduced Paper PCSG 27 02/03. The Steering Group agreed to consider the commentary report first, followed by the revised draft of the Code with all amendments highlighted.

Commentary Report

(Paragraph numbers refer to the commentary report)
6.2 Paragraph 7 - the Steering Group asked the ODPM, NAW and Scottish Executive to comment on the redraft of the Code, specifically to ensure that the second exposure draft is consistent with the latest position vis-à-vis legislation. Comments were requested by the first week in February.
6.3 Paragraph 19 - it was commented that it is a helpful steer that it is likely that it will not be necessary to separate HRA and non-HRA debt, but that the means of separating HRA and non-HRA items for the purposes of the prudential framework will be undertaken through distinguishing between HRA and non-HRA capital expenditure and capital financing.
6.4 Paragraph 19 - it was queried whether ALMOs are taking a different approach and Graham Fletcher agreed to look into this matter separately with David Thomas.
6.5 Paragraph 35 - the Steering Group agreed that, whilst the definition of the capital financing requirement should not include premiums, some wording should be added within the Code to the effect that the results of the test in paragraph 44 of the Code could be affected by premiums.
6.6 Paragraph 37 - the Steering Group agreed to use the term 'capital financing requirement' within the second exposure draft.
6.7 Paragraph 40 - the Steering Group agreed the approach taken within the revised draft with respect to FRS 17.

The revised draft Code

(Paragraph numbers refer to the revised draft)
6.8 The Steering Group welcomed the revised draft, and in particular the restructuring of the sections, which it was agreed improves clarity.
6.9 Martin Easton, for the LGA, asked for a separate meeting with CIPFA to discuss points of detail, not principle, within the revised draft. It was agreed that a similar opportunity should also be afforded to COSLA and the WLGA.
6.10 Preface - the reference to the system of capital finance being 'new' should be deleted, since it is intended that the framework will exist long term.
6.11 Executive summary - it was agreed that the executive summary will be drafted and consulted on with members through correspondence before the next meeting.
6.12 Paragraph 4 - this new paragraph was welcomed. It was queried whether the government and auditors would take the same approach. Pam Williams commented that the government is on record that the system is designed for local decision making, that it is understood that authorities will have different indicators and that future guidance will make this clear. Paul Mayers and Ronnie Hinds confirmed this for the Audit Commission and Audit Scotland. Comparisons between the prudential indicators for different local authorities is not the objective. Comparisons for individual local authorities over time will be valid.
6.13 Paragraph 8 - the ODPM and Peter Martin will separately consider with the GLA and other functional bodies whether any special wording is necessary with respect to the GLA and functional bodies in the light of amendments that are being tabled to the Local Government Bill.
6.14 Paragraph 11 - within the restructured draft, this is the first reference to the authorised limit and operational boundary. There should be a cross reference here to the paragraphs that explain them.
6.15 Paragraph 14 - the reference to capital commitments should be deleted.
6.16 Paragraph 20 - the second sentence of the penultimate bullet point should be deleted.
6.17 Paragraph 21 - the reference to the limits to be determined under legislation in Scotland should be adjacent to the equivalent reference for England and Wales.
6.18 Paragraph 23 - the first bullet point should read 'affordability, eg implications for Council Tax' and the other bullet points reviewed in this light. The Secretary was asked to redraft accordingly and consult with members through correspondence before the next meeting.
6.19 Paragraph 25 - in the sentence that begins "The two are related concepts" delete the rest of that sentence, since the same point is covered in the following sentence.
6.20 Paragraph 28 - ensure that the requirement for local authorities to consider known significant variations beyond a three year timeframe is included within the executive summary.
6.21 Paragraph 29 - the bullet points are not intended to be an exhaustive list but they have been added to considerably over time. After discussion it was agreed that all the points should be kept but re-ordered so that they flow better.
6.22 Paragraphs 38 & 39 - there was a long discussion on the indicator proposed for the estimates of the impact of financing costs on the Council Tax. It was suggested that a fundamental indicator of affordability for the Council to consider in setting their forward plans is the actual Council Tax that will result. This alternative method of calculation would show the actual impact of the capital investment decisions on the Council Tax. It would allow the effect of the totality of the Council's plans to be considered at budget setting time. It would also allow different options for the capital investment programme to be considered by comparing the different levels of Council Tax that would result, holding all other things constant other than varying the capital programme. Furthermore, it would obviate the need either to allocate the financing costs to a proportion of the Council Tax, or to consider marginal costing, which can raise significant issues of differences of professional opinion. Moreover, this indicator would take into consideration the effects of self financing and the effects of government support. It would also reflect the revenue impact of capital schemes other than financing costs, thus facilitating the consideration of revenue intensive vis-à-vis capital intensive options. It was agreed that the Secretary will redraft paragraphs 38 and 39 accordingly and consult with members through correspondence before the next meeting.
6.23 Paragraphs 38 & 39 - the ODPM, NAW and Scottish Executive were asked to consider whether any reference needs to be made to levies or precepts.
6.24 Paragraph 40 and other references to HRA - it was confirmed that where a local authority has an HRA, the requirement is for relevant indicators to be shown for both HRA and non-HRA elements, not HRA, non-HRA and total. Also, the Steering Group confirmed that since the HRA has a statutory definition, the split should be as determined under statute and was not a matter for CIPFA to determine.
6.25 On the prudential indicators for treasury management, it was reported that it had been possible to make a number of further modifications and simplifications, especially as a result of comments from the road-testing authorities.
6.26 Paragraphs 68 & 69 - with regard to limits on interest rate exposures, the Code now allows for authorities to set their exposures by reference to either their net interest payments/receipts or their outstanding net principal sums. This gives more flexibility and a potentially more meaningful set of indicators for individual authorities. The setting of upper limits only was queried. It was explained that this has the effect of setting ranges within which an authority would limit its exposure to both fixed and variable interest rate movements. The Panel agreed with this approach.
6.27 Paragraph 74 - in respect of the maturity structure of borrowings, the periods used have been changed to mirror those used in the CIPFA/LASAAC Accounting SORP. The use of only fixed rate borrowing in this indicator was queried. Peter Morley explained that the indicator was designed, in effect, to be a control over an authority having large concentrations of debt needing to be replaced at times of uncertainty over interest rates. The inclusion of variable rate debt would be necessary only if authorities were thought to face substantial refinancing risks: but this is not the case. The Panel agreed with this view.
6.28 Paragraph 77 - with regard to the proposed limit over the investment of sums for longer than 364 days, it was reported that the clause requiring authorities to relate their investment sums to their projected cash balances had been removed. It was now thought sufficient for authorities to be advised by way of guidance notes that this would be a prudent matter to be taken into account.
6.29 Paragraph 80 - the Steering Group expressed support for the revised wording, which it was noted has been drawn from guidance sent to local authorities in Wales in September 2002 by the Welsh Assembly Government.
6.30 Paragraph 88 - the fourth bullet point should read 'capital overdrawn' not 'bank overdraft'.
6.31 Paragraph 91 - it was noted that further work is being undertaken on the definition of other long term liabilities in discussion with the ODPM and LGA.
6.32 Appendices - it was agreed that the appendices will be drafted and consulted on with members through correspondence before the next meeting.
6.33 Foreign exchange - it was agreed that there is no need for a reference within the Prudential Code to foreign exchange at this stage.
7 ROAD TESTING THE DRAFT PRUDENTIAL CODE
7.1 The Steering Group had before them copies of reports received by the date of the meeting, that have been authorised by their Chief Finance Officer of the authority concerned for publication. Other reports received will be circulated by post. Earlier results from road testing reported under Chatham House rules have already been considered by the CIPFA Secretariat in the development of the current draft of the Code. Members of the Steering Group were asked to let the Secretary know if other points arise from their consideration of the reports from road testing.
7.2 The Chairman expressed thanks, on behalf of the Prudential Code Steering Group, to those authorities who have road tested the draft Code. The results from road testing have been extremely helpful in the development of the second exposure draft of the Code.
8 TRAINING AND GUIDANCE
8.1 The Steering Group agreed to receive a report on training and guidance for the new prudential system at its next meeting.
9

DATE OF NEXT MEETING

Monday 24 February at 2.00pm.