Changes to the prudential framework

On 10 November 2017 the DCLG (now MHCLG) published a consultation on changes to the guidance on local authority investments and minimum revenue provision (MRP). The consultation closed on 22 December.

The prudential framework under the Local Government Act 2003 incorporates four statutory codes. The Prudential Code and the Treasury Management Code are prepared by CIPFA, and were updated in December 2017. The government consultation covered changes to the Statutory Guidance on Local Authority Investments and the Statutory Guidance on Minimum Revenue Provision.

The MHCLG has now published a summary of the responses to the consultation together with a final version of the two statutory guidance documents.

The changes include:

  • a new principle requiring local authorities to disclose the contribution that non-core investments make towards their service delivery objectives and/or placemaking role
  • a new requirement to include quantitative indicators that will allow assessment of risk exposure
  • extending the principles of prioritising security and liquidity over yield to cover non-financial assets, although local authorities are permitted to determine the relative importance of security, liquidity and yield for different types of investment and can assess liquidity of non-financial assets on a portfolio basis
  • requiring local authorities to disclose their dependence on commercial income to deliver statutory services and the amount of borrowing that has been committed to generate that income
  • requiring additional disclosure by local authorities who borrow solely to invest in revenue generating investments – the guidance makes clear that borrowing in advance of need solely to generate a profit is not prudential, and local authorities will need to explain why they have chosen to disregard the statutory guidance
  • extending the requirements regarding knowledge and expertise to cover other key individuals in the decision making process
  • changing the definition of 'prudent provision' to one that requires local authorities to set MRP in a way that covers the gap between the capital financing requirement and the amount of that requirement that is funded by income, grants and receipts
  • clarifying that a charge to a revenue account for MRP should not be a negative charge (ie a credit)
  • clarifying the approach to be adopted when changing the methodologies used to calculate MRP, to make it clear that an overpayment cannot be calculated retrospectively
  • introducing a maximum useful economic life of 50 years for calculating MRP, although local authorities can exceed this where there is related PFI debt with a longer term, or where the local authority has an opinion from a qualified person that the asset will deliver benefits for more than 50 years.

The revised Guidance on Local Government Investments applies from 1 April 2018. However as many local authorities will have already finalised their strategies and budgets that will be presented to council for approval, those that would face significant challenges in preparing the disclosures required by the guidance may defer inclusion of these disclosures to the first strategy presented after 1 April 2018.

Implementation of the revised Guidance on Minimum Revenue Provision is deferred to 2019/20, however early adoption is encouraged.

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