Agenda item

Joint report of the Treasurer to the Fire Authority and Chief Fire Officer

Mark Kimberley, Interim Treasurer, and Tracy Stevenson, Temporary Head of Finance, presented the report informing Members of the Authority’s obligations under the CIPFA Prudential Code for Capital Finance and seeking approval of the proposed capital plans, prudential limits and monitoring processes set out in the report, highlighting the following points:

(a)  The objectives of the Prudential Code are to ensure that:

·  capital plans and investment plans are affordable and proportionate;

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

·  risks associated with investment are proportionate to financial capacity;

·  treasury management decisions are in accordance with good professional practice.

(b)  Estimates of the Ratio of Financing Costs to Net Revenue Stream are:

(c)  The estimate of total Capital Expenditure and Capital Funding is:

(d)  MRP re-investment refers to the use of the minimum revenue provision which is used to reduce the borrowing need rather than for the repayment of debt due to the Authority’s loans being payable on maturity. Borrowing refers to the shortfall in funding after other funding sources have been applied. This borrowing may not necessarily take place externally. The Authority may judge it prudent to make use of the cash that it has already invested for long-term purposes. In doing this, the Authority does not reduce the magnitude of the funds it is holding for these long-term purposes but simply adopts an efficient and effective treasury management strategy. This practice, known as “internal borrowing”, is common in local authorities and means there is no immediate link between the need to borrow for capital spending and the level of external borrowing.

(e)  The Capital Financing Requirement is the amount required from external sources to fund capital expenditure and represents the Authority’s underlying need to borrow for capital purposes. It will therefore be the aggregate of all capital expenditure, less any revenue or reserve contributions, capital grants or capital receipts. The above table shows that the Capital Financing Requirement (CFR) steadily increases during the period from 2022/23 to 2027/28. The CFR increases when annual capital expenditure exceeds the funding available from capital receipts, government grants and revenue sources, and decreases when the funding exceeds the expenditure. The movement in the estimated CFR figures is mainly driven by the varying levels of estimated capital expenditure for each year, with the most significant increase taking place in 2023/24 when capital expenditure is expected to peak at £8.5m.

(f)  The operational boundary is the Authority’s estimate of its total external debt, including other long-term liabilities (such as finance leases) which are separately identified. This is to reflect the most likely scenario and not the worst case. It is possible for the operational boundary to be temporarily breached to take account of unusual movements in cash flow but this should not be a regular occurrence. A variation from the operational boundary is permissible but will be reported to Fire Authority.

(g)  The authorised limit is essentially the same as the operational boundary but allows headroom over and above it to take account of unusual movements in cash flow, and therefore should be the maximum amount of external debt that the Authority is exposed to at any given time. Any proposed variation from the authorised limit must be authorised by the Fire Authority.

(h)  The liability benchmark is a projection of the amount of loan debt outstanding that the Authority needs each year to fund its existing debt liabilities, planned prudential borrowing for capital expenditure and other cash flows. This is shown by the gap between the Authority’s existing loans that are still outstanding at a given future date and the Authority’s future need for borrowing. It therefore shows how closely the existing loans book fits the future need of the Authority based on its current plans. Any shortfall will have to be met by future borrowing and any excess will have to be invested unless borrowing is prematurely repaid. However, the Treasury Management Code of Practice does not require authorities to always minimise risks by closely matching their loan debt to the liability benchmark. Factors such as interest rate expectations may lead an authority to prudently conclude that it is appropriate to have a maturity profile that does not exactly match the benchmark, or to borrow in advance of need to secure affordable interest costs. The liability benchmark is simply a tool to help the authority manage risk.

Resolved to approve the Prudential Limits for 2024/25.