CIPFA has published a second consultation on revisions to the Prudential Code for Capital Finance in Local Authorities and the Treasury Management in the Public Services Code of Practice. Although the proposals remain subject to consultation, they point towards a significant change in how local authorities calculate, present and use their prudential indicators.
The consultation follows CIPFA’s initial proposals published in August 2025 and reflects feedback received from across the sector. Responses to the latest consultation are required by 12 August 2026, with the revised Codes currently expected to apply from 2027/28.
While some of the proposals simplify the existing framework, others will require considerably more detailed forecasting and closer integration between treasury management, capital finance and medium-term financial planning.
The liability benchmark takes centre stage - The most significant proposal is to make the liability benchmark the central framework for demonstrating an authority’s borrowing requirement, investment position and longer-term treasury strategy.
CIPFA proposes replacing the existing treasury management prudential indicators with five new indicators covering the authority’s net treasury position, treasury benchmarks, existing commitments, future borrowing requirements and projected investment balances. These would primarily be presented as long-term charts, supported by medium-term data tables.
The intention is to provide members and officers with a clearer picture of how the authority’s capital plans, reserves, provisions, working capital, investments and existing borrowing commitments interact over time.
This is a logical development. The liability benchmark can provide a much more useful picture of an authority’s treasury position than a collection of indicators prepared independently. However, it will also increase the importance of the assumptions and financial information underpinning the model.
The liability benchmark would need to draw consistently from the capital programme, capital financing requirement, minimum revenue provision forecasts, reserves, cash flow projections, investment plans and existing debt portfolio. For housing authorities, further analysis may also be required to distinguish between General Fund and Housing Revenue Account borrowing requirements.
Authorities that currently update the liability benchmark once a year for inclusion in the treasury management strategy are likely to need a more integrated and regularly maintained approach.
Changes to borrowing limits and existing indicators - CIPFA proposes strengthening the link between the authorised borrowing limit and affordability. Under the revised approach, the limit would be informed by the peak of the authority’s projected liability benchmark, together with suitable headroom for unusual cash movements.
This would make the relationship between borrowing decisions, the medium-term financial plan and the resources available to meet interest, MRP and other financing costs much more explicit. It should also encourage greater scrutiny of whether proposed capital programmes remain affordable over the medium and longer term.
The operational boundary would be removed as a formal prudential indicator, despite a majority of respondents to the first consultation supporting its retention. CIPFA considers that the liability benchmark now performs a similar role and that retaining multiple measures of debt could create unnecessary confusion.
The maturity structure of borrowing and long-term treasury investments would also cease to be formal prudential indicators. This does not mean that maturity analysis is becoming less important. Authorities will still need to monitor refinancing, interest rate and liquidity risks through their treasury management practices and internal reporting arrangements.
Wider group and investment risks - The proposals also reflect growing concern about the financial risks associated with council-owned companies, subsidiaries and other group undertakings.
Where an authority has significant group activities, particularly material lending to subsidiaries, CIPFA proposes that it should consider preparing group-level prudential indicators alongside the authority’s own figures. Intra-group income and expenditure would be removed so that the underlying financial position of the wider group is not obscured by transactions between the council and its companies.
Capital strategies would also need to place greater emphasis on the ongoing monitoring of service and commercial investments. Authorities would be expected to review whether the original business case remains valid, whether forecast income is being achieved and whether a suitable exit strategy remains available.
Commercial and service investments would be removed from the scope of the Treasury Management Code and instead addressed through the Prudential Code and statutory investment guidance. This should provide a clearer separation between conventional treasury investments and wider investment activity, although it will not reduce the need for robust governance, risk assessment and performance monitoring.
CIPFA also proposes that interest receivable should no longer be deducted when calculating financing costs as a proportion of the net revenue stream. This would prevent income from loans, investments and finance leases from masking an authority’s underlying cost of debt.
Preparing for implementation - The proposed 2027/28 commencement date may appear some way off, but the practical timetable is tighter than it initially seems. For many authorities, the 2027/28 budget-setting process will begin during autumn 2026.
Changes may therefore be required to models, data collection processes, reporting templates, governance arrangements and committee timetables well before the revised Codes formally take effect. Members will also need to understand a new suite of indicators and how these relate to borrowing affordability, capital programme risks and the authority’s overall financial position.
Arlingclose will be responding to CIPFA’s consultation and will consider both the technical principles and the practical implications of implementing the proposals. We would welcome comments from authorities and other affected organisations, particularly where the proposed requirements could create modelling, data, governance or reporting difficulties.
Once the final Codes have been published, Arlingclose will be well placed to help organisations assess the impact and implement the required changes. This support is expected to include reviewing liability benchmark and prudential indicator models, updating treasury management and capital strategies, revising reporting templates, considering General Fund and HRA arrangements, and providing tailored training for both officers and elected members.
Organisations that would like to discuss the consultation can contact the technical team at treasury@arlingclose.com.
-960x640.webp&w=3840&q=75)
