OLDHAM COUNCIL

COUNCIL

25th FEBRUARY 2009

HOUSING REVENUE ACCOUNT ESTIMATES 2008/2009 TO 2011/2012 AND

FIRST CHOICE HOMES OLDHAM MANAGEMENT FEE 2008/2009 AND 2009/2010

JOINT REPORT OF THE EXECUTIVE DIRECTOR, ADULT AND COMMUNITY SERVICES AND THE INTERIM DIRECTOR OF FINANCE

1.0Purpose of Report

1.1The report informs Council of the following items: -

(a)The Housing Revenue Account (HRA) estimates for 2008/2009 and 2009/2010.

(b)Two sets of strategic HRA estimates for 2010/2011 and 2011/2012 (one based on stock transfer from 1st April 2010, and the other assuming no transfer takes place).

(c)The First Choice Homes Oldham (FCHO) Management Fee for 2008/2009 and 2009/2010.

(d)The rent increase from the 6th April 2009 and the increases for other non-dwelling rents and services charges from the 6th April 2009.

(e) The Final HRA Subsidy Determinations for 2009/2010.

2.0Executive Summary

2.1The report sets out the HRA estimates for 2008/2009 revised and 2009/2010 original following the receipt of the Draft HRA Subsidy. The opportunity is also taken to present two alternative strategic budgets for 2010/2011 and 2011/2012 (one based on stock transfer from 1st April 2010, and the other assuming no transfer takes place).

2.2In addition, the method taken in setting the FCHO Management Fee is set out in detail.

3.0Recommendations

3.1Council is recommended to;

(1)note the forecast out-turn for 2008/2009;

(2) approve the proposed HRA budget for 2009/2010;

(3)agree the management fee due to FCHO in 2009/2010;

(4)approve the proposed increases in dwelling rents, non-dwelling rents, service charges and leaseholder service charges;

(5)note the strategic forecasts for 2010/11 and 2011/12; and

4.0Introduction

4.1The budget and policy framework, approved by the Cabinet in November 2002, set out an annual timetable for the HRA budget process. Production of this report and the ability to scrutinise the budget, are key features of that framework, along with consultation with tenants, local area Boards and the Main Board of the Arms Length Management Organisation (ALMO), FCHO, set up by the Council to manage its housing stock from the 1st April 2002.

4.2This report, then based on draft HRA Subsidy Determinations, was considered and approved by Cabinet on 15th December 2008.

4.2The report was due to be scrutinised by the Performance and Value For Money Select Committee on 18th December 2008. At that meeting, consideration of the report was deferred to the meeting on 16th February. As that meeting coincides with this meeting, any proposals or recommendations made by that Committee will need to be reported directly to the Council for its meeting on 25th February 2009.

5.0Consultation

5.1The Council has set up FCHO to which it has delegated the management and repair responsibility for the HRA dwelling stock. Although the HRA estimates and rent and charges setting remain the responsibility of the Council, the opportunity has been taken to consult with FCHO and to ask for their recommendations in the setting of the HRA budget.

5.2The Main Board of FCHO considered a report regarding the FCHO budget at a meeting on 12th January 2009, when this report was included as an appendix for approval of the proposed management fee.

5.3Detailed consultation with tenants were undertaken in January 2009, led by the Service Director-Strategic Housing. This included service priorities and proposed rent increases, together with detailed financial implications.

6.0Housing Revenue Account Subsidy (HRAS) Determination

6.1The 2009/2010 Final Determinations were published on 18th December 2008. The final allowances are:

Management Allowance: £595.76 per property, an increase of 1.94% on 2008/2009.

Maintenance Allowance: £1,099.78 per property, an increase of 3.70% on 2008/2009.

Guideline Rent: £2,971.52 per property (£61.91 a week ~ on a 48 week basis), an increase of 5.32% on 2008/2009.

Major Repairs Allowance: £650.66 per property, an increase of 2.44% on 2008/2009.

ALMO Allowance: £6,912,000, remains at the same level as that received in 2008/2009.

PFI2 Allowance: £9,899,488, remains at the same level as that received in 2008/2009.

6.3Once the PFI4 scheme commences (August 2009), a revised determination will be issued to award the PFI4 credit (estimated at £6,832k) and reduce the Major Repairs Allowance (MRA) (estimated at £182k) as the transferred properties will no longer be eligible for MRA. These amendments have been included within the budget forecasts.

7.0Rent Restructuring

7.1The CLG (then ODPM), from 2002/2003, introduced changes outlined in the Government’s policy statement; Quality and Choice: A Decent Home for All – The Way Forward for Housing. This document set out a new method of calculating property rents in the social housing sector. This method proposes that rent setting should be brought onto a common system based upon relative property values and local earnings levels.

7.2Authorities were required to start restructuring their rents in 2002/2003 and complete the process over a ten-year period. 2009/2010 is the seventh year of this exercise. Although there is some Authority discretion over the precise pace and timing of the change, the Determination assumes a movement in equal instalments over the ten-year period. This Authority adopted an approach that it would phase in restructuring equally over the ten-year period (Housing Committee: 26th July 2001).

7.3As stated in paragraph 6.1, above, the draft guideline rent increase for 2009/2010 is 5.31%. For 2006/2007 and 2007/2008, however, the CLG requested that authorities limit individual rent increases to 5% ~ a request that this council complied with in both years. Last year, the CLG requested that councils revert back to the full rent restructuring process with an average rent increase of 7.06%.

7.4For 2009/10, authorities have been asked, by CLG, to limit individual rent increases to 7%. Complying with the request means that average rents will increase by 6.13%. The Council may choose to not impose the 7% limit. In this case, average rent increases would still be 6.13%, with over 200 tenants receiving an increase in excess of 7%.

7.5CLG will ‘refund’ the Council for rent ‘lost’ if the 7% limit is applied ~ albeit not until 2010/11, through a ‘Caps and Limits’ adjustment within the HRA Subsidy regime.

7.6CLG has not applied individual rent limits, previously imposed, in calculating guideline rents. This meant that the HRA Subsidy system was assuming a higher rent increase than authorities actually imposed (if they complied with the limit requests). In the current year, the Council has ‘lost’ some £314k rental income which has been assumed in HRA Subsidy but not actually charged to tenants ~ this will be fully reimbursed to the Council, by CLG, in 2009/10, through the Caps and Limits adjustment.

7.7It should be noted, however, that the caps and limits adjustment is only paid to authorities that have complied consistently, since 2002/03, with the rent restructuring regime, including individual limits.

8.0The HRA Base Budget

8.1The 2008/2009 revised budget and original budget for 2009/2010 are attached at Appendix A. The budgets reflect the financial commitments arising from maintaining the Council’s policies throughout 2009/2010.

9.0The HRA Budget 2008/2009

9.1The revised HRA budget for 2008/2009 shows a year-end working balance of £659k, some £425k higher than in the original budget. This has been reported to members on a regular basis throughout the year.

10.0The HRA Budget 2009/2010

10.1The HRA budget for 2009/2010 has been produced on the basis of the following assumptions:

(1)Further stock reductions due to Right to Buy and Demolitions assumed to be 65 in total during 2009/2010;

(2)Void levels remaining at their current level;

(3) Individual rent increases limited to 7%;

(4)Inclusion of £223k for tenant consultation and ballot costs associated with the stock options process;

(5) The level of FCHO management fee is at the level determined by the formula as agreed between the Council and FCHO. The details of the management fee formula calculation are set out in further detail at paragraph 11.0 below;

(6)The PFI4 scheme will commence from 1st August 2009;

(7)The maintenance of a PFI2 Reserve to ensure all future financial obligations (to the HRA) for the scheme can be met;

(8)A provision of £30k has been made for a grant to the Independent Housing Aid Centre. This is a grant to assist in the costs associated with the provision of services provided to Council Tenants;

(9)No voluntary debt repayment provision in any year; and

(10)There are 48 rent weeks in 2009/2010.

10.2An analysis of variances between 2008/2009 revised budget and the original budget for 2009/2010 is given in Appendix C.

10.3The Director of Finance recommends that the HRA should maintain a balance of at least £750k.

11.0The FCHO Management Fee 2008/2009 and 2009/2010

11.1Management Fee 2008/2009

11.1.1There are no proposals to amend the fee for 2008/2009.

11.2Management Fee 2009/2010

11.2.1The financial year 2009/2010 is the eighth year of the operation of the Council’s ALMO. The Management Fee for the this year has been calculated on the basis specified in the agreement using a formula that takes account of the following;

(1)The increase in HRA Subsidy Management and Maintenance Allowances from 2008/2009 to 2009/2010;

(2)The reduction in stock numbers from April 2007 to April 2008;

(3)Allowances for certain costs, associated with PFI2 properties, that are not the responsibility of Oldham Retirement Housing Partnership.

11.2.2Using this formula allows a calculation of the Management Fee that mirrors the factors contained in the HRA Subsidy that this Authority receives and is undertaken on a clear and open basis. It also allows the conversion of the Management Fee into an “allowance” per property managed. This calculation covers all services provided with the exception of heating energy costs which are fully reimbursed (FCHO is still responsible for energy costs and TV aerial maintenance costs in PFI2 properties).

The method and calculation of the Management Fee is shown at Appendix B.

12.0Dwelling Rent, Non-Dwelling Rents and Services Charges and Leaseholder Charges Increases 2008/2009

12.1The HRA 2009/2010 budget has been calculated taking into account a 7% limit on individual rent increases, as outlined at paragraph 10.1 above. Normal practice is to recommend increases in non-dwelling rents and services charges separately for approval. The table below shows the proposed increases:

Rent and Service Charge / Proposed Increase
% / Value per Year
£k
1 / Garage rent / 5.0 / 17
2 / Other services charges (e.g., concierge service) / 5.0 / 4
Total / 21

12.2Heating charges were increased from October 2006 and the programme to install meters and controls is now complete. A 5% price increase was introduced in April 2008 and again in October 2008 to reflect large increases in energy costs over the last twelve months.

12.3A comprehensive review of central heating charges is currently underway. This will review latest energy costs, forecast income levels and any problems that have arisen since the introduction of meters. This review will be concluded by January 2009 in order that any recommendations can be taken into account in determining the final budget position for 2009/10 (and beyond). In the meantime, these estimates assume a further 5% increase in heating charges from April 2009, generating additional income of £66k to meet anticipated additional energy costs (met by FCHO).

12.4Leaseholders who pay service charges will see those charges rise by inflation (5.0%) from 1st April 2009. This is estimated to generate additional income of approximately £12k.

13.0Risk Assessment

13.1The HRA budget set out in this report is based on our joint best assessment of the likely financial position of the HRA in 2008/2009 and 2009/2010. Attached at Appendix D is a risk register and at Appendix E a risk assessment as at December 2008. Forecasting is extremely difficult and there are a number of key issues that, should they change, will affect the proposed budget. These are set out below.

13.2As stated in paragraph 10.1 above the budget has been prepared on the basis that there are further reductions in stock of 65 properties due to Right to Buy sales and demolitions. There is a potential that stock losses may exceed this level. Firstly, the HMRF prospectus includes a significant amount of demolition, the timing of which is uncertain. Secondly, there will be further demolitions within the PFI4 scheme. Each additional property lost would cost the HRA £1,700 in a full year, so if a further 100 were lost throughout 2009/2010 the overall loss would be in the region of £85k, which would need to be accommodated within the total HRA budget.

13.3There would be a risk to income if the average void level were higher than the 5% budgeted for in 2009/2010. The impact upon income is that a 1% increase in voids costs approximately £400k in a full year

13.4The creation of an ALMO to have responsibility for the management and maintenance of HRA housing stock introduces an area of risk for the HRA. The replacement of directly controlled budgets with the payment of a management fee to an arms length company is an additional risk for the HRA. In addition the need for FCHO to restructure to meet changing service delivery requirements and the reduction in stock numbers will need the support of the Council and the HRA to achieve.

14.0Strategic HRA estimates 2010/2011 and 2011/2012 (No Transfer)

14.1The projected forecasts for 2010/11 and 2011/2012 are attached at Appendix F. The projection reflects the financial commitments arising from maintaining the Council’s current policies. Due to the level of ongoing uncertainty over stock losses the figures identified are likely to be subject to change as the future becomes more certain.

14.2The projections made indicate a substantial worsening in the financial position of the HRA in 2011/12, with a negative balance of £1,260k forecast. The principal reason for this is the replacement of the ALMO allowance (£6,912k) with a capital allowance for ALMO borrowing (£4,912k) from 2011/12 onwards. The financial position is then exacerbated by the real terms annual reduction in HRA Subsidy.

14.3It is illegal for the Council to budget for a deficit balance in the HRA and, therefore, corrective action would be required before the 2011/12 budget is set. The only real choice for the Council would be to reduce the FCHO Management Fee by some £2,000k (which would simply move the ‘problem’ from the HRA to FCHO).

14.4Whilst not detailed in Appendix F, the forecast for 2012/13 also shows an in year deficit of £2,917k. This is likely to increase year on year thereafter, requiring even further reductions to the FCHO Management Fee.

15.0Strategic HRA estimates 2010/2011 and 2011/2012 (Transfer ~ April 2010)

15.1The projected forecasts, assuming that a stock transfer occurs in April 2010, for 2010/11 and 2011/2012 are attached at Appendix G.

15.2As the account will only be dealing with properties within the two PFI schemes, it ought to remain fairly balanced on an annual basis ~ eligible debt will continue to be met from subsidy, with rents and other Subsidy allowances effectively passed through to the PFI reserves.

15.3It is possible that the rent income for 2011/12 may be substantially lower due to early demolitions within the PFI4 scheme. Precise timings and, therefore, financial implications will not been known until early in the new financial year. There are, however, sufficient balances forecast to accommodate any temporary rent losses.

15.4Whilst not detailed in Appendix G, the forecast for 2012/13 shows that the HRA continues to remain fairly balanced. This is likely to remain so for future years.

16.0Treasurer’s Comments

16.1Proposals set out in this report are based upon our joint best assessment of the likely financial position for 2009/2010. Forecasting is again extremely difficult given the uncertainty caused by movement in stock numbers, void levels and the impact of introducing heat meters and controls. This makes it difficult to forecast rental income, heating income and HRA Subsidy.

16.2Appendices F and G show quite clearly the marked differences in the financial health of the HRA between a stock transfer happening and not happening. It is quite clear that without a stock transfer the HRA is not financially viable unless it reduces the FCHO Management Fee by at least £2,500k every year from 2011/12 ~ this, of course, would mean that FCHO would have to make very severe reductions in its service provision to tenants.

17.0Corporate Human Resources Comments

17.1None.

18.0Legal Services’ Comments

18.1It is statutory requirement that the Authority set a balanced HRA budget, having due regard to an appropriate level of working balances and giving due consideration to the risks involved. (BB)

19.0IT Implications

19.1None.

20.0Property Implications

20.1None.

21.0Environmental and Health and Safety Implications

21.1There are none specific at this stage.

22.0Community Cohesion Implications (Including Crime and Disorder Implications in Accordance with Section 17 of the Act)

22.1Continuation of a robust consultation process open to all tenants and tenants representatives will ensure maximum engagement and provide the opportunity for the views of all groups to be considered in setting the HRA budget and the provision of services to tenants.

22.2The funding the HRA receives from the Subsidy Determination supports the Council in achieving the aims set out in its Housing Strategy.

23.0Forward Plan Reference

23.1Key Decision – Yes.

24.0 Conclusions

24.1 Central Government continues to tightly control the level of Housing Subsidy and the level of the rent increase, effectively limiting the options available to the Cabinet in setting its HRA budget. As in previous years, rent increases will be above inflation whilst management and maintenance allowances remain lower than inflation.

24.2Through the procedures set out in the agreed Performance Management Framework regular monitoring of the HRA will take place. This will help ensure that issues arising can be managed effectively. It is proposed that the regular HRA monitoring reports continue to be produced for the Overview and Scrutiny Commission to keep members appraised. Those reports, for information, will also be presented to the FCHO Board.

24.3The financial case for a stock transfer is very clearly demonstrated.

The following is a list of the background papers on which this report is based in accordance with the requirements of Section 100D (1) of the Local GovernmentAct 1972. It does not include documents, which would disclose exempt or confidential information as defined by that Act.

Files held in the Director of Finance’s Offices

The above papers and documents may be inspected during normal office hours at Room 422, Civic Centre, Oldham (Contact B P Shinn, Tel 0161 911 4976)

HRA Income & Expenditure Account 2008/2009 / Original Budget 2008/2009 / Revised Budget 2008/2009 / Variance 2008/2009 / Original Budget 2009/2010 / Year on Year Variance (To Revised) / Appendix A
A / B / C (B-A) / D / E (D-B)
£ / £ / £ / £ / £
Income
Dwellings rents (gross) / -38,099,820 / -38,570,140 / -470,320 / -40,202,390 / -1,632,250
Non-dwelling rents (gross) / -662,240 / -632,830 / 29,410 / -664,480 / -31,650
Charges for services and facilities / -2,330,270 / -2,249,660 / 80,610 / -2,356,530 / -106,870
Contributions towards expenditure / -7,561,720 / -7,511,080 / 50,640 / -7,572,310 / -61,230
HRA Subsidy ~ PFI Credits / -9,899,490 / -9,899,490 / 0 / -16,731,180 / -6,831,690
HRA Subsidy ~ Major Repairs Allowance / -8,108,450 / -8,108,450 / 0 / -8,021,190 / 87,260
HRA Subsidy ~ Caps and Limits / 0 / 0 / 0 / -301,610 / -301,610
Total Income / -66,661,990 / -66,971,650 / -309,660 / -75,849,690 / -8,878,040
Expenditure
First Choice Homes Management Fee / 23,785,040 / 23,785,040 / 0 / 23,489,990 / -295,050
PFI 2 & PFI4 Allowances / 13,021,480 / 13,021,480 / 0 / 20,307,030 / 7,285,550
HRA Subsidy ~ Housing Element / 326,090 / 872,820 / 546,730 / 1,894,930 / 1,022,110
Rent, rates and other charges / 6,519,900 / 6,810,620 / 290,720 / 7,000,190 / 189,570
Depreciation and impairment of fixed assets / 12,199,480 / 12,199,480 / 0 / 12,112,220 / -87,260
Debt management costs / 145,000 / 95,000 / -50,000 / 95,000 / 0
Increased provision for bad or doubtful debts / 385,200 / 385,200 / 0 / 397,650 / 12,450
Total Expenditure / 56,382,190 / 57,169,640 / 787,450 / 65,297,010 / 8,127,370
Net Cost of HRA Services per I & E Account / -10,279,800 / -9,802,010 / 477,790 / -10,552,680 / -750,670
HRA share of Corporate and Democratic Core / 846,190 / 375,000 / -471,190 / 384,380 / 9,380
0
Net Cost of HRA Services / -9,433,610 / -9,427,010 / 6,600 / -10,168,300 / -741,290
Interest payable and other similar charges / 11,835,100 / 11,859,730 / 24,630 / 12,150,150 / 290,420
Amortisation of Premiums and Discounts / 1,584,300 / 1,009,300 / -575,000 / 1,009,300 / 0
Interest and Investment Income / -40,080 / -48,830 / -8,750 / -44,180 / 4,650
-Surplus/Deficit for the year on HRA Services / 3,945,710 / 3,393,190 / -552,520 / 2,946,970 / -446,220
Statement of Movement on HRA Balance / Original Budget 2008/2009 / Revised Budget 2008/2009 / Variance 2008/2009 / Original Budget 2009/2010 / Year on Year Variance (To Revised) / Appendix A
A / B / C (B-A) / D / E (D-B)
£ / £ / £ / £ / £
-Surplus/Deficit for the year on HRA Services / 3,945,710 / 3,393,190 / -552,520 / 2,946,970 / -446,220
Net additional amount required by statute / -3,016,710 / -3,000,180 / 16,530 / -3,447,630 / -447,450
-Increase/Decrease in the HRA Balance / 929,000 / 393,010 / -535,990 / -500,660 / -893,670
HRA Balance brought forward / -1,163,530 / -1,052,280 / 111,250 / -659,270 / 393,010
HRA Balance carried forward / -234,530 / -659,270 / -424,740 / -1,159,930 / -500,660
Note to Statement of Movement on HRA Balance / Original Budget 2008/2009 / Revised Budget 2008/2009 / Variance 2008/2009 / Original Budget 2009/2010 / Year on Year Variance (To Revised)
A / B / C (B-A) / D / E (D-B)
13 / £ / £ / £ / £ / £
Items included in HRA I & E account but excluded from the movement on HRA balance for the year
Differences in accordance with SORP (impairment) / -4,091,030 / -4,091,030 / 0 / -4,091,030 / 0
Government Grants Deferred / 0 / 0 / 0 / 0 / 0
-4,091,030 / -4,091,030 / 0 / -4,091,030 / 0
Items not included in HRA I & E account but included in the movement on HRA balance for the year
Transfer to / from (-) Major Repairs Reserve / 0 / 0 / 0 / 0 / 0
HRA contributions to Minimum Revenue Provision / 158,320 / 158,320 / 0 / 191,900 / 33,580
Revenue contribution to capital expenditure / 916,000 / 932,530 / 16,530 / 451,500 / -481,030
1,074,320 / 1,090,850 / 16,530 / 643,400 / -447,450
Net additional amount required by statute / -3,016,710 / -3,000,180 / 16,530 / -3,447,630 / -447,450

Appendix B