AGENDA ITEM 7X

BOROUGH OF POOLE

COUNCIL HOUSING FINANCE WORKING PARTY

17OCTOBER 2011

UPDATE ON GOVERNMENT’S SELF-FINANCING PROPOSAL FOR THE HOUSING REVENUE ACCOUNT

PART OF THE PUBLISHED FORWARD PLAN: No

1.PURPOSE OF THE REPORT

1.1The purpose of this report is to outline and update the Council Housing Finance Working Party on the latest position in respect of the proposal to implementself-financing within Council Housing.

2.DECISIONS REQUIRED

2.1Thatmembers:

a)Note the latest position in respect of the Housing Revenue Account (HRA) self financing system.

b)Note that, subject to the progress of the Localism Bill, the payment date for the Self Financing debt settlement will be the 28 March 2012.1

3. RECAP ON SELF FINANCING PROPOSAL

3.1In February 2009 the Council, in partnership with Poole Housing Partnership, established a Council Housing Options Appraisal Working Party to examine options for the future funding of the Council’s Housing Stock.

3.2Since then the work of the group has been heavily influenced by the Government’s national policy towards the future funding of Council owned Housing stock which concluded with a report and various presentations around the Governments proposals to implement a new Housing Revenue Account (HRA) self financing proposal which is being introduced with the objectives of;

a)Providing local authorities with the resources, incentives and flexibilities they need to manage their own stock for the long term and to drive up quality and efficiency.

b)Providing tenants with the information they need to hold their landlord to account by replacing the current opaque (HRA Subsidy) system with one which has a clear relationship between the rent a landlord collects and the services they provide.

3.3 A further objective of the proposal is to move away from short term financial planning and enable a future whereby Councils and ALMOs canplan ahead for investment, carry out effective asset management and end the unpopular system of HRA “negative” subsidy.

3.3The proposal will not end the statutory requirement for local authorities to maintain a separate ring-fenced Housing Revenue Account (HRA).

3.4The whole self financing proposal and the valuation of the settlement will be premised on Council’s continuing to implement the Governments rent restructuring policy. Any future deviation from this policy will undermine the Housing Revenue Account and the Thirty Year Business Plan.

3.5Introduction of the new system is subject to the Localism Bill obtaining Royal Assent in the autumn of this year.

3.6Housing Revenue Account – Self Financing System – How it will work

3.6.1The Government will calculate the individual value of each local authority’s housing landlord business which they will then compared to their existing level of HRA debt in order to establish a sustainable self- financing settlement.

If the valuation is higher than the current debt supported by the HRA subsidy system, the authority will be required to pay Government the difference.

Poole’s initial valuation has been assessed at £89.7m which means once the current HRA subsidy debt is deducted Poole will be required to make a payment of £43.8m to the Department of Communities and Local Government (DCLG). In order to finance this payment the expectation is that the Council will borrow £43.8m (on behalf of the HRA) by way of additional borrowing.

A consequence of making this payment is Poole will no longer have to make the annual (approx) £5m HRA subsidy payment to CLG, often referred to as the tax on tenants. Instead the HRA will need to meet the interest and capital repayment costs associated with its £99.7m of total debt (£45.9m current HRA subsidy debt, £10m for the prudential borrowing funded photovoltaic cells project, and the new £43.8m of debt required to be taken out to finance the payment to the Government).

3.7Other Implications of the new system

3.7.1HRA - Borrowing Limit

The Government have confirmed that they will place a borrowing limit (cap) on HRA debt after self-financing is introduced. For Poole this has been initially assessed at £99.7m. The debt position on the final day of a financial year will be used to determine if the debt cap has been breached.

3.7.2Capital Receipts

The Government will continue to retain 75% of any sales under the Right to Buy (RTB) system. The remaining 25% will continue to be retained as will full local flexibility as to how it is used. Pooling for non RTB receipts remains although some of the rules maybe relaxed.

3.7.3Reopening the self-financing settlement

The Government will retain the right to re-open the self–financing settlement to reflect changes in Government policy which have a material impact on the viability of the 30-year model underpinning the settlement.

3.7.4Housing Benefit – Cost Control

Government intend to continue with the method by which it controls Housing Benefit issued to Council tenants by only recognising rent up to a specific threshold, referred to as the “limit rent”. However this position will be considered further to the policy to abolish Housing Benefit and introduce a Universal Benefit Credit.

3.7.5Housing Revenue Account – Ring-fence

In line with their emphasis on localism, the present government does not intend to issue new guidance on the operation of the ring fence which they feel is already fit for purpose. Their expectation is that local authorities will continue to make their own decisions based on the principle of “who benefits pays” and follow existing guidelines.

3.7.6Debt Management

The external debt of the Local Authority is currently managed as one pool of debt across the entire Council. The proposal under the self financing model is that two separate pools of debt are created, one for the General Fund and the other for the HRA. Such an approach will clearly limit the impact that HRA business decisions have on the General Fund and vice versa. A two pool model will also reduce complexities around calculating the HRA share of debt charges and assist in establishing a direct link between rental income and debt costs.

3.7.7Depreciation

Currently the depreciation charge to the HRA is credited to a reserve specifically ring-fenced for future capital investment purposes and is derived from a specific subsidy element known as the Major Repairs Allowance. This allowance will no longer be available under self-financing and hence will no longer be calculated by Government and be available to be used as the depreciation proxy by local authorities.

The proposal is a depreciation charge, consistent with the principles of International Financial Reporting Standards (IFRS), which considers a number of significant components of a dwelling and utilises asset maintenance / stock condition data and assigns a value, component life and remaining life.

3.8.Revised Housing Revenue Account

3.8.1Analysis of the self-financing proposals confirms that after an initial 5 year period the finance available under the self financing proposal will be sufficient to meet the investment needs as well as completely repay the initial £99.7m of debt by the end of year 24 of the plan. From year 25 onwards the Council should be able to invest its entire rental income in the maintenance, capital investment or management of the stock. Alternatively at this point, consideration can be given to the potential for regeneration or new build.

However the Council and Poole Housing Partnership will need to closely manage the capital expenditure needsduring the first 5 years of the model as they are currently in excess of the resources available. It should though be appreciated that this position is far better than it would have been if the current HRA subsidy system continues.

4.Latest Position

4.1Council Housing Finance and HRA Reform

4.1.1The Localism Bill has successfully completed the report stage in the House of Lords. To date there have been no objections or amendments and Royal Assent is expected in November 2011.

4.1.2The Department of Communities and Local Government (DCLG) Senior Officershave confirmed that the total amount of the national debt repayment has not been remodelled and they are still using the same formula as previously specified. However the higher than anticipated September Retail Price Index will mean that the settlement figure will differ from that previously announced (circa £44M) although hopefully , not significantly.

4.1.3Local Authorities have provided all the data required to enable the Government to calculate the Self Financing settlement (referred to as the Base Data Return).

4.1.4DCLG will issue draft figures in respect of both the self financing proposal and the traditional HRA subsidy determination on 11th November 2011 as part of a consultation process with a response deadline of 23rd December 2011.

4.1.5Final self financing settlement details will be issued no later than 28th January 2012 (DCLG are not sure of actual date yet) and it is expected that Local Authorities will set budgets and formally approve borrowing (debt) plans in February 2012.

4.2Making the Payment

4.2.1The payment date has been set as the 28 March 2012. This is the date that Poole will need to pay over circa £44m to DCLG.

4.2.2The council has alerted its bank to the fact that it is likely to receive (via extra borrowing) and then make a payment of circa £44m on this date. This is to ensure that internal controls within the banking system in respect of large or unusual payment do not prevent the payment being made.

4.2.3The UK’s largest financial institutions have joined Local Authorities in expressing concern that Local Authorities will be drawing money from the Government’s Consolidated Loans Fund (via Debt Management Office borrowing) only to repay the exact same money into the same Government account being where Department of Communities and Local Government amounts are held. The concern is attached to the huge risk posed by having such significant sums (approximately £13bn) flushing through the electronic financial system.

4.2.4As the 28 March 2012 actually falls within the 2011/12 financial year, Council will need to approve revised 2011/12 prudential indicators which provide the framework and threshold within which the Council can undertake external borrowing. These indicators are normally approved by Audit Committee prior to Council, therefore arrangements for a special Audit Committee will need to be made (next scheduled Audit Committee 29 February 2012).

4.2.5Danny Alexander announced at the Liberal Democrats conference on the 18 September 2011 that Public Works Loan Board (PWLB) interest charges will be reduced in respect of any amounts drawn down in support of the HRA self financing settlement. The reduction will reverse the effect of the 1% increase above government gilts that was imposed as part of the 2010 comprehensive spending review.

4.2.6The Debt Management Office (DMO) who administer the PWLB debt are in the process of setting up a new web portal for Local Authorities to use in drawing down any loans which support the self financing settlement. The portal should be available in December for training and familiarisation. The facility will go live once the final settlement details have been issued in January and will close at the end of play on the 26 March 2012 (allowing a 2 day clearance process for payments to local authorities of amounts borrowed).

4.2.7The Council is actively in discussion with its Treasury Management Advisors to consider the options available to the Council in respect of the payment, including consideration of using internal resources andtaking on additional external, including PWLB, debt. Consideration is also being given to the structure of any additional debt to ensure it ties into the HRA’s Business Plan (debt not taken on for longer than required) and to ensure the Council maximises any advantage in the current debt yield (makes the minimum interest payment possible). This work will also ensure that the proposals are equitable to the Council’s General Fund.

4.2.8As part of the 2012/13 Treasury Management Strategy, Audit Committee and Council will also need to approve the borrowing strategy associated with the self financing settlement along with the principles for splitting (or otherwise) of the Council’s current external debt between the Housing Revenue Account and General Fund.

4.2.8TheGovernment is working to resolve a number of residual technical issues including ensuring that any extra debt taken around the 28 March will not have a detrimental impact on either the HRA or General Fund in 2011/12. The resolution of these issues are likely to require amendments or updates to the following documents;

  • Department of Communities and Local Government - 2011/12 – Housing Revenue Account subsidy determinations (due January 2012)
  • CIPFA - The Code of Practice on Local Authority Accounting in the United Kingdom
  • CIPFA – Prudential Code of Practice for Treasury Management

4.3Housing Revenue Account 2012/13 Budget and rent setting

4.3.1The 2012/13 HRA Budget and rent setting report is due at Communities Overview and Scrutiny Committee on the 17 January, Cabinet on the 14 February and Council on the 23 February 2012. The implications on this timetable bearing in mind the Government have not yet set a date for the release of the final HRA determination / Self Financing Offer are currently being considered.

4.3.2In support of the budget and self financing proposal Poole Housing Partnership are current reviewing the 30 year HRA Business Plan which will show all likely income and expenditure, all assumptions made and the financial ability (or otherwise) to service the investment required in the Council’s Housing Stock.

4.3.3Council House rent levels increase in line with the Government’s rent restructuring formula. This process also limits rent increases to the September retail price index (rpi) + 0.5% + £2 per week. Based on estimate of the September RPI being approximately 5% then rents are considered likely to rise by 6% or more next year. DCLG Officers have confirmed that they do not have any current plans to mitigate this increase.

4.3.4The whole self financing proposal is premised on rents rising over the next 30 years in line with the Governments Rent Restructuring formula. Any council not increasing rents will potentially find that their Business Plan for investment in the stock over the next 30 years will be undermined as will their ability to make their necessary debt repayments.

4.4Right to Buy Discount

4.4.1In early October the Government announced their intention to raise Right to Buy discounts to a level which makes the scheme attractive again and rejuvenates housing stock. The intention is that the money raised is used to repay debt and fund more affordable housing, with an aim of building an additional affordable unit for every home bought.

4.4.2The Government intends to set out the full details of the scheme including the level of discount and the timetable in their Housing Strategy which it is anticipated will be published shortly. They also acknowledge that Council’s will need to be able to cover the debt associated with any properties sold and are working on the details of the mechanism.

5.CONSULTATION

5.1These changes are some of the most important changes in many years to the way Council housing is financed. The changes have been implemented by the Government in response to proposals on self financing made by the housing sector.

5.2Residents have been involved in the stock options process and will need to be kept involved now in the process of moving to self financing.

5.3Residents representatives are already represented on the Working Party. In addition, Housing Strategy Panel has been kept up to date with developments on self financing, and this will continue. Furthermore, it is proposed to arrange meetings with the Residents Panel and to have a Self Financing “special” version of the At Home magazine.

56. FINANCIAL IMPLICATIONS

56.1 Financial implications are as outlined within the report.

67.LEGAL IMPLICATIONS

67.1There are no legal implications.

78.RISK MANAGEMENT IMPLICATIONS

78.1This report addresses matters outlined in the following risk which appears on the Council’s Corporate Risk register:

  • The Government has announced its intention to legislate for a self financing model to fund council housing effective from April 2012. (Ref : KCR014)

78.2Other risks associated with self-financing include:

  1. The risk in financing management and maintenance of the housing stock moves from central Government to Local Government;
  1. The risk associated with future rent increases will sit very firmly as a local decision.
  2. However as the self financing valuation and settlement is premised on Council’s continuing to implement the Government’s Rent Restructuring formula then any deviations will potentially undermine the financial viability of the Poole’s Housing Revenue Account.
  1. The Housing Revenue Accounts will be committed in the first instance to the repayment of existing debt.
  2. Only once debt is repaid can consideration be given to the maintenance standard of the properties and then in turn the quality of the Housing Management service.
  1. Income could drop as a result of the changes proposed to Housing Benefit such as:

Proposals to end Housing Benefit being paid direct to Landlords, this could significantly reduce rent income levels

Reduction in the amount paid of Housing Benefit

Increases in “Non-Dependant” charges

The need to increase bad debt provisions within the HRA

89.EQUALITIES IMPLICATIONS

9.1Proposed revenue budgets for 2012/13 onwards should not impact on front line service provision, and the level of capital disabled adaptations in the estimated Capital Programme should enable us to meet the needs of disabled and older residents to have aids and adaptations fitted to support their independence.

9.2Older and disabled residents have been positively affected by the changes to heating and communal utility charges; the majority have benefited from reduced personal heating charges, and a lower split of communal utility costs between all residents benefiting from these services. Furthermore the majority of older residents have seen a reduction in their Supporting People and Sheltered Warden charges for 2011/12

9.3The services of the officers visiting homes as part of the Financial Inclusion & Fuel Poverty Programme have and continue to assist tenants in maximising their entitlement to national benefits and help mitigate increases in rents. This work becomes even more important as the current changes, and planned further changes, in benefits take effect.