COUNCIL 12/04/2011 FOR INFORMATION AGENDA ITEM 9

BOROUGH OF POOLE CABINET 5 APRIL 2011 HOUSING REVENUE ACCOUNT CAPITAL PROGRAMME

ADDITIONAL WORKS FUNDED FROM SUPPORTED BORROWING

PART OF THE PUBLISHED FORWARD PLAN : YES

1. PURPOSE OF THE REPORT The purpose of this report is to: a) seek approval to undertake additional works within the Housing Revenue Account (HRA) 2011/12 Capital Programme. b) advise members on the issues associated with the utilisation of current Government HRA supported borrowings which will ultimately be used to provide the resources required to enable these additional capital works to be undertaken.

2. DECISIONS REQUIRED

2.1 It is recommended that Cabinet recommend to Council: a) Approval of proposal to make £3.86m of additional investment in the HRA 2011/12 capital programme to enable the Sterte Capital Scheme to be progressed. b) Approval of the proposal to maximise the Council’s utilisation of supported borrowing available to the HRA capital programme in 2010/11 to provide the resources required to enable these additional works to be undertaken with minimum impact to the General Fund. c) Note that the proposals will necessitate an adjustment to the Council’s 2011/12 Treasury Management Strategy and specifically the Treasury Management Prudential Indicators. Members of Audit Committee are being consulted about these adjustments at the time of writing this report, with a view to the Chair of Audit providing advice to Cabinet and Council in their consideration of this item.

3. BACKGROUND

3.1 Following the introduction of new capital financing regulations in 2004/05 by Government, the Council chose to limit the extent to which it has utilised the full amount of available supported borrowing approvals that could be applied in relation to the Housing Revenue Account (HRA).

1 3.2 The unapplied amount is £3.86m and arose historically on the introduction of a new requirement by Government for councils to pay over a percentage of any realised HRA Capital Receipts to Government, rather than use them to offset the HRA debt position as had been the case previously.

3.3 The unapplied amount was not therefore considered for use previously by the Council as it would have impacted adversely on the General Fund, due to the specific regulations which currently direct the operation of the Council’s overall Treasury Management function. These require the Council currently to manage one debt pool and dictate what can and can not be charged to the HRA versus the General Fund; and specifically the amount of interest on borrowing that can be re-charged to the HRA - which is considerably lower than the actual cost of money to the Council at any given time. For example if the cost of taking £1m of borrowing for HRA capital purposes costs £55k only £30k could be re-charged to the HRA under the current regulations with the residual amount falling as a cost to the General Fund. However, the introduction of the HRA Self-Financing regime from 1/4/12 as now proposed by the Coalition Government provides an opportunity for the Council to review the approach taken in previous years as the new regime will result in the debt pool being ‘de-coupled’ thereby allowing the full cost of money to be properly recharged to the HRA for borrowing that benefits the HRA. The new regime also presents opportunities for the Council to re- assess its overall debt management strategy for the HRA to ensure it optimises the future financing position of the HRA following the introduction of Self- Financing next year. These matters are discussed below.

4. DEBT CAP AND SELF FINANCING

4.1 In February 2011 the Government introduced a paper outlining their intention to replace the current HRA Subsidy System with a Self-Financing scheme for Council Housing purposes.

4.2 The proposal contains reference to the Government’s intention to introduce a borrowing limit (cap) on HRA debt once the new system is introduced in April 2012. The argument put forward for the debt cap by Government is that borrowing by local authorities for housing purposes is included in the Public Sector Borrowing Requirement (PSBR) and therefore forms part of the national deficit. The Government’s first priority is to reduce this national deficit and takes the view therefore that any borrowing should be both affordable and subject to nationally prescribed limits. The cap will be determined by Government as at 31/3/12 and it is understood that it will not be revised thereafter. Consequently, whilst the macro-economic issues involved are understood, it is also clearly important for the Council to seek to optimise the amount of ‘borrowing headroom’ that will be afforded to its HRA in future years to mitigate any risk of its ability to raise finance to meet local needs and to operate as flexibly as possible being compromised in the future.

4.3 Clarification has been sought by officers from the Government Department as to the level at which the debt cap will be set under the self -financing proposal as it stands. It has become clear from those discussions in recent weeks, that if no further HRA capital works are committed between now and 1/4/12 other than those already included in the current Capital programme, the Government will set the future debt cap at £90m - being the full amount of the HRA supported borrowing amount (£46m) plus the amount of self financing debt required to ‘buy

2 out’ of the current national HRA scheme (£44m). However, should the proposal to advance the Photo-Voltaic scheme in 2011/12 - as set out in a separate report to this agenda - is accepted by members, the Government will assume that the first £4m of the £10m of prudential borrowing needed to fund the PV scheme will count against the currently unapplied amount of HRA Subsidy debt. This would mean that the debt cap would be determined at £96m in those circumstances. Therefore, in order to optimise the position, the unapplied amount must be applied before the borrowing needed to fund the photo-voltaic scheme is taken - assuming the scheme is approved by members. If this is done the debt cap will be set at £100m on the 31/3/2012, optimising the future financial position of the HRA. These alternative scenarios and the resulting debt cap limits are set out in Exhibit 1 below.

4.4 It should be emphasised that debt cap will be set at what the Government regard as a sustainable amount for the HRA landlord to manage into the future. Optimising the debt cap now will ensure Council is able to exercise greater flexibility in managing the future position in respect of future housing stock maintenance, improvement and re-generation than would otherwise be the case.

Exhibit 1 Debt Cap – With and without PV Prudential Borrowing

Actual Government Self PV Total HRA Debt Supported Financing Prudential Debt HRA Debt Debt Borrowing Cap payment £m £m £m £m £m Option 1 Standard position 46 44 0 90 Without PV prudential borrowing Option 2 Revised position 42 44 10 96 With PV prudential borrowing Option 3 Revised position With PV prudential 46 44 10 100 borrowing and using utilising all HRA supported borrowing

Please note that the Government will not confirm the final self-financing settlement and by implication the debt cap until early 2012

4.5 Therefore consideration has been given as to the how the Council can best achieve Option 3 to both optimise the debt cap at 31/3/2012 and provide much needed resources to enable implementation of the Sterte capital scheme without creating an adverse impact to the General Fund over the period of the current MTFP. The way in which that can be best achieved has been determined by the Council’s Chief Finance Officer in consultation with PHP officers and is set out below for Members consideration and approval.

5. PROPOSAL 3 5.1 In order to achieve the combined benefits to the Council identified in paragraph 4.5 above, it is proposed that the Council changes the funding arrangement previously assumed in the HRA Capital Programme, replacing the use of monies from the HRA Major Repairs Reserve in 2010/11 to help fund the Programme and instead applying the currently unapplied supported borrowing approval of £3.86m. In order to minimise the impact to the General Fund this approach assumes that: a) Capital expenditure on the element of the Sterte capital scheme funded through this mechanism will be undertaken in late 2011; b) Internal reserves and cash balances will be used in 2011/12 with the relevant external borrowing being undertaken in early 2013. c) The HRA Self-financing proposal is introduced from 2012/13 onwards.

5.2 This approach will ensure that the General Fund will not bear any additional net cost as a consequence of applying the additional £3.86m on behalf of the HRA before the Self-Financing regime comes into force in 2011/12. This is because the solution proposed envisages that the Council will make short term use of its internal balances during 2011/12 and thereafter the full cost of the borrowing taken in 2012/13 will fall directly and fully to the HRA.

5.3 This approach is also advantageous to the HRA, as the cost of money charge to the HRA for using internal balances will be 1.3% in 2010/11 and 2011/12 as opposed to the current rate of 5.5% in the external borrowing market place. The current HRA subsidy system provides resources to cover these costs. From 2012/13 the HRA will incur interest costs entirely consistent with the Self- Financing proposal, although it has been assumed that the £3.86m will not be physically borrowed until 2013. Any additional costs that fall to the HRA which are over and above those assumed in the Budget will be managed by adjustments to the revenue contribution to capital.

6. FINANCIAL IMPLICATIONS

6.1 Financial implications are as outlined within the report.

7. LEGAL AND RISK MANAGEMENT IMPLICATIONS The key risks to be considered are; 7.1 The new legislation is not passed, preventing the Self-Financing scheme coming into effect from 1/4/2012. The Self-Financing scheme as currently proposed and on which the proposal set out in Section 5 above is based forms part of the Localism Bill. The Bill is scheduled for Royal Assent in the Autumn of 2011. There is therefore a risk at this time that the proposed scheme will not come into effect, or may be delayed in some way. Whilst it is generally felt that these risks are not high, if the self financing proposal is not enshrined within legislation then the current rules and regulations will remain in-force with the consequence that a significant proportion of the interest costs associated with the additional debt will fall as an unbudgeted liability upon the Council’s General Fund. The maximum exposure to the General Fund in those circumstances would be an annual interest charge of £96k with a

4 further £116k falling as a charge to the HRA (assuming an external interest rate on the borrowing to be taken of 5.5%). .

7.2 Self-financing proposal is subject to change before being finalised The Government’s Self-financing proposals are only in a draft proposal format. It will not be until early 2012 that the final regulations will be issued. There is a possibility therefore that the scheme may be changed in some way that impacts the mitigations designed to minimise the impact of taking up the additional £3.86m to both the general Fund and the HRA as set out in Section 5 above. It is not possible to assess the likelihood or impact of this risk at this time in the absence of anyone knowing whether or how current consultation work by the Government and/or other national considerations will change the proposals from the current indicative framework, if at all.

7.3 Lost opportunity to achieve an optimised solution The risks of not applying the unapplied borrowing amount are clear in so far as it would impact on the ability of the Council to undertake necessary improvement works and result in the future debt cap of the HRA being significantly below that which would otherwise be achieved.

7.3 Interest rate exposure. The proposal set out in Section 5 above, assumes that the Council will initially use internal reserves and cash balances in applying the supported borrowing amount and will not physically be externally borrowing until early in the 2013 calendar year. Until such time as the borrowing is actually undertaken there is a risk that interest rates will increase above those assumed in modelling an optimised solution for the Council and the HRA. This exposure will fall to the Housing Revenue account if the Self-Financing proposals are implement: or shared with the General Fund if the scheme does not come into force as expected. Whilst it is always possible that interest rates could fall, financial experts and commentators are generally of the view that interest rates are likely to increase over the next few years. So for example, if the rates were to rise to 10% by 2013, the cost of borrowing £3.86m would rise to an annual additional cost of £386k.

8. EQUALITIES IMPLICATIONS

8.1 There are no equalities issues.

9. CONCLUSIONS

9.1 The proposal set out in Section 5 above, enables the Council to maximise the future debt cap for the HRA to be set by Government in the move to the national Self-Financing regime from 1/4/12 whilst facilitating the ability of the Council to progress necessary works to Sterte Court with no adverse impact to the General Fund and at a preferential rate to the HRA based on the assumptions set out in bringing forward this proposal. Whilst officers have been innovative and worked constructively to mitigate as much of the risk of and possible future financial exposure to the General Fund and the HRA, some residual risks remain subject to the eventual determination of the Self-Financing Scheme - albeit these in themselves would in no way preclude the Council from acting. Nonetheless,

5 members will clearly want to weigh carefully the relative risks and benefits of proceeding in reaching their decision in this matter.

E WILKINSON CHIEF FINANCE OFFICER & HEAD OF FINANCIAL SERVICES

Report authors

Liz Wilkinson CFO & Head of Financial services Telephone (01202) 63.3105 Email: [email protected]

Adam Richens Head of Accountancy Telephone: (01202) 63.3399 email: [email protected]

Background Papers Nil Date 24 March 2011

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