The end of the housing revenue account system is finally in sight, with the new self-financing model set to start in 2012. There’s a lot to do by then
Most eyes in local government are inevitably on 2011/12 and its unprecedented budget cuts. December’s local government finance settlement, the cuts in general and the Localism Bill continue to receive plenty of press coverage and no finance professional will need reminding about the huge list of things to do following on from them.
There was, though, on the same day as the settlement, a written ministerial statement on the reform of the housing revenue account subsidy system.
The Localism Bill had already restated the intention of the Department for Communities and Local Government to replace the HRA with a self-financing system and to provide detailed indicative figures. However, the ministerial statement contained some important information that requires action now.
The minister confirmed the proposed start date for the new self-financing system as April 2012. There was already plenty for finance professionals to consider with the original start date of 2011. Now some major criteria have changed and the new date means fresh data will be used for the settlement. So it will invariably have a new look.
All authorities currently in the HRA Subsidy system will need to give a great deal of thought to the reform and to work through the probable implications – and some worst case/best case scenarios – if they are to be ready for the DCLG’s announcement of indicative figures.
The minister confirmed that the government will use the basic method for calculating the debt reallocation that was consulted upon last March. This will be based on a 30-year notional business plan of income and expenditure for each landlord. A payment to or from each council will then be made to reflect the difference between the value of the business and the housing debt currently supported under the HRA. The income assumptions built into the valuation will be based on the existing social rent policy for councils that their rents should ‘converge’ with standard housing association rents in 2015/16.
October’s Comprehensive Spending Review changed two key goalposts, putting up the Public Works Loan Board loan rate and taking away the facility for authorities to retain 100% of right-to-buy receipts.
Other points that housing finance professionals should be looking at in the context of their own councils are:
• The discount rate for calculating the net present value of each council’s housing business will be 6.5%, rather than the 7% used in the original prospectus – so remodelling is required
• Expenditure for management, maintenance and major repairs will be as identified in independent research published last year, increasing the costs used in the valuation by an average of 11.7%
• There will be funding ‘for treasury management costs and to reflect planned demolitions’ – so likely costs in these areas need to be calculated
• The government will continue to pay subsidy to local authorities for the Private Finance Initiative schemes currently funded through the HRA
• 75% of net receipts from right-to-buy sales will be returned to the Exchequer – but now ‘estimates of the loss of income from RTB sales will be built into the valuation of each council’s housing business’. Authorities will want to prepare their own estimates
• Councils will be capped on overall housing borrowing, the cap linked to the opening debt level under the self-financing system. How will this fit with your business plan?
So to get ahead, finance professionals will need to: re-model their HRA business plans; do scenario planning around likely debt amounts and costs; work carefully through the debt pooling and depreciation implications; include the self-financing system in risk management analyses; look for knock-on impacts to/from the general fund; and determine likely treasury management costs.
CIPFA will be publishing detailed guidance on debt pooling and on depreciation alongside the government announcement. Looking forward through 2011, amidst the cuts, at least the self-financing system is one change that will potentially offer the big long-term rewards of control, flexibility and planning.
Lesley Lodge is finance and policy manager at CIPFA
