Cementing reform, by Ken Lee

6 May 10
KEN LEE The proposed local government housing finance changes have positive aspects but councils still have some work to do

The proposed local government housing finance changes have positive aspects but councils still have some work to do

The long-awaited Government proposals for the reform of local authority housing finance are out. They represent sweeping change and involve huge sums of money. They also contain some surprises.

Councils have until July 6 to respond and need to think about the direct impact of the proposals. They must also consider any indirect impact on the general fund or treasury management costs. For starters, they will need to determine just how far the modelled figures in the consultation paper resemble reality.

So just what is in the proposals? Well, as expected, authorities will either be able to ‘buy’ themselves out of a negative subsidy position or receive a lump sum in lieu of future positive subsidy payments.

The proposals are to base this arrangement on the Supported Capital Financing Requirement. For councils that redeem debt, the government is proposing to meet the cost of debt premiums. If local authorities commit to building 10,000 new homes, a 7% discount rate will be used in valuing the business – rather than the 6.5% discount rate typically used in housing transfer.

Also, the proposals will finally end pooling of capital receipts. Authorities will be able to retain their housing revenue account capital receipts provided 75% of these have been or will be used for affordable housing and regeneration projects. The remaining 25% may be used for any capital purpose.

The timing is interesting: if there is agreement, the government proposes a voluntary implementation as soon as 2011/12, subject to confirmation at the next Spending Review. If there is no agreement, the government will seek new primary legislation, possibly for implementation by 2012/13.

And the surprises? The good news is that the government is offering authorities at least 10% more to spend on managing, maintaining and repairing their stock than at present. Effectively, this is a welcome commitment to safeguarding the decent homes programme as it stands. This offer does not, however, cover the existing backlog for decent homes. Government figures put this at some £3.2bn. Instead, that would be ‘a priority’ for the next Spending Review.

The other unexpected suggestion is that a cap would be put on the overall level of housing debt in each authority. This is against the principles of the Prudential Code, which has proved that councils can and do manage borrowing prudently. The government, however, cites the importance of overall levels of public sector borrowing for its decision. This is to be enforced through powers to specify the amount of debt that could be supported and using an item in the housing revenue account.

This is ‘a full and final settlement’ and authorities will be expected to ‘manage their normal business risks without recourse to government’.

Councils must judge the impact of the proposals and the viability of their specific offer. Authorities in positive subsidy will need to determine if equivalent debt can be identified and the impact on their financing costs. They must be clear on how the costs of premiums will be funded.

Authorities also need to test the opening debt figure proposed, in a local business plan. Here, a number of factors will affect the borrowing profile in individual plans. These  include the interest rates on existing and new debt and the difference between current actual housing debt held by a council and the level of debt supported by the subsidy system.

All authorities will want to check the borrowing ‘headroom’ available under different scenarios and the shape and steepness of the likely debt profile curve over 30 years. Chief financial officers will want to look carefully at the advantages and disadvantages of the possible mechanisms and any impacts on the general fund.

Ken Lee is chair of CIPFA’s Local Authority Housing Panel

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