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HRA Self Financing – SDCT Briefing Paper

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					                                    HRA Self Financing – SDCT Briefing Paper
                                                   May 2012
    1. DCLG/LGA working groups

DCLG/LGA HRA Implementation and Transaction Working Group (TWG)


Terms of Reference attached appendix A. In addition to the Group Membership shown in the terms of
reference the following have been added:

Sally Marshall             Society District Council Treasurer representative
James Deane                Dacorum Borough Council (Corporate Finance)

TWG 1st Meeting:

The first meeting has been held and its focus was on the proposal to bring forward the HRA transaction date
from early April to end of March 2012. CLG indicated a willingness to address the concerns that authorities
had raised about this, but the expectation is that the date will be moved forward. The key issues arising from
the meeting were:
     DCLG are proposing to issue a special Item 8 Determination that addresses the impacts of the
         transaction date falling in the 2011/12 financial year.
     Without making a firm commitment, DCLG accepted the point that bringing forward the transaction
         date could lead to additional costs for borrowing authorities. LGA and Council representatives have
         been asked to develop a proposal on how these additional costs could be estimated.
     The accounting and auditing issues created by bringing the transaction date forward
     Involvement of members from CIPFA Treasury Management panel to join the TWG

CIPFA Treasury Management Panel meeting
Since the TWG meeting, a CIPFA panel meeting has discussed the issue of HRA reform and gave Heather Whicker
(DCLG) some useful feedback on a number of TM issues. DCLG has confirmed that they have taken the following actions
from it:
     Action around comparing reserves with payments, looking at whether early payment interest could be borne by
         HRA rather than General Fund
     Actions on PWLB on whether they could have forward rates and offer short term loans (it is understood that the
         answer is probably no, but PWLB would check).

The conversation covered bond issues, whether there would be a sector wide approach and using 'short-term loans' to
cover if can't do Bonds until after March. There were also other risks around the scale of the transaction, the short-timing
to raise funds and limited expertise in the sector - all of which made this high risk.

Second Meeting of TWG – May 2011
CLG have asked for a paper/list of any outstanding issues around implementation/future management of self-financing
that the TWG are not already considering, as per the action points from the meeting.
Two issues have been raised with LGA by finance staff at local authorities:
     1. whether it would be possible for money to flow directly from PWLB to CLG, rather than through council bank
         accounts and potentially the DMO for a day or two each;
     2. a concern that EU procurement rules could hinder authorities from pursuing certain options (e.g. a bond issue) if
         there isn’t sufficient time between the Bill being passed and the date of the transaction to go through required
         procurement processes.

LGA have asked that we provide details of any issues we would like raising by Monday 16 May. LGA sense is that they
are thinking longer term as well as just the transaction, so if we are not clear on any aspect of how self-financing will
operate (including the role government will take), this would seem a good opportunity to put it on the table (even if you
think now is not necessarily the time to explore it in detail).
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DCLG/LGA HRA Implementation and Transaction Senior Reference Group (SRG)
Purpose:     To support the implementation of new Self Financing system for Council Housing and that it
             links effectively to other policies and strategic drivers.

DCLG/LGA HRA TWG will report as needed to the Senior Reference Group. The SRG will also task specific
issues to the TWG to resolve. The SRG will be responsible for strategic level issues, whilst the TWG will
manage the technical, administrative and working level issues.

Group Membership:
Jon Bright                         DCLG Chair
Peter Ruback                       DCLG Local Authority Housing Finance & Decent Homes
David Kuenssberg                   DCLG Finance Business Partners and Planning & reporting
Graham Duncan                      DCLG Strategy, Revenue and Capital
Martin Wheatley                    LGA
Heather Whicker                    DCLG HRA reform implementation
4 LA Chief Executives/Treasurers   (includes SM as rep for SDCT)

    2. Transaction Date

The TWG considered a discussion paper on the potential transaction date. There are three potential dates
under consideration on which the one-off transaction could occur:
    Wednesday 28 March 2012
    Monday 2 April 2012
    Friday 29 June 2012 (based on SF starting on 1 April 2012 but with a transaction date separate from
       and after that event, ie on the last working day of the first quarter of the financial year). This is the
       least preferred as this would result in a part-year subsidy system and a part-year SF system, with a
       switch between the two mid-year, resulting in substantial additional complexity.

The choice of date is influenced by:

    a) the timing of Royal Asset of the Localism Bill (currently planned for November 2011, although this
       cannot be guaranteed) – A delay in Royal Assent need not delay the implementation of Self Financing
       for 2012/13, as long as there is sufficient time between Royal Assent and the end of the financial year
       to make final determinations on the self-financing settlement payments and the borrowing cap. So in
       theory Royal Assent as late as January/early February could still deliver the necessary legal framework
       for self financing for 2012/13.
    b) Practical constraints for local authorities – LA’s would prefer 2 April over 28 March. This was
       anticipated in the DCLG Implementation document in February and moving from this would have a
       number of impacts:
        LAs may need to resubmit borrowing strategies through full council scrutiny if any payment is due
            in the current financial year, increasing technical process and politic risk
        It raises additional complexities around the rules governing the ringfence and movements
            between the HRA and General Fund, which would need to be corrected via a short consultation
            and revision to ‘Item 8’ in the current financial year
        There may be accounting complexities in moving from subsidy to self-financing in year
        Potential additional cost for borrowing authorities (ie having to borrow 5 days earlier)
    c) Practical constraints for Central Government – PWLB & HMT have expressed strong preference for 28
       March option for the following reasons:
        All transactions occur in one financial year so only the net changes are shown in yearend accounts
        Enables more accurate quarterly borrowing forecasting
        A couple of days’ distance from the financial year end, thus allowing greater time for managing
            alongside year end which is typically associated with high volume of transactions.
        HMT have also raised the concern that if transactions fall across financial years they will press for
            greater prescription on the information and monitoring required on LA’s to manage the risk.

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It is likely that the transaction date will be brought forward to 28 March 2012. This would result in an
amending Item 8 determination. DCLG have also been asked to look at compensating LA’s taking on debt early
for the additional costs of an earlier transaction.

    3. Item 8 Determination and Subsidy Determination

Likely changes to be made to the Item 8 Determination to accommodate a 28 March transaction:

        The 2011/12 determination was issued in January 2011. It would need to be amended if the self-
         financing settlement transactions were to take place in 2011/12. The determination is likely to be
         amended to exclude the effects of all the settlement transactions from the Item 8 calculations to
         ensure that they are not included, eg the Mid-Year HRA Capital Financing Requirement and the
         Consolidated Rate of Interest.

        Ensuring the effects of the settlement transaction are excluded from the Item 8 calculations would
         mean that there would be no need to change the period to which the determination (which relates to
         the 12 months from 1 April 2011) applies.

        Borrowing by authorities to make the payment for the settlement would be taken out for a housing
         purpose. Therefore, it is reasonable that LA’s should have the ability to charge actual interest costs
         arising from borrowing for the settlement to the HRA. It is likely that the Item 8 determination will
         allow this. This would follow a similar arrangement as that for housing PFA schemes whereby the
         effects are excluded from the Item 8 debit, but the PFI payments themselves are accounted for in the
         HRA.

Subsidy implications:

The HRA Subsidy Determination (issued January 2011) applies for the year beginning 1 April 2011. The
determination will, therefore, run until 31 March 2012. The subsidy determination would need to be
amended to ensure that the effects of the settlement transactions were removed from the CRI calculations in
the same way as for Item 8.

It the settlement transactions occur on 28 March 2012, authorities receiving debt would incur an extra few
days interest costs on their borrowing for the settlement. DCLG is aware of the possibility that for some
authorities these costs could be significant. Where it emerges this is the case, DCLG would consider discussing
with Treasury the possibility of compensating authorities through the subsidy system for additional interest
incurred during those few days.

There could also be some additional debt management expenses falling in 2011-12, but DCLG would not
anticipate that these would be significant. Therefore, they would not expect to further compensate
authorities through the subsidy system.

    4. Calculation of interest–

At the TWG the LGA and the Local Government reps were asked to look at ways of calculating interest changes where LAs
taking on debt and borrowing early require compensation through the subsidy system if the transactions occur on 28
March as referred to above. Therefore: LGA have requested views on:

    a)   In relation to the proposal for an interest rate charging model, is the CIPFA treasury management panel likely
         to be best placed to advise on this? Are there any other volunteers with ideas on this, responses required
         urgently?
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    b) Are there other issues around the transaction/implementation that we need to raise now? In terms of issues
        around the future management of self-financing are there are issues on which we will need further clarity
        once the more pressing transaction issues are resolved.

Suggestions for Calculation of interest received by LGA to date:
    Keep it as simple as possible with the following options:
           o The PWLB 30 year interest rate (this is the only likely option as all loans will be taken out over
                a long period of time, even though this will be on 28 March – there will be no short term
                borrowing for a few days. A high level estimate of this cost to the Treasury/DCLG will be £7m
                for 3 days – based on £13bn debt to be taken on at interest rate of 6.5%)
           o The Commercial Market 30 year interest rates
           o The individual local authority current CRI rate
    There are some secondary sources of intelligence that could be used such as:
           o The CIPFA stats for HRA. The latest stats are for 2009/10. These can give indicative figures for
                LA current and historic rates of interest on debt (known as CRI) for HRA. If you filter out those
                LAs with no positive Capital Financing Requirement CFR (ie debt free) then you can get a range
                of existing CRI for different LAs and for each individual LA.
           o If you then look at the current PWLB rates for annuity and maturity debt you can see probably
                the likely cost of borrowing at present for taking on debt.
           o It’s a little complicated by the methodology used for setting the CRI which involves taking
                account of whether the LA has financed all its CFR from external loans or from internal
                borrowing.

    5. Accounting and Balance Sheet issues

LA representatives of the TWG were asked to consider the accounting entries and balance sheet issues.
Attached at appendix B is a paper setting out the accounting entries considered necessary by one of the
representatives to deal with the entries necessitated by the Settlement on the statement of Accounts attached
at Appendix B – Any comments?

    6. HRA transaction monitoring and reporting – Data requirements
The LGA are considering data collection requirements in advance of the settlement to build up a global picture
of “total planned borrowing and sources” to help encourage government to mitigate the impacts arising from
the scale of the transaction as well as to identify authorities that might be in need of additional support. It is
likely that the information required will include:
      The amount that authorities are expecting their final determination to be
      How much they are expecting to borrow internally (if any) and externally
      The source(s) of external borrowing and how far developed authorities plans are
      When they anticipate borrowing this money.

It is anticipated that this information may be collected in June, October, December and late February (with
authorities formally required to let government know the source of their borrowing in January 2012).

Views are sought on the likely data requirements and frequency of collection of data.
Clearly this data will be commercially sensitive and will need to be treated as such.




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                                                                                             Appendix A

                                        Terms of Reference

                         DCLG/LGA HRA Transaction Working Group



Purpose: To support a smooth HRA Self-Financing transaction.

Permanent Membership:

Peter Ruback (Joint Chair) - DCLG
Martin Wheatley (Joint Chair) – LGA
Heather Whicker– DCLG, Team Leader HRA Implementation
Nick Allan (Secretary) – DCLG, HRA Transaction
Ellie Greenwood – LGA
Stephen Edwards – DCLG, Team Leader HRA Policy
Dick Johnson – Westminster (housing finance)
Sukvinder Kalsi – Birmingham (housing finance)
** LGA to add LA members


Additional Membership:

Depending on the issues to be discussed further colleagues may attend:

DCLG attendees may include – Catherine Doherty, HRA Legislation and Communications, Jon Yates,
HCA Implementation, Jemma Kingham, Finance, Neil Riddell, Local Government Capital Finance and
Reserves, Steve Melbourne, Local Government Finance Data and Dissemination Team + HMT, Debt
Management Office/Public Works Loan Board colleagues.

Frequency: Approximately every four weeks until July 2011. The Group will then review whether to
continue and, if so, with what frequency.

Objectives

The overall objective is to help achieve a smooth Self-Financing transaction by ensuring an agreed
understanding of the issues and the processes between local authorities (via the LGA) and central
Government.

Under this the group will have a number of specific objectives:

       To allow DCLG to test the process and specific timings of the Self-Financing transaction with
        local authority practitioners to ensure, as far as practicable, that processes and timings are
        workable for local authorities.
       To identify specific risks and issues that have the potential to derail the smooth operation of
        the transaction and to assist Government to put in place actions/policies to mitigate.
       To help ensure smooth communication on the transaction between local authority and central
        Government on a ‘no-surprises’ basis and to test and, where appropriate, manage this two-
        way communication.
       To feed into the transaction and regulatory/accounting documentation to ensure that this is off
        the requisite quality to support an efficient reform.




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    Assumed Accounting Entries                                             Appendix B

    Note the treatment of the repayment to DCLG is assumed here to be a capital payment, since it is
    funded by loan funding, however no tangible assets result and therefore it is assumed an
    intangible asset is created i.e. the current value of future economic benefits to the HRA of
    retaining all its income and that this is written off or amortised to revenue over the life of the
    settlement.

    [A] LA Taking On A Loan

    [1] Taking on a loan to repay DCLG

    DR     CASH                                              £100m

    CR     LOANS OUTSTANDING                                 £100m

    [2] Repaying DCLG

    CR     CASH                                              £100m

    DR     CAPITAL PAYMENT DCLG                              £100m

    [3] Annual Amortisation of Payment over 30 year life

    CR     CASH                                              £3.3m

    DR     I&E Amortisation                                  £3.3m

    [1] Position at year end if borrow and do not repay DCLG

    Balance Sheet

    Current Assets

    Cash and Cash Equivalents                                £100m

    Long term Liabilities

    Long term borrowing                                      £100m

    Total Assets Less Liabilities                          nil

[2] Position at year end if borrow and repay DCLG

    Balance Sheet

    Current Assets

    Cash and Cash Equivalents                                £0m

    Non Current Assets

    Intangible Assets                                        £100m

    Long term Liabilities

    Long term borrowing                                      £100m

    Total Assets Less Liabilities                          nil

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