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Agenda Item No

 

 

The Vale of Glamorgan Council

 

Cabinet Meeting: 15 December, 2014

 

Joint Report of the Leader and the Cabinet Member for Housing, Building Maintenance and Community Safety

 

Voluntary Agreement for the Exit of the Housing Revenue Account Subsidy System and the associated Housing Business Plan 2014

 

Purpose of the Report

1.         To present the Housing Business Plan 2014 and to outline the Heads of Terms associated with the draft Voluntary Agreement for the exit from the Housing Revenue Account Subsidy System (HRAS).

Recommendations

1.         That Cabinet endorse the Housing Business Plan 2014 and the Heads of Terms of the Voluntary Agreement and refer this report to Council for approval.

2.         That Cabinet recommend that Council grants delegated authority to the Director of Visible Services and Housing in consultation with the Head of Finance, the Head of Legal Services, the Leader and the Cabinet Member for Housing, Building Maintenance and Community Safety to agree to the exit of the HRAS system once formal notification is received.

3.         That Cabinet recommend that Council grants delegated authority to the Head of Finance in consultation with the Director of Visible Services and Housing, the Head of Legal Services, the Leader and the Cabinet Member for Housing, Building Maintenance and Community Safety to agree to the final settlement amount.

4.         That Cabinet recommend that Council grants delegated authority to the Head of Finance in consultation with the Director of Visible Services and Housing, the Head of Legal Services, the Leader and the Cabinet Member for Housing, Building Maintenance and Community Safety to agree a change in the Treasury Management Strategy, in order to borrow the required settlement amount from Public Works Loans Board (PWLB).

5.         That Cabinet recommend that Council grants delegated authority to the Director of Visible Services and Housing in consultation with the Head of Finance, the Head of Legal Services, the Leader, and the Cabinet Member for Housing, Building Maintenance and Community Safety to agree any changes to the Business Plan if necessary before submission on 7th January 2015 and thereafter.

6.         THAT Cabinet recommend that Council grants delegated authority to the Head of Legal Services in consultation with Director of Visible Services and Housing, the Leader and Cabinet Member for Housing, Building Maintenance and Community Safety to finalise the terms of the Voluntary Agreement and execute the same.

7.         That Cabinet authorises the use of article 13.09 of the Council's Constitution (urgent decision procedure) to enable this report to be presented to Council on 17th December 2014, in order to meet Welsh Government deadlines.

Reasons for the Recommendations

1.         In order that pre Cabinet scrutiny is undertaken by the lead Scrutiny Committee.

2.         To accommodate exit of the HRAS system, and ensure that all key decisions and actions have been made to implement the changes.

3.         To accommodate exit of the HRAS system.

4.         To enable the Council to borrow the agreed settlement figure from PWLB, as per the terms of the Voluntary Agreement.

5.         To enable submission of a 30 year Business Plan accompanied by application for MRA (Major Repairs Allowance) by 7th January 2015 as per the conditions of the grant.

6.         To ensure that the Council meets the required deadlines for the exit of the HRAS System.

7.         In order to meet Welsh Government deadlines.

Background

2.         The Welsh Government (WG) has been in discussions with HM Treasury since 2010 with a view to agreeing a financial settlement that would enable the eleven stock retaining local housing authorities (LHAs) to exit from the Housing Revenue Account Subsidy (HRAS) system.

3.         The principle for Local Authorities buying themselves out of the system is that “every stock retaining authority should be better off than the current positionâ€. This includes not only the financial benefits from exiting HRAS but also the benefits of becoming self-financing.

4.         Welsh Government announced in June 2013 that an agreement had been reached with HM Treasury, which together with the introduction of new self-financing arrangements is expected to generate revenue savings for the eleven LHAs each year. This will allow LHAs to increase their investment in their existing stock and where possible, support the delivery of additional housing supply.

5.         There have been delays in WG providing the draft voluntary agreement and clarity on the assumptions associated with the Business Plan.  Due to the need for both the Business Plan and the Voluntary Agreement to be submitted to WG during January 2015, it will be necessary for Council to make a determination at the meeting on 17th December 2014.   In light of this requirement, Cabinet is asked to authorise the use of article 13.09 of the Council's Constitution (urgent decision procedure) to enable this report to be presented to Council on 17th December 2014. 

 

Relevant Issues and Options

6.         The key elements of the agreement between WG and HM Treasury are as follows.

7.         LHAs are required to buy themselves out of the HRAS.

8.         The £73M of annual negative subsidy payments across Wales will be replaced by interest payments of approximately £40M. This will satisfy HM Treasury’s requirement that the agreement is fiscally neutral over the longer term.

9.         The £40M annual interest payments will be converted to a lump sum settlement value a short period before the agreed implementation date. This will enable LHAs to consider their borrowing requirements in accordance with their local Treasury Management Strategy, to meet current business plan commitments and provide flexibility for LHAs to determine the type and period of loan. The Vale of Glamorgan's Treasury Management Strategy will require amendment to reflect the settlement figure.

10.      In order to fund the buy-out, Treasury require LHAs to borrow from the Public Works Loans Board (PWLB).

11.      HM Treasury requires a housing related borrowing cap to be imposed on each LHA in order to control public sector borrowing. This will be known as 'the limit on indebtedness'. Failure to comply with this will result in sanctions by Treasury. This will mean the Welsh Budget will be reduced and the reduction passed on to each LHA as appropriate.

12.      HM Treasury agreed that the eleven Welsh LHAs could exit the HRAS system in March 2015, subject to the Welsh Government securing and managing a borrowing cap through a voluntary agreement between each of the eleven LHAs and Welsh Ministers.

13.      The powers for Welsh Ministers and local authorities to enter into a voluntary agreement are provided in section 80B of the Local Government and Housing Act 1989.

14.      It is essential that all eleven LHAs agree and sign the voluntary agreement. Failure to do so will result in the HRAS remaining in place in Wales until appropriate UK legislation is passed.  This means that at least £73M will continue to be paid back to HM Treasury each year.

15.      The voluntary agreement will act as an interim arrangement until the Wales Bill comes into force and as a fall-back position should the Wales Bill fall for whatever reason. Once the Wales Bill receives Royal Assent and the appropriate provisions are commenced, Treasury will need to issue a determination to the Welsh Ministers which will set the macro borrowing cap for Wales. This will enable the Welsh Ministers, subject to consultation, to issue a determination to LHAs which will set the limit of indebtedness for each LA. There is the potential for the legislative process to replace the need for a voluntary agreement.  Attached at Appendix 1 are the current draft heads of terms of the Voluntary Agreement (the final draft is anticipated on the 19th December 2014).

16.      In June 2014 Council agreed to the terms by which it would engage with the exit process. Attached as Appendix 2 are the agreed options for the distribution method for the settlement amount as provided by WG and Appendix 3 sets out the latest draft calculation of the limit of indebtedness associated with the buyout, again this has been provided by WG. 

17.      Appendix 2 shows how the £40m of interest payments will be shared between all stock owning Welsh Council's and is distributed according to the payment made by each Council as negative subsidy under the HRAS.  Under this arrangement, each LA would pay 45.12% less than they currently pay in negative subsidy payments.

18.      As set out in Appendix 3, the limit on indebtedness is estimated to be £1.85bn based on the following:

- Total Wales borrowing to fund the estimated settlement figure £919.5M

- Existing borrowing by Welsh LHA's which is estimated to be £450.7M

- Borrowing required to meet Welsh Housing Quality Standard (WHQS) which is estimated at £358.1M

19.      The remaining £121.7M 'headroom' below the limit of indebtedness has been allocated to the LHA's based on the compromise option 3, following the consultation paper in May 2014. The Vale of Glamorgan's headroom figure is likely to be £5.2M. Taking into account the indicative borrowing required for WHQS delivery of £33.9M, and existing debt of £2.1M this will give the Vale scope for new borrowing totalling at £41.2M at any point in time.

20.      The final settlement figure will be converted based on PWLB interest rates on a 30 year maturity loan on 31st March 2015.

21.      The HRA Business Plan 2014 demonstrates that this level of borrowing is affordable over the longer term, and headroom will continue to be available as repayment of debt is made.  This available headroom below the cap along with the savings generated from exiting the HRAS will lead to significant sums being available for future spending and allow the Council to consider building new housing and wider regeneration projects.  WG requires all local authorities who retain their housing stock to submit annually an acceptable Housing Business Plan that indicates a detailed financial forecast in the form of a 30 year financial model.

22.      The Business Plan is the primary tool for a local authority’s housing landlord service and includes all assets within the Council’s Housing Revenue Account (HRA).The submission deadline for the plan is the 7th of January 2015. Formal notification of the settlement amount and Business Planning Guidance, which forms part of the application for Major Repairs Allowance (MRA) had not been received at the time of writing, therefore this plan is based on indicative figures. The MRA grant application, a pivotal financing component for the Housing Improvement Programme will be submitted at the same time as the Business Plan.

       Housing Business Plan 2014

23.      The Housing Business Plan 2014 is attached at Appendix 4.  The Plan assumes that HRAS exit goes ahead on the planned date of 2nd April 2015.  Any associated borrowing to facilitate the buy-out has been based on the amounts provided by WG at Appendix 3 The main assumptions in the plan are as follows.

24.      Gross average rents are £83.13 in 2014/15 calculated on a 52 week basis. In December 2013, the WG agreed to fix the level of rent increases for a period of 5 years from 2014/15 to 2018/19. During this period rents are assumed to increase by CPI plus 1.5% each year. After 2018/19 rents have been assumed to increase by CPI plus 1%.

25.      The Major Repairs Allowance of £2.76M per year is assumed to continue.  No inflation has been allowed for this grant.

26.      The latest survey information from Keystone Asset Management Software has been used to profile the stock investment needs over the next 30 years.

27.      Settlement debt of £63.2M charged to the HRA at a projected interest rate of 4.35%, with annual principal repayments of 2%. In later years any revenue surpluses have been offset against debt as voluntary repayments, resulting in full debt repayment by year 25.

28.      Total borrowing of £33.9M in the years up to and including 2016/17 to fund the achievement of WHQS, this amount includes any borrowing undertaken in 2014/15.

29.      Use of forecasted borrowing headroom totalling £9.8M in the years to 2019/20 to enable new build schemes and regeneration, at any one time however the peak debt will be within the limit of indebtedness by approximately £3.2M .

30.      Expenditure on Responsive and Cyclical repairs is assumed to increase by 2% inflation as per WG guidance.  There have also been additions totalling £3M over the first 10 years to facilitate an external painting programme.

31.      Additional Staffing costs of £317K per annum to both support any new estate redevelopment and tenant management, two anti-social behaviour co-ordinators and two estate 'Handy men'.

32.      To deal with the specific impacts of Welfare Reform an additional staffing budget of £100K has been included within the plan.  This budget will be used to fund staff to work with tenants providing them options to prevent them falling into arrears and/or becoming homeless as a direct result of the Welfare Reform.

33.      The Provision for doubtful debts has been increased to allow for the negative impact of Welfare Reform and in particular, Universal Credit on rent collection.  The Provision has been increased from 0.95% to 6% in Year 1 (2015/16), reducing to 3% in following years. The effect of the Universal Credit roll out, when it occurs is difficult to estimate, it is felt however that these levels are prudent.

34.      All other Revenue income and expenditure is based on the 2014/15 revised budget plus inflation.

35.      The headroom available below the limit of indebtedness along with the savings generated from the HRAS subsidy buyout and other changes to the base model, will allow further investment in new build and regeneration schemes.  For this plan, investment in new build properties and further regeneration has been set aside in the first 5 years totalling £20.1M.  Preliminary work has begun on a feasibility study for small new build sites in the short-term and further studies will be commissioned to identify any continuing programme of new build and regeneration.

36.      The latest projections are attached at Appendix G(i) and G(ii) to the Business Plan.  The total amount of debt outstanding at any one point would be £101.2M, based on a settlement buyout amount of £63.231M the corresponding Limit on Indebtedness would be £104.385M.

 37.      A summary of the movement in the financial position is included in the table below.

 

December 2013

December 2014

Difference

WHQS Target

2016/17

2016/17

No Change

 

 

 

 

Revenue Surplus at year 30

£103.5M

£142.2M

+£38.7M

Repayment of Debt

Year 18

Year 25

+ 7 years

 

 

Increased Capital Investment as a result of exit:-

 

New Build & Regeneration Yrs 1-5

 

£20.1M

+£20.1M

New Build & Regeneration Yrs 6-30 estimated

 

£144.0M

+£144.0M

Total New Build & Regeneration

 

£164.1M

+£164.1M

 

 

Borrowing Requirements

 

O/s Debt

£2.1M

£5.9M

+ £3.8M estimated borrowing for 2014/15

WHQS borrowing requirement (including 2014/2015)

 

£33.9M

£30.1M

- £3.8M estimated borrowing for 2014/15

New Investment & Regeneration

 

£9.8M

+£9.8M

Borrowing required to exit HRAS

 

£63.2M

+£63.2M

Total Borrowing

£36.0M

£109.0M

+£73.0M

 

 

 

 

Peak Debt

£31.5M

£101.2M

+£69.7M

 

 

 

 

The Peak debt of £101.2M will leave available borrowing of £3.2M

 

        Sensitivity Analysis and Risk Analysis

 

38.      The Base Plan assumes that all debt could be repaid within the 30 year period (at year 25). However, as the Plan cannot afford to begin voluntary repayments until later years, it could well be the case that as those repayments become due, current pressures may dictate that any revenue surpluses be used for reinvestment instead.   With this in mind, the sensitivity analysis has been based on a plan where only minimum repayments of debt are made (at 2% of outstanding debt per annum).

39.      There are a number of risks associated with the assumptions used in the financial projections for the Business Plan.  Some of the potential risks have been modelled to assess their impact on the viability of the business case.  The results and relative risk assessments are shown in Appendix H and I to the plan.

40.      The Business Plan is most sensitive to the cessation or reduction of the Major Repairs Allowance.   Sensitivity 5 explores this risk and whilst the Business Plan is still viable, the limit on indebtedness would be breached. In addition, the HRA Revenue surplus at year 30 is considerably reduced.

 

Resource Implications (Financial and Employment)

41.      In broad terms the 30 year Business Plan is both viable and sustainable in terms of meeting the Council's obligations on WHQS for existing stock, the resultant debt arising from the buy-out and towards tenants in terms of service delivery.

42.      There will be resources available to commence a new build and regeneration programme.  For the time being amounts used in the plan are provisions at this stage.

43.      Given the forecasted surpluses, the availability of resources to meet the Council's obligations should be relatively resilient to changes in financial conditions.

44.      Possible changes to the financial regime that the Council operates will be a further risk. For instance, should changes be introduced to the rules on prudential borrowing, without which the Council could not achieve WHQS by April 2017.

45.      There are extensive monitoring and regulatory arrangements that govern the Council’s finances.  In reality, the Council would take steps to avoid severe financial consequences and so the risks are consequently more likely to impact on the level of improvement to properties and level of service to tenants.

46.      The figures in the Housing Business Plan are based on current projections and if financial conditions should worsen then the level of investment proposed may not be achievable.

Sustainability and Climate Change Implications

47.      The principles of sustainability run through the Housing Business Plan and the delivery of the Welsh Housing Quality Standard. Communities will be strengthened by having access to good quality housing in safe and secure environments.  With regard to WHQs works, key performance indicators are in place to monitor contractors against community impact and environmental impact.

Legal Implications (to Include Human Rights Implications)

48.      It is a legal requirement of the Welsh Government that each local authority produces a Business Plan and 30 year financial forecast describing how it will provide the investment to meet the Welsh Housing Quality Standard.

49.      The Housing (Wales) Act came into force on 17th September 2014 and allows Welsh Government to repeal the relevant sections of the primary legislation that sets the framework for the HRAS system in Wales.

50.      The Draft Voluntary Agreement sets out the financial implications for the authority in terms of exiting the HRAS, and setting the limit of indebtedness. The final Voluntary Agreement is due from Welsh Government on 19th December 2014.  The agreement will need to be signed and submitted by the 19th January 2015 and delegated authority is sought for this to occur within the necessary timeframes.

51.      Failure to enter into the Voluntary agreement means that for all 11 Welsh Councils with a housing stock, there will be a delay in benefitting from the opportunities that leaving the HRAS will bring.

Crime and Disorder Implications

52.      Many of the requirements of the WHQS contribute to the Crime and Disorder agenda, in particular, the requirements of safe and secure dwellings located in safe and attractive environments.

Equal Opportunities Implications (to include Welsh Language issues)

53.      The Housing Improvement Programme improves the Council’s opportunities for assisting disadvantaged members of society.

Corporate/Service Objectives

54.      Meeting the WHQS and the Housing Improvement Programme contributes to the Council’s corporate priority that Vale of Glamorgan residents have access to affordable, good quality suitable housing and housing advice and support.

Policy Framework and Budget

55.      This report is a matter for approval by Council.

Consultation (including Ward Member Consultation)

56.      The Leader and Cabinet Member for Housing, Building Maintenance and Community Safety have been consulted.  As this is an issue that affects several wards, Ward Member consultation has not been undertaken.

Relevant Scrutiny Committee

 

57.      Corporate Resources

Background Papers

Housing Business Plan 2013

 

Contact Officer

Lori Bigglestone - Accountant

 

Officers Consulted

Hayley Selway – Head of Housing and Building Services

Alan Jenkins – Head of Finance

Debbie Marles - Head of Legal Services

Andrew Treweek - Operational Manager (Assets)

Mike Ingram – Operational Manager (Housing)

 

Responsible Officer:

Sian Davies - Managing Director

Miles Punter - Director of Visible Services and Housing

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