Inviting caution

There were cheers from around England’s council housing departments last month when the government published its prospectus on housing revenue account reform. After many years’ work, the proposals, at last, offer the realistic prospect of a future free of the discredited HRA subsidy system for financing council homes.

The plan is for each council to have a level of debt within its HRA fixed on the ‘settlement’ date - 1 April 2011 at the earliest - in exchange for the end of the existing HRA subsidy system. For some (including currently debt-free councils) this represents an increase in debt. These are councils which pay into the HRA system and - as Inside Housing revealed earlier this month (1 April 2010) - include five councils which would take on more than £1.5 billion between them. For others, the plans would mean reduced debt, but the loss of HRA subsidy.

The headline details seem reasonable. Every council will see at least a 10 per cent rise in assumed expenditure on management, maintenance and major repairs (the higher the expenditure, the lower the debt each HRA is assumed to be able to service). Rent convergence - the process of bringing council and housing association rents into line - would continue, with an assumed convergence year of 2015/16.

Many feel that if this offer is rejected, another opportunity for reform is unlikely to arise any time soon. We at Housing Quality Network would agree. However, that does not mean there should be no discussion about the plans. We believe there are several crucial issues each council should consider before submitting their responses to the government by July.

1. Is your HRA viable?

You might expect that the government’s proposed methodology would produce a viable HRA. However, a majority of councils’ current business plans indicated their HRAs will not be viable in 30 years’ time. Councils must ask: will the proposed changes ensure 30-year viability in our HRA?

2. A solvent HRA in an insolvent council?

Even if your HRA is viable for 30 years, this is likely to be more than can be said for your council’s general funds. Resources in the immediate future look especially tight for district councils. Will the ring fence which prevents the HRA being used to pay for non-housing services provide adequate protection under these circumstances?

3. Are local issues reflected in the plans?

When considering assumed rents and expenditure within the proposals, councils should examine: a Existing limits on rent increases (of RPI + 0.5 per cent + £2 per week); these are included in the debt calculation using averaged figures. In fact, a precise calculation can only be made on a dwelling by dwelling basis. With this in mind, will your council be adequately compensated?

Similarly, the few inner-London councils where caps on formula rents apply must be satisfied with the arrangements. The government intends to discuss these with them.

• Rent convergence year - the plans ‘assume’ the convergence year to be 2015/16. Will councils carry the cost if this date changes?
• Your projected stock investment needs over 30 years - will the proposed settlement cover any decent homes costs and the extra types of work which the July 2009 consultation paper proposed adding - for example, spending on lifts or CCTV equipment? Note that inflation-only increases in costs are assumed.

When it comes to repairs costs, the plans assert the government’s commitment to clearing £3.2 billion worth of repairs backlogs. Although under the proposed settlement the government will receive £450 million more than this from councils, it has made clear the cash is earmarked to make the proposals fiscally neutral.

Meeting the repairs bill, it adds, will be considered in the next spending review. We all know how tight resources will be in that review.

• Actual management and maintenance costs - are these adequate, again given that inflation-only increases in costs are assumed?

The plans state that the proposed discount rate - which calculates future costs at today’s prices - ‘… recognises that the actual costs incurred by an authority… may not be fully reflected’. Modelling is essential to test your HRA’s position.

4. Is the system flexible enough?

It is proposed that councils’ debt will be capped at the settlement level. This appears to apply even if a proposal to reduce the starting debt to allow for building new homes is confirmed. This may be a significant issue for some councils but will depend on the actual level of debt at present.

5. Risk

The reformed HRA would carry all of the risks councils run today when it comes to how well or badly they collect rent and manage costs. But it would also carry risks which authorities are currently insulated from to an extent - especially external factors such as interest and inflation rate fluctuations.

There are lessons to be learned from the experience of transfer housing associations here. Those with sound business plans and risk-management processes have flourished, while others have only survived by losing their independence - for example, by joining a group or transferring their stock to another association.

Hopefully, none of the five points above will prove to be a deal breaker and the HRA subsidy system will, finally, meet its end. But before that happens, councils must consider the above ahead of indicating their willingness to sign up. It will be too late to negotiate afterwards.

Robin Tebbutt is executive director (finance) of the Housing Quality Network

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