Agenda item

To present to Council the recommendations of the Cabinet for setting of a prudent Minimum Revenue Provision (MRP) for the repayment of debt, and to report on the status of the ongoing review of MRP policy and any further advice on the options to revise the policy.

(a)       That Members approved for the Council Fund (CF) unfinanced capital expenditure, changing the MRP policy for  supported and unsupported borrowing from ‘straight line’ to the ‘annuity’ method from 2017/18.  This would mean that:-

• The historic balance of outstanding capital expenditure funded from supported borrowing as at 31 March 2017, will be provided for on an annuity basis over the remaining 49 year period (as it was changed to straight line over 50 years in 2016/17)

• 2016/17 capital expenditure funded from supported and unsupported borrowing (and future years) will be provided for based on the asset’s life on an annuity basis

(b)       That Members approve for the Housing Revenue Account (HRA):-

• Option 2 (Capital Financing Requirement Method) be used for the calculation of the HRA’s MRP in 2018/19 for all capital expenditure funded by debt.

(c)        That Members approve that MRP on loans from the Council to NEW Homes to build affordable homes through the Strategic Housing and Regeneration Programme (SHARP) (which qualify as capital expenditure in accounting terms) be as follows:-

• No MRP is made during the construction period (of short duration) as the asset has not been brought into use and no benefit is being derived from its use.

• Once the assets are brought into use, capital repayments will be made by NEW Homes. The Council’s MRP will be equal to the repayments made by NEW Homes. The repayments made by NEW Homes will be classed, in accounting terms, as capital receipts, which can only be used to fund capital expenditure or repay debt which is a form of MRP. The capital repayment/capital receipt will be set aside to repay debt, and is the Council’s MRP policy for repaying the loan.

The Corporate Finance Manager introduced the report to present the recommendations of Cabinet for the setting of a prudent Minimum Revenue Provision (MRP) for the repayment of debt, and to report on the status of the ongoing review of MRP policy and any further advice on the options to revise the policy. 

The Corporate Finance Manager provided background information and referred to the recent review of the Council’s method of calculating the Minimum Revenue Provision policy and the merits of moving to a different model similar to a number of English local authorities.  He reported on the three main options for consideration and the difference between the straight line and annuity methods as detailed in the report.  The Corporate Finance Manager also explained the reasons why the straight line method was favoured in the 2016/17 review and why the annuity method could be considered at least as prudent.  He drew attention to the table in the report which summarised the difference in the MRP charged for outstanding council fund capital expenditure funded from supported borrowing and unsupported borrowing using the current straight line method and the annuity method for the next fifty years. 

In conclusion the Corporate Finance Manager commented that prudence was a subjective concept and therefore none of the options or methods described could be assessed as being the absolute correct method as it was a matter of judgement.  The option must first and foremost be prudent but also sustainable and affordable over the long term and it was for Council to decide which method it considered to be prudent.

The Chief Executive acknowledged the complexity of the subject and commented on  the work which had been undertaken on the review of the MRP policy last year.  He provided background information and context on the recent urgent review of the MRP policy following a recommendation made through a very recent independent peer review of the Council’s financial position.    The Chief Executive advised that following further recent discussions with the Welsh Audit Office and the retained advisors Arlingclose, officers were confident in recommending that option 2, the annuity method, was a prudent method, consistent with guidance, and was an ‘open’ option for consideration by the Council.

Councillor Richard Jones said he did not support the recommendation  for option 2, as he felt it was not prudent or sustainable due to the fact  that there would be an increase in future years.  He referred to a report to a meeting of the Cabinet in 2016 and the advice and decision making at that time regarding prudence and the MRP.  He suggested that the straight line method be continued for the MRP for the sake of the medium term financial plan.

The Chief Executive and Corporate Finance Manger provided further clarity in response to the concerns raised by Councillor Jones and advised that the annuity method was no less prudent than the existing straight line method and was no more costly to the Council or Flintshire’s tax-payers as it takes into account the time value of money.

Councillor Dave Mackie referred to the term ‘the life of the asset’ in the report and asked if this was the same as the length of the loan.  He expressed concern that if the loan was shorter than the ‘life of the asset’ there may not be sufficient funds available in that situation as funds would be credited for a longer period.  He also referred to the final sentence in paragraph 1.08 of the report which referred to the possibility of updated guidance later in the year from the Welsh Government on setting the MRP policy and asked if it would be better to wait until the guidance had been received before changing the MRP again.

The Chief Executive explained that at the present time the UK guidance also applied in Wales and commented that there would be no benefit in waiting, based on past experience, as the new Welsh guidance was expected to be the same as the new English guidance.  He also referred to the financial considerations and emphasised that the Council had to adopt an MRP policy for 2017/18 by 31 March 2018 and if the Council was to approve the annuity method it would release funds in 2017/18 as well as future years.  The Corporate Finance Manager also responded to the concerns  expressed by Councillor Mackie on the ‘life of the asset’ and  referred to historical spend, and the averaging of the life of the assets which came out at a 50 year cycle, and borrowing costs. 

The two officers emphasised that a decision on MRP had to be made on the basis of setting a prudent policy as part of the Medium Term Financial Strategy, and should not be made as a short-term measure to support annual budget setting.

Councillor Derek Butler said he supported the recommendation to approve option 2 which had been endorsed by the Wales Audit Office and was recommended as prudent by officers, and said that the rationale was clearly set out in the report.

Councillors Bernie Attridge and Arnold Woolley also spoke in support of approval of option 2; the annuity method.

Councillor Mike Peers referred to the setting aside of revenue resources for the payment of debt and asked for further information on how much was being set aside and where the figures were presented for information.  He drew attention to the reference to an historic document linked in the report which referred to the sum of £22.97M of internal cash which related to capital expenditure and asked for an explanation of where the fund was held and for what purpose.  Officers advised that the sum of £22.97M was due to day to day cash flow/balances at that point in time. Councillor Peers also sought further clarification around the consequences of the annuity method.  The Chief Executive and Corporate Finance Manager referred to the graph on page 48 of the report and provided further details in response to the questions raised by Councillor Peers.

Councillor Aaron Shotton moved the recommendations in the report which were duly seconded. 

When put to the vote the recommended method Option 2 – change to annuity method from 2017/18, and recommendations 2 and 3 as detailed in the report were carried.

RESOLVED:

(a)       That Members approved for the Council Fund (CF) unfinanced capital expenditure, changing the MRP policy for  supported and unsupported borrowing from ‘straight line’ to the ‘annuity’ method from 2017/18.  This would mean that:-

• The historic balance of outstanding capital expenditure funded from supported borrowing as at 31 March 2017, will be provided for on an annuity basis over the remaining 49 year period (as it was changed to straight line over 50 years in 2016/17)

• 2016/17 capital expenditure funded from supported and unsupported borrowing (and future years) will be provided for based on the asset’s life on an annuity basis

(b)       That Members approve for the Housing Revenue Account (HRA):-

• Option 2 (Capital Financing Requirement Method) be used for the calculation of the HRA’s MRP in 2018/19 for all capital expenditure funded by debt.

(c)        That Members approve that MRP on loans from the Council to NEW Homes to build affordable homes through the Strategic Housing and Regeneration Programme (SHARP) (which qualify as capital expenditure in accounting terms) be as follows:-

• No MRP is made during the construction period (of short duration) as the asset has not been brought into use and no benefit is being derived from its use.

• Once the assets are brought into use, capital repayments will be made by NEW Homes. The Council’s MRP will be equal to the repayments made by NEW Homes. The repayments made by NEW Homes will be classed, in accounting terms, as capital receipts, which can only be used to fund capital expenditure or repay debt which is a form of MRP. The capital repayment/capital receipt will be set aside to repay debt, and is the Council’s MRP policy for repaying the loan.