1. www.cih.org HRA Reform and Self Financing From Prospectus to Legislation Council with ALMOs Group 14 th January 2011 Steve Partridge

2. Introduction HRA reform: update and the issues old and new Rents and options Big issues: influencing the debate

3. Recap: prospectus ‘proposals’ in summary Essentially… –To dismantle the system and replace with a ‘one-off’ adjustment of housing debt –Keep rents and RTB receipts locally – revenue flexibility –But … control over capital expenditure and capping borrowing Nationally system destined for massive surplus –£13-14bn from 2010/11 at today’s prices Voluntary ‘deal’ from the previous government –‘Split’ the surplus between central and local government –Proposed debt allocation was c£25-26bn - c£3-5bn ‘extra’ debt –Based on the position at 2011 with increased allowances and assumed interest (discount) rate 7% or 6.5% –For capital: ALMO decent homes -> capital grants – and nothing for anyone else; £3.2bn (around half of what the research identified as the potential need)

4. CSR and HRA reform: tightening the first 5 yrs Voluntary deal no longer on the table –Legislation through the Localism Bill –Some predictability and some opportunities –Some additional risks around the ‘deal’ Financial situation a challenge but still a long term solution –How different could it be to what might it have looked like in 5 years? 10 years? –Comparing the subsidy future vs the future from the March prospectus A better deal for the longer term… …but not escaping the next 5 years untouched It is likely to feel ‘more difficult’ in the early years…

5. HRA reform: “Policy Document” key areas 1.Timetable and planning 2.Updated basis for debt settlement calculation 3.The basis for the ‘transaction’ 4.Technical and accounting guidance in draft 5.Details of legislative provisions 6.Self financing in practice: requirements for LAs and ALMOs 7.The basis for reopening the settlement 8.Regulation (including rents) 9.Policy towards other options The Bill’s clauses are limited in number All the main details are likely to be in Policy Statements

6. Key financial changes since March Receipts to exchequer 75% continued –CSR announcement to 2015 – but is the thinking moving to forever? –But… account to be taken in the settlement by reducing opening debt making an assumption of RTB sales? –Impacts and risks Increase in the cost of public sector borrowing –PWLB margins base to 1% above gilts –Typical BP impact over long term is either for delay in debt repayment or more of a squeeze on day to day income or both… –Revenue and capital squeeze Some positives… –Aids and adaptations funding –An assumption of increased debt management costs ? But some further wrinkles… mainly in the debt distribution

7. Forward one year: Subsidy 2011/12 Final determination: broadly the formulae are unchanged –2.25% increase in allowances – M&M again protected –2.46% increase in MRA – not protected –6.8% increase in Guideline rents 2010/112011/12Change £m Guideline rents-6,191-6,474-283 Mgmt & Maintenance allowances3,3283,360+32 Major Repairs Allowance1,2731,282+9 Debt/Other *1,2461,388+142 ALMO/PFI subsidy *24491-153 Expenditure6,0916,121 Subsidy surplus-100-353-253 A difficult settlement For tenants? For LA/ALMOs? For CLG? Focus of the financial challenge is really on next year Assumes single interest rate and PFI included

8. Subsidy determination final 2011/12 Significant shift to negativity – across the board –2011/12 :133 negative paying £825m – 41 positive getting £472m –2010/11 :128 negative paying £700m – 50 positive getting £600m Net subsidy for ALMO authorities –2011/12: 29 paying in £160m and 36 receiving £420m – net £260m –Last year: 28 paying in £108m and 35 receiving £527m

9. Settlement: what we know KNOWN Impact of 2011/12 determination –Negative subsidy rises by £250m Aids and adaptations TO BE CONFIRMED IN DETAIL Rent policy: convergence at 2016 continued Discount factor - 6.5% aligned with stock transfers Allowance uplifts held at 5% and 28% - removal of floor? PFI – HRA schemes to be taken out of settlement RTB sales to be taken into account in the settlement Stock transfer – at levels of expenditure included in the settlement only £6.5bn receipt to government suggests settlement around £28-29bn?

10. Technical progress: other key areas Debt pooling Depreciation and debt repayment Capping borrowing and administration –What goes into the cap? HRA Balance Sheet Opening the settlement

11. Decent homes funding: prospects and issues Prospective allocation for LAs and ALMOs £1.595bn –Funded by previous ALMO funding and LA Supported Capital Expenditure previously paid as part of the subsidy system 48 authorities with non-DHS < 10% –Allocation average £8k-£10k depending on assumptions Opportunity for non-ALMO authorities compared to previous expectations Making a special case –Regeneration and where decent homes failures < 10% BUT… Phasing a real issue in terms of back-loading What price the level of over-subscription? 11/1212/1313/1414/15 Allocation yr £m260352389594 PayableSCE Lower settlementGrant

12. Checklist of ‘to watch out for’ Properties and assumptions Distributional impacts if allowance uplifts are changed Borrowing outside of the subsidy system (for new build) What will happen to rebate limitation? –Critical in the context of future rental flexibility If it is going to happen… some financial thoughts –Could you borrow in advance ? –Could you use reserves in advance? –Are there any Treasury Management decisions that need to be taken? –What options might there be towards rents as the settlement approaches? –Could you take alternative views on the financing of investment and services before next April?

13. Issues for business plans getting ready For many, tighter in the early years and risk of ‘reopening’ For some, addressing backlogs will be unachievable, stock condition could worsen and there may be… literally… no place to go 1. Update HRA business plan modelling 2.Run key scenarios: understand the key factors 3.Assess knock on impacts from General Fund 4.Develop a changed Risk Management profile 5.Begin to focus on long term Asset Management By Easter, all will need to have assessed implications By April 2012, business planning for real

14. Two case studies 1.Fully funded capital in every year –Longer to cover debt 2.Backlogs outstanding –Exacerbated in short term –Long term impact pushes fundability beyond 30 years AFTER BEFORE

15. Intermediate renting for LAs and ALMOs? Intermediate renting for Housing Associations –Linked to grant for new build What is the position for local authorities – despite the press? Need to distinguish three things –Statutory provisions in the 1989 LG&H Act –Housing Subsidy System – financial control over individual property rental targets –The ‘benefit cap’ (rebate limitation) for LAs a crucial financial determinant Tenure type and length also a key issue Quiet in the context of the settlement – but what could be the regulatory future?

16. What are our options? Self financing IS the future –Progressing through parliament – final determination next January Two key business planning strands set the framework for the future –Asset Management Strategy –ALMO expansion and diversification options Whole stock transfer looks financially impossible –PFI and LHCs unsupported Partial transfer –May re-emerge even if no overhanging debt clearance ALMO private finance options (“CoCo”) work for the NFA concluding in the spring –Challenges on structure and taxation to be resolved

17. Contacts Steve Partridge Director of Financial Policy and Development steve.partridge@cih.org steve.partridge@consultcih.co.uk 07968 354948 02476 472720

18. Key lobbying and influencing issues 1.The level of the settlement 2. Impact of backlogs – national government shifting responsibility locally without the resources to address 3. Right to Buy receipts –Devil in the detail of the assumptions made 4. Borrowing cap –Addressing the administration process 5.Pressure on the issue of rebate limitation –Some form of answer would be helpful(!) 6. Cost of borrowing? 7.Keeping other options open – financially? 8.Others?