Housing Revenue Account interest

Treasury accountants at England’s 130 local housing authorities will have an additional task to complete when this financial year ends – splitting interest costs and income between the General Fund (GF) and the Housing Revenue Account (HRA) on a fair and equitable basis.  In previous years, interest was split according to the very detailed “item 8” determinations issued each year by central government.  This didn’t always give a sensible answer, but at least it stopped the authority from needing to exercise any judgement.  Following HRA reform last March, the division of interest is now a matter for local discretion.  There are two main areas to consider.

First, interest on long-term borrowing.  Authorities have been encouraged, but not forced, to split their debt portfolios into two pools this year – one each for the GF and HRA, taking note of each fund’s capital financing requirement.  CIPFA’s recommended method in the new Treasury Management Code of Practice has some advantages, although the initial guidance raised more questions than it answered.  Why should the benefit of £13bn in very cheap new loans borrowed in March get assigned entirely to the HRA pool, when the benefit of government paying off £7bn of expensive old loans gets shared with the GF?  And why should all the cheap internal borrowing and short-term loans from other local authorities get assigned entirely to the GF?  Leaving all the short-term and LOBO debt in the GF will leave it far more exposed to interest rate risk than the HRA.  Later guidance encourages accountants to seek a solution that best meets their authority’s unique position; no doubt this will result in 130 different methods being invented.

The other area to consider is the interest on the notional cash balance, which may be in credit or debit.  This is a complication that arises from the HRA and GF sharing a bank account but not being allowed to subsidise each other.  For every directorate except housing, it’s a bit like a big family, where the earners like Mum and Dad subsidise cash consuming departments like children, with the family income topped up with benefits (government grants).  No-one cares too much about who is spending whose money.  But the HRA is a bit like the teenage son who’s just reached 18 and suddenly needs to be self-financing.  Not only does his income need to cover his costs, but if you’re going to do it properly, he needs to pay or receive interest on his fair share of the family’s debt or savings. It would be rather tricky to determine a teenager’s share of the family’s assets, liabilities and accumulated wealth (or reserves), and hence calculate his share of the combined savings account, but for the HRA we have an accounting system that should be able to generate a HRA-only balance sheet.

Taking the HRA’s assets (mostly council houses and rent debtors) and subtracting its liabilities (creditors, provisions, HRA loans pool, etc.) and its reserves (including its shares of the capital adjustment account, revaluation reserve, capital receipts, statutory adjustment accounts, etc.) will give you the notional cash balance.  A positive number is a credit balance on which the HRA should receive interest, while a negative number represents an internal overdraft.  Creating monthly balance sheets will be more in the spirit of self-financing than the old method of taking an average of the year’s opening and closing balances, especially as many HRAs will generate a lot more cash this year than they did before the reform.

You also need to think about what interest rate should be applied to this balance.  What rates would be achieved if the HRA and GF were investing or borrowing short-term in their own right?  How do these relate to the average rate on the authority’s total investments?  Is one fund being starved of higher rate long-term investment income because all of its resources have been internally lent to the other fund?  And what allowance should be made for the fact that all the credit risk lies with the GF, since the HRA cannot be charged with impairment losses on defaulted investments?

Plenty to think about there, before we even look at other parts of the item 8 determinations that now require authorities to exercise some judgement, such as internal and external premiums, or voluntary provisions for debt repayment.  I foresee a busy time ahead for treasury accountants and their advisers!

David Green is Client Director at Arlingclose Limited.  This is the writer’s personal opinion and does not constitute investment advice.