To submit a report by the Director of Function (Resources)/Section 151 Officer.
The report of the Director of Function (Resources)/Section 5 Officer outlining proposed changes to the Council’s MRP Policy was presented for the Executive’s consideration. Attached to the report at Appendix 3 was a report by Link Group, the Council’s Treasury Management Advisors commissioned in February 2021 which included a review of the Council’s MRP strategy and policy along with an options appraisal.
Councillor Robin Williams, Portfolio Member for Finance, Corporate Business and Customer Experience summarised the regulatory context which requires local authorities to charge to the revenue account for each financial year a Minimum Revenue Provision (MRP) to account for the cost of their debt in the financial year. The MRP charge must be prudent the aim being to ensure that the cost of the debt is charged to the revenue account over a period that is commensurate with that over which the capital expenditure provides benefits and that it is affordable. The available methods to determine a prudent provision are set out in Welsh Government Guidance on Minimum Revenue Provision which allows for 4 different methods – the Regulatory Method; the CFR Method; The Asset Life Method (divided into two further options namely the equal instalment method and the annuity method) and the Depreciation Method. A local authority can change the method its uses to calculate all or part of its MRP at any time.
The Portfolio Member reported that the Council revised its MRP Policy in 2018 and adopted the Equal Instalment Asset Life Method to calculate its MRP charge for both its supported borrowing and unsupported borrowing. In February 2021 it instructed its Treasury Management Advisors (Link Group) to review its MRP policy to establish whether the 2018 Policy remained fit for both current and future spending plans but due to other issues the outcome of the review was not considered further at the time. With the change in the economic climate and the resulting pressures, it is now considered to be an opportune time to consider the results of the Link review. The Link report as appended recommends the Asset Life Annuity approach to calculate MRP charges from 2022/23 onwards both for HRA supported and unsupported borrowing and for General Fund supported and unsupported borrowing this being on the basis that it is prudent, affordable and sustainable.
The Portfolio Member explained what adopting the Annuity method entailed saying that it follows a similar method to a standard repayment mortgage where the combined repayment sum of principal repayment and interest remains constant and as a result, the amount of principal repaid in the early years is low and increases over time. Therefore under the annuity method, the MRP charge is low in the initial years and increases over time. Although the overall sum set aside through the current and proposed MRP policies are the same, when the timing of the cash flows is taken into account and the value of future sums discounted to their current value, the net present value under the proposed method is lower than the current method, reducing also the impact on future generations in line with the principles of the Well-being of Future Generations (Wales) Act 2015. Different options were considered in relation to periods of time and interest rates as detailed in the report and the most affordable were selected.
It was resolved to recommend to the Full Council that it approve the following MRP changes for the current financial year 2022/23 and beyond –
· To note the report in Appendix 1 and Link Asset Group’s report attached in Appendix 3 on the Minimum Revenue Provision (MRP) options.
· To change the Housing Revenue Account (HRA) MRP charge on supported borrowing CFR from 2% of the HRA capital financing requirement (CFR) to the Asset Life – Annuity approach for 60 years at the Council’s average interest rate payable on its loans (Option 1ch in Table 2 in Appendix 1 to the report) from 1 April, 2022.
· To change the HRA MRP on unsupported borrowing CFR from 2% of the HRA CFR to the Asset Life – Annuity approach for 60 years at the Council’s average interest rate on its loans (Option 2ch in Table 2 in Appendix 1) from 1 April, 2022.
· To change the Council Fund MRP on supported borrowing CFR from the Asset Life – Equal Instalment method to the Asset Life – Annuity approach for 46 years at the Council’s average interest rate payable on its loans (Option 3ch in Table 2 in Appendix 1) from 1 April, 2022.
· To change the Council Fund MRP on unsupported borrowing CFR from the Asset Life – Equal Instalment approach to the Asset Life – Annuity method for 27.5 years at the Council’s average interest rate payable on its loans from 1 April, 2022.
· To approve the revised MRP Policy Statement for 2022/23 and beyond in Appendix 2 of the report which is based on the options in the recommendations in the bullet points above.