Risk Metric 1 the total of a local authority’s debt (including credit arrangements) as compared to the financial resources at the disposal of the authority.
Question 1. Considering the objectives set out in this document, and the principles set out, do you agree that the proposed calculation (calculation 1(a)) should be the basis for this metric? YES/NO. Please explain.
23. NO.
24. The proposal is that calculation 1(a) should be calculated by dividing the Capital Finance Requirement (CFR) by the Total Service Expenditure - net service expenditure (TSE). While both these measurements are very useful pieces of data, CFR is not the same as total debt and TSE does not pick up all financial resources at the disposal of the authority.
25. The CFR is the measurement of the authority’s underlying need to borrow, even if that borrowing has not yet been undertaken (eg by being covered by internal borrowing). As such it is a very good indicator of overall borrowing need but that is not the same as debt. Actual local authority outstanding debt is reported (eg in the quarterly returns) but the level of debt will fluctuate with ongoing cash flow management and other time factors and so is not such a good comparative measure.
26. TSE does not wholly capture the resources available to a local authority. It would be wrong to assume that the revenue resources that make up TSE are the only resources available to pay down debt. TSE is also net of any income received (so in this calculation it will penalise local authorities with high levels of income, including sales fees and charges) and it takes no account of one-off figures such as usable reserves and capital receipts.
27. Use of capital receipts is highly restricted but since one of the allowed uses of capital receipts is to repay debt, it is surprising that the proposal to measure “financial resources available” does not take any account of them.
28. Reserves are a complex subject. Reserves are held for a variety of reasons, and they are crucial to the financial stability of local authorities. But if the metric is to measure “financial resources available to the local authority” then the measurement of the metric has to include some consideration of the level of reserves available.
29. There are specific issues relating to HRA councils (see point made in general points, above). CFR includes HRA indebtedness, but TSE does not include HRA spending. We suggest that HRA figures should be excluded for the CFR; they are not included in any of the calculations for financial resources available.
Question 2 Are any of the alternative calculations more appropriate than the proposed calculation? YES/NO. Please explain.
30. NO
31. The alternatives do not individually offer better options. Alternative measurements of debt are worse than the CFR offered in option 1 (a) (as, for example, they suggest measurement of debt servicing costs, which is further away from the definition in the Bill). Two of the alternatives suggested use core spending power (CSP) as the measure of resources available to the local authority. It would be completely unacceptable to use CSP. Apart from being very incomplete as a measure of financial resources available (covering only amounts included in the annual revenue local government finance settlement) it may be redefined each year by the Secretary of State. It would be entirely inappropriate for the Secretary of State to set the underlying figures to be used in a metric used to measure whether a local authority will be subject to intervention by that same Secretary of State.
Question 3. Considering the objectives set out in this document, and the principles set out, is there an alternative calculation/s you think is more appropriate? YES/NO. Please explain.
32.YES
33. It is accepted that CFR is probably the best measure available of overall need to borrow and that this is actually a more useful measure than overall debt (it is used in the calculations associated with the Prudential Code). However, the wording of the Act will be “Total debt” and such a figure is available.
34. An alternative calculation of financial resources that takes account of sales fees and charges and other income, capital receipts and reserves would be a much more accurate measurement of the financial resources available to a local authority than any of the options given in the consultation. This would also be less likely to encourage local authorities to seek to cut income generation.
Risk Metric 2 The proportion of the total of a local authority’s capital assets which is investments made, or held, wholly or mainly in order to generate financial return.
Question 4. Considering the objectives set out in this document, and the principles set out, do you agree that the proposed calculation (calculation 2(a)) should be the basis for this metric? YES/NO. Please explain.
35. NO
36. The proposal is to divide investment income by TSE. This in no way makes any attempt to measure “proportion of capital assets” and seems wholly unrelated to the metric stated in the Bill. Neither investment income nor a measure of service expenditure can be seen as a proxy for capital assets.
Question 5 Are any of the alternative calculations more appropriate than the proposed calculation? YES/NO. Please explain.
37. NO.
38. Most of the alternatives are just as far from the metric as the preferred option. Some of the options propose using CSP; see answer to Question 3 above for further problems with that. Given that this metric clearly specifies “capital assets” any measurement must be of capital assets, but the proposal and most of the alternatives given here use revenue figures, for example using a measure of service expenditure as proxy for total capital assets. That is clearly wrong.
39. The one exception is option 2 c which divides commercial (capital) expenditure by total capital expenditure. This at least looks at capital and so is nearer to the actual metric than any of the others. The problems with it are (i) that it will look at one year’s expenditure rather than overall assets as specified in the metric and (ii) there are questions of interpretation of commercial capital expenditure, and it is unlikely that all capital expenditure in this category will be “wholly or mainly for a financial return” (for example, in some cases it could include investment in a leisure centre or a car park). This could therefore penalise local authorities and open them up to intervention for undertaking activities that are wholly unrelated to the what the metric is stated to measure.
Question 6. Considering the objectives set out in this document, and the principles set out, is there an alternative calculation/s you think is more appropriate? YES/NO. Please explain.
40. NO
41. The information specified in this particular metric is not currently collected as part of the annual data collection managed by DLUHC. However, the capital information collected has been subject to a review and there are proposals to collect additional data that have been trialled. It was understood at the time that the review being undertaken that it was linked to the need to collect data for a process similar to that now specified by the metrics in the bill. It would therefore make sense to postpone making the regulations for this metric alone until the capital data review has been fully implemented and it is clear that the data is understood, complete and can be relied on. At that point it should be possible to implement measurement of the metric as it is specified in the bill. Laying regulations to measure something else could trigger interventions in local authorities for undertaking activities wholly unrelated to those specified in the bill.
Risk Metric 3 The proportion of the total of a local authority’s debt (including credit arrangements) in relation to which the counterparty is not central government or a local authority.
Question 7. Considering the objectives set out in this document, and the principles set out, do you agree that the proposed calculation (calculation 3(a)) should be the basis for this metric? YES/NO. Please explain.
42. YES
43. The proposal is to take total borrowing less borrowing from PWLB and local authorities and to divide the result by total borrowing. As a calculation this is straightforward and clearly meets the measurement as specified in the bill.
44. The problem with this is that the metric does not act as an indicator of any particular risk and the justification for it in the consultation document is unconvincing (and not linked to the measurement). It is not unlawful or even regarded as bad practice for councils to borrow from commercial sources. It leads to a balanced portfolio of debt. It is not clear what problem is trying to be addressed here. Nevertheless the measurement as proposed is clearly “correct”.
Question 8. Are any of the alternative calculations more appropriate than the proposed calculation? YES/NO. Please explain.
45. NO
46. The proposal is better than the alternatives offered. The alternatives take the result further away from the metric as stated in the bill.
Question 9. Considering the objectives set out in this document, and the principles set out, is there an alternative calculation/s you think is more appropriate? YES/NO. Please explain.
47. Perhaps.
48. Consideration does not appear to have been given to using more of the data in the quarterly borrowing and investment returns published by DLUHC (also called “live tables”) that contain more up to date and detailed data than that in the annual capital return suggested in the proposed options. This might offer a better option for measurement and certainly more detail, which might, on balance, be more useful.
49. However, as stated above, it is hard to see that this metric actually measures any real risk. This is one where the approach taken to the trigger will be particularly important and it would be hoped that the trigger point will be set in such a way that the number of local authorities passing a trigger point on this will be very small and preferably zero. Consideration could therefore be given to whether there is a current need to lay regulations to specify how this metric is measured. Instead it could be deferred and only laid if circumstances should change so much in the future that this ever becomes an area of real measurable risk.
Risk Metric 4 The amount of minimum revenue provision charged by a local authority to a revenue account for a financial year.
Question 10. Considering the objectives set out in this document, and the principles set out, do you agree that the proposed calculation (calculation 4(a)) should be the basis for this metric? YES/NO. Please explain.
50. YES
51. The proposal is to compare minimum revenue provision (MRP) with CFR less any HRA figures. This meets the metric as specified in the bill.
52. The only issue with this is that the consultation document states that the MRP figure can be taken from either capital or revenue returns. However, investigation shows that these two figures are not the same, and advice from some of our members is that they are not supposed to be the same. There should therefore be further investigation into which of the two figures should be used and data quality checked before any formal measurement is included in regulations. Advice from some of our members is that the capital figure is likely to be the better one for this measurement.
53. A further issue with this is how the trigger point will be calculated. The proposals presented at the consultation event would mean 188 councils would pass the trigger point. As outlined in the general points above, the whole measurement of the trigger points and implementation of subsequent action needs careful consideration and be subject to full and transparent public consultation.
Question 11. Considering the objectives set out in this document, and the principles set out, is there an alternative calculation/s you think is more appropriate? YES/NO. Please explain.
54. NO.