DLUHC to tighten rules on debt repayment provisions

The government plans to crack down on municipalities that make inadequate arrangements to finance their loans by new proposals put out for consultation today.

Under the prudential framework, councils that borrow money for investment projects must set aside money from their revenue account each year – known as the Minimum Income Provision (MRP) – for s ensure they can afford to repay the debt.

But the Department of Upgrading, Housing and Communities says some councils are ‘not fully complying with the requirement to provide for a prudent revenue provision, resulting in underpayment of MRPs’.

The department wants to change the current rules to tackle behavior such as councils using capital receipts instead of a charge on revenue for MRP, and not charging MRP on debt linked to investment assets or capital loans.

To do this, he proposes to add additional text to the 2003 legislation on local government finances.

This includes new regulations which state that capital receipts cannot be used in lieu of the revenue levy for MRPs.

The consultation indicates that it is “not the intention to prevent the authorities from using capital inflows to reduce the overall debt balance”.

The other proposed addition is that the conservative MRP be determined in relation to the local authority’s total capital funding need. This aims to “stop the intentional exclusion of debt from the MRP determination because it relates to an investment asset or capital loan”.

The consultation points out that under the proposed changes, “some authorities will need to change their practices under the proposed changes and this could increase the annual cost to revenue”.

A significant part of the current financial problems at Slough BC, which issued a Section 114 notice in July, has to do with the council’s failure to deal with matrimonial real property appropriately.

In August, a report by the council’s acting chief financial officer, Steven Mair, said MRP had been improperly funded for “a number of years” using capital receipts.

The proposed amendments would come into effect during the fiscal year beginning April 1, 2023. The government will not apply the regulations retroactively.

Tana T. Thorsen