By Don Peebles, Head of CIPFA Policy & Technical UK, CIPFA
During the first couple of months of this year, there has been renewed public attention on local government finances, particularly following the widely reported news that Northamptonshire County Council were unable to balance its budget and the issuing of section 114 notice.
The public has grown accustomed to hearing about councils struggling with cuts and having to make saving through transformation, restructures, changes in service or increases in fees, such as car parking. But the news of Northamptonshire has helped bring home the degree of challenges that some authorities are experiencing. This has also meant that council budgets and the savings are now coming under far greater scrutiny than they would otherwise.
Often, when we think of the savings local government are making, we think of those tangible cuts to services that leave us with, say, a reduced public library service or less frequent bin collections. However, there are a number of approaches to savings that councils can make in the background, away from frontline services.
One such approach, which is already being considered by a number of councils this year, is the saving around minimum revenue provision (MRP).
MRP represents the minimum amount that must be charged to an authority’s revenue account each year for financing of capital expenditure, which will have initially been funded by borrowing. It is part of all authorities accounting practices and is about making sure that an authority can pay off the debts it has from buying capital assets, such as building schools or care homes.
MRP is important for prudent accounting, because it allows an authority to put aside an amount of revenue that can be used towards the capital expenditure that as financed through either borrowing or credit.
Regulations require a local authority to determine each financial year an amount of MRP, which it considers to be prudent by reference to a calculated capital financing requirement (CFR). The Ministry of Housing, Communities and Local Government (MHCLG) has also produced statutory guidance which local authorities must have regard to.
So why is it authorities have been looking at this recently? Essentially, it is about maximising existing assets. The severe financial pressures that have faced councils over the last few years have meant that they have had to explore every avenue to ensure their existing resources work harder.
MRP is probably one of the more invisible means of doing this and it involves an authority calculate the provision they need to have to pay back their borrowing.
Fifteen years ago, this would have been a simple calculation and one that would be identical across all the councils, but since 2004 there has been flexibilities in how councils calculate MRP. This does not mean that there is a complete free for all in the way MRP is calculated as it forms part of the prudential framework.
Local authorities have one of four recommended ways (with some restrictions) to calculate MRP and these are explained in detail within the statutory guidance on MRP. The four methods include:
- Regulatory method - MRP is charged at 4% of the authority’s underlying need to borrow for capital purposes: the capital financing requirement (CFR).
- CFR method - This method simplifies the calculation of MRP by basing the charge solely on the authority’s CFR but excludes the technical adjustments included in option 1. The annual MRP charge is set at 4% of the non-housing CFR at the end of the preceding financial year.
- Asset Life method.
- Depreciation method - MRP is equal to the depreciation provision required in accordance with proper accounting practices to be charged to the comprehensive income and expenditure statement.
This piece of guidance was recently update in line with the other prudential framework documents to ensure that they provide transparent and contemporary guidance for councils.
By allowing the councils four methods of calculation this allows them flexibility to reflect their own circumstances and local agenda. As with individual household expenditure each council will, in line with the Prudential Code, be able to justify what they consider prudent and this reflects their approach to MRP.
This article first appeared in the MJ
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