ITEM CA14
CABINET – 20 MAY 2008
MINIMUM REVENUE PROVISION METHODOLOGY
Report by Assistant Chief Executive & Chief Finance Officer
Introduction
1. The Council is required by statute to charge a Minimum Revenue Provision (MRP) to the General Fund Revenue account each year for the repayment of debt. The MRP charge is the means by which capital expenditure which has been funded by borrowing is paid for by council tax payers.
2. Until 2007/08, the basis of the calculation for the MRP was specified in legislation. However, the government has now issued legislation and guidance that gives local authorities more freedom to determine what is a prudent level of MRP.
3. The legislation which came into force on 31 March 2008, requires local authorities to draw up a statement of their policy on the MRP, for full approval by Council. The statement is required to cover the methodology to be used for the 2007/08 accounts, the methodology to be used in 2008/09 is also required. The statement for the two years may be combined and is required to be approved by full Council as soon as is practicable.
Options for Prudent Provision
4. The final guidance, which wasn’t issued until April 2008, sets out a number of options for making ‘prudent provision’. Options 1 and 2 relate to Government supported borrowing. Options 3 and 4 relate to new borrowing under the Prudential system for which no Government support is being given and is therefore self-financed. Authorities are able to use any of the four options for MRP. The options are explained below.
Option 1 - Regulatory Method
5. This is the current method, and for debt supported by Revenue Support Grant (RSG), authorities can choose to continue to use the formula. This is calculated as 4% of the council’s general fund capital financing requirement, adjusted for smoothing factors from the transition to the prudential capital financing regime in 2003.
Option 2 – Capital Financing Requirement (CFR) Method
6. Option 2 differs from Option 1 only in that the smoothing factors are removed. This is a simpler calculation; however for most authorities, including Oxfordshire, it would result in a higher level of provision than Option 1. Option 3 – Asset Life Method
7. For new borrowing under the Prudential system, Option 3 is to make provision in equal instalments over the estimated life of the asset for which the borrowing is undertaken. As with the existing scheme of MRP, provision for the debt will normally commence in the financial year following the one in which the expenditure is incurred. There is however one exception to this rule under Option 3. In the case of the construction of a new building or infrastructure, MRP would not have to be charged until the new asset came into service. The MRP ‘holiday’ would perhaps be two or three years in the case of major projects and could make them more affordable.
Option 4 – Depreciation Method
8. For new borrowing under the Prudential system, Option 4 is to make MRP in accordance with the standard rules for depreciation accounting.
MRP Methodology Statement
9. The policy already in place in the Council is reflected in Options 1 and 3; consequently the statement requiring approval by Council is a confirmation of existing practice and not a change in policy. The Council is recommended therefore to approve the following statement:
10. For capital expenditure incurred before 1 April 2008 or which in the future will relate to Supported Capital Expenditure, the MRP policy will be based on existing regulations (Option 1 – Regulatory Method).
11. From 1 April 2008, for all unsupported borrowing, the MRP policy will be based on the estimated life of the assets for which the borrowing is undertaken (Option 3 – Asset Life Method).
RECOMMENDATION
12. The Cabinet is RECOMMENDED to recommend the Council to approve the Minimum Revenue Provision Methodology as set out in paragraphs 10 and 11 of the report.
SUE SCANE Assistant Chief Executive & Chief Finance Officer Corporate Core
Background papers: The Local Authorities (Capital Finance and Accounting) (England) (Amendment) Regulations 2008
Contact Officer: Lorna Baxter, Strategic Financial Planning Manager Tel: (01865) 816087
May 2008
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