It seems like every day I read something about ‘subsidised council tenants’. A number of times on Red Brick we have tried to debunk the fallacies of who subsidises whom in housing and to show that council housing has been running a surplus for a number of years. Now there is also growing evidence that income from rents is being used to prop up the wider finances of a significant number of councils.
In a well-researched piece for LGC News last week, Keith Cooper quoted case after case of councils switching costs and charges from their general funds (GF) to their housing revenue accounts (HRA). He found examples of community centres, libraries and street lighting costs being switched, presumably so that they would appear as savings in besieged general funds.
Despite the fact that there is a statutory ring-fence around the HRA, designed to ensure that tenants’ rents are spent on the management and maintenance of their homes and paying off debt, wily council Finance Directors have for decades managed the interface between the GF and the HRA to meet their overall objectives. There is no suggestion that the practices described by Keith Cooper are illegal, most Finance Directors are well aware of the limits they must stay within, but they are certainly canny practice and there is insufficient transparency. In his article, Keith Cooper quotes one Director saying they are ‘creative’.
In councils where I have worked it would be possible to find up to 60 separate sets of financial transfers between the GF and the HRA, ranging from an apportionment of ‘overheads’ like the cost of democratic functions and senior management, through service level agreements for services like payroll or accountancy or personnel, to proxy contracts for services like grounds maintenance and additional refuse clearance. With such complex arrangements there is plenty of scope for ‘creativity’.
Tenants have in the past complained about some practices which in effect required them to pay twice – as rent payers and as council tax payers – for their services. For example, it was frequent practice for general street lighting and road maintenance to be paid for from the council tax, but for ‘estate roads’ and estate lighting to be charged to the HRA. Another example was for the HRA to be charged for ‘extra refuse collection’ when the service was little different from that provided elsewhere.
Although well-known in the tight world of Finance Directors, these arrangements were often unknown to tenants and leaseholders and normally remained unchallenged. The setting up of arms length management organisations (that then sought to control their own costs) cast light into this gloomy corner of housing finance, often for the first time. Some apportionments turned out to be little more than back-of-the envelope calculations, others more sophisticated attempts to identify real costs. In most cases a review of a council charge led to a saving for the ALMO.
The HRA ring-fence was originally introduced to prevent cross-subsidies going in the opposite direction – from the ratepayer to the rent payer. As rents rose faster than inflation and councils came under increasing pressure to keep rate increases down, so the balance gradually shifted in the other direction.
The pressure on councils is extremely intense at present so it is no surprise they are looking at a service that is currently slightly better resourced to help out. Tenants, if asked, may indeed support a portion of their rents going to aid services that they also benefit from, especially if the option is to lose them. One of Keith Cooper’s examples – a council which is charging its HRA to fund extra welfare rights officers – may indeed be providing exactly what tenants need most.
But there are longer term questions of fairness involved. Far from being subsidised, tenants in some or even many places are cross-subsiding taxpayers. Council housing is a trading activity, the future of which will only be secure if it shown to pay its way. Individual tenants, as well as leaseholders, are increasingly being asked to pay service charges on top of their rent, charges which do not always count for housing benefit purposes, eating into their other income. And over the next few years tenants on housing benefit will see a growing gap between their HB and their actual rent as HB increases fall behind inflation and specific measures such as the bedroom tax are introduced. What seem like small sums at the margins of a high turnover account might become critical to some individuals.
If it is inevitable and understandable that councils will be ‘creative’ in current circumstances, it is important to retain the integrity of the HRA as a council housing trading account, on the principle that it exists to pay for tenants’ services from tenants’ rents. And as HRA surpluses are an important source of financial strength to enable new council housebuilding, the implications are much wider than they seem.