One of the biggest challenges for local authorities planning for reorganisation, is how to deal with the technical fixes and adjustments that local authority finance has collected over the years.
To many practitioners, one of the more mysterious treatments is Adjustment-A. When the Prudential Framework was introduced by the Local Government Act 2003, the old Credit Ceiling system for measuring cumulative capital expenditure funded by borrowing was replaced by the Capital Financing Requirement (CFR).
The Credit Ceiling and CFR are important as they measure an authority’s underlying debt, they dictate how much it should charge revenue each year to prudently repay that debt.
As the Credit Ceiling and CFR were calculated in different ways, the new figure was often different to the old. Where the CFR was higher this meant there were “losers” who would need to make a larger repayment on the same debt.
The Adjustment-A was introduced to get around this – any authority where the CFR was higher than the credit ceiling, and were using the “Regulatory Method” for their Minimum Revenue Provision to repay debt (MRP) could reduce the CFR they needed to make MRP on by the difference between the new and the old figures.
Regardless of if you think this was an elegant technical solution or a last minute bodge, Adjustment-A has impacted the revenue accounts of local authorities for the intervening 20 or so years.
With Local Government reorganisation now here, these technical adjustments will need aggregating and dealing with. The Balance Sheets of the new organisations will dictate their new CFRs, therefore the amount the new councils will need to spend on debt repayment. The updated English MRP guidance has made the need to make MRP on the entire CFR (with some exclusions) clear.
Unless there is a direction from central government, new councils will need to decide how to deal with their historic Adjustment-As. Where an entire authority has been absorbed into a new authority, it will appear straightforward, but what about authorities which are split with parts going to different new authorities? The temptation might be to ignore it, but this could pile higher costs on to a new organisation.
There are a number of different approaches new authorities can take – but most will involve examining the old CFR in detail to transfer debt, and therefore the proportion of the Adjustment-A, in an equitable fashion so that the new organisations start life on the right foot.
Arlingclose has extensive experience in assisting clients on the capital financing impact of reorganisation. To discuss this, or any other financial factor of reorganisation contact Stephen Kitching (skitching@arlingclose.com) , Mark Swallow (mswallow@arlingclose.com) or David Blake (dblake@arlingclose.com).
07/11/2025
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