Why is there a deficiency payment?
ONCHAN DISTRICT COMMISSIONERS
Owing to the current public interest in public housing rent levels, Onchan District Commissioners would like to provide some background to their views on the subject. These comments have already been given to the Department of Health and Social Care and to all MHKs.
Members of the Board believe that there should be a much deeper conversation between all Local Authorities, their tenants and the Government regarding the future provision of housing in the Isle of Man, particularly with respect to affordability.
There is a lot of information in this document but the Commissioners believe it is necessary in order to gain an understanding of these complex issues.
Why is there a ‘deficiency payment’?
In 1943, Onchan Village Commissioners stated that they would prefer social housing to be treated as a national matter, undertaken by central government. There was some support for this view:
“I say we have the financial capacity to provide these houses; our finances are overflowing, to such an extent that we don't know what to do with the money.”
S.Norris MLC, TYNWALD COURT, FEBRUARY 6, 1945. 305
Tynwald did not agree. Responsibility for providing houses after the war was to remain with the local authorities.
Rents for the new houses were proposed to be set at one-sixth (17%) of a general labourer’s basic pay.
“We have got to visualise that we are not always going to live in the happy land of to-day, when the demand for labour is greater than the supply, and perhaps high wages. That is in the future. We have to build houses at rents which the working man can pay; otherwise we will again revert to slumdom…”
A.J.Teare MHK, TYNWALD COURT, FEBRUARY 6, 1945. 305
Local Authorities could not afford to build the houses, without major costs to the rate-payers, if the rental income was to be set at this level, so the government in their resolution of 6th February 1945 agreed that the deficiency – the difference between annual cost and annual income – would be funded two-thirds by government, with one-third coming from the local authorities’ rates. This was later amended (17th April 1946) to ¾ and ¼.
“(b) The authority concerned to submit an estimate of the rents which may reasonably be expected to be obtained from such houses”
Thirty years later, on 9th July 1974, Tynwald increased their deficiency payments to 100% and it was agreed unanimously with local authorities and the Local Government Board that, rather than having different rents for each housing scheme (newer houses costing more), all the houses within an authority should be put into one pool and rents levelled out, one to help the other.
Public housing is supposed to be ‘affordable’ housing. Our current social housing rents should not be set on the amenity value of a particular property nor on private market rents, but on the average working wage; this was the intention of public housing from the outset. The UK Department of Communities and Local Government continue to stress that rents must be determined with regard to local incomes, stating that “Renting is affordable if it is no more that 25% of gross household income”. In fact, Guernsey’s housing system limits public housing rents to between 14% and 25% of gross income.
The current situation
Onchan District Commissioners are concerned that rents for social housing have increased by approximately 30% over the last three years, and they requested a moratorium for the next financial year. They also felt that this was a view held by a number of other social housing providers and were concerned to note that DHSC Minister Howard Quayle has referred to “growing costs” without identifying the source of this alleged increased burden. The Board noted that there was no increase for inflation nor was there an uplift of the monetary value of the administration allowance paid to local authorities, which remains at the 2011/12 level. In real terms, this represents a reduction rather than an increase in costs.
The source of the growing costs appears to be the Department’s Housing Division.
The 2012 report from the David Tolson Partnership stated “It may also be noted that raising the rents by 30% would mean that DSC Housing would have no deficit (indeed would generate a small surplus) due to its low levels of debt.” This would indicate that the Tolson projection for DSC housing (now DHSC housing) was for there to be a credit balance accrued from the rental income from that point onwards[i]. Is this, perhaps, the reason why the DHSC is so keen to increase rents?
Government Accounts suggest that, following the Tolson Report, DHSC rental income actually increased by 46%, from £3.7m in 2012 to £5.4m in 2014[ii], although it also appears that their administration costs have risen 250% over the past 3 years to £2m[iii].
The DHSC has generated a surplus of £4.5m from its own social housing stock over the past 3 years[iv]. This is not because the Department is efficient, it is because the Department took £12m from General Revenues (the taxpayer) in 2012/13 to fund its own capital programme[v] – an option, obviously, not open to local authorities, who must borrow from the Banks and pay back the capital with interest.
The recent reporting of the Government’s rent increase, due to ‘increasing deficiency payments’, seems to imply that this is required because of Local Authority inefficiency, and that is certainly the impression gained by the public.
The burden of deficiency payments was not forced upon central government by inefficient local government. The payments were devised and introduced by Tynwald as a method of ensuring that public sector housing would be built by local authorities and let out at an affordable rental for the lower paid members of our society. It was an accepted expense on the taxpayer in order to provide decent housing. Government approves all capital borrowing and all housing schemes and knows, in advance, what the effect will be upon the General Revenue Account. It is deceptive for the DHSC to try to claim that deficiency payments are the fault of the local authorities, and it is disreputable that the DHSC demands that we impose rent increases, without means-testing, where the costs are sustainable under the existing rental income and deficiencies are not claimed. This was never the intention of Tynwald (nor was it subject to any consultation).
There is no evidence of ‘increasing deficiency payments’. Historically, deficiency payments have been falling. They went up in 2011 and 2012 due to construction of properties in Ramsey and Port Erin, but have again been falling since that time and are now about the same as they were in 2010.
Minister Quayle has quoted a figure of £6.25m as the deficiency on public housing. That figure is actually his Department’s budget estimate for 2013/14. The total claim from local authority accounts in 2013/14 was £4.4m split roughly 50/50 social/sheltered.
The net income from DHSC houses balances off almost 50% of the total deficiency payment. The actual cost to Government is therefore £2.46m. It is, perhaps, again relevant to note at this point that the DHSC administration cost for the Housing Division for 2014 was £2.03m.
Onchan District Commissioners have been able to complete a major refurbishment project on 118 homes at a cost of over £4.25 million, a property conversion into five new flats, and a property acquisition for future development, all without claiming any subsidy from central government funding for our general housing stock. This is on top of our normal repairs and renewals work, and ongoing administration of the services. Our administration cost is £91.5k. The Commissioners feel that their prudent financial management is not being reflected in the application by the DHSC of an “across the board” rent rise, and that our tenants are suffering an unjustified financial hardship because of the DHSC’s policies[vi].
Taking Ramsey as an example; to reduce Ramsey’s deficit (£1.3m) to zero their rents would need to increase by a further 57%. Does every local authority therefore have to raise their rents by 57%?
The Department’s response
Howard Quayle MHK, Minister for the Department of Health and Social Care, responded to the above comments with a defence of his Department (see endnotes), rather than addressing the issue of tenants’ difficulties with respect to affordability.
He has turned down the offer of a meeting with the Commissioners:
“The rent increase for 2015/16 is set at 5% and all Housing Authorities are required to implement the increase. Given this, I believe there is little to be constructively gained by meeting to reiterate the issues covered above.”
However, in his letter dated 9th January 2015 Mr Quayle admits that “It would be very short sighted of any Political administration, either local or national, to believe public sector housing will ever be fully self-funding and there is a clear need for on-going public subsidy arrangements to support the sector.”
If that is the case, then why is the Department attempting to make public sector housing fully self-funded from tenants’ rents?
In answer to a question in Tynwald on 20th January 2015 Minister Quayle said “Public sector rents are achieving more realistic levels…”
By what measure are they ‘more realistic’?
The Department’s continued reliance on market values as a benchmark for social housing rents is neither fair nor equitable, nor is it what the originators of social housing wanted when they introduced the scheme of deficiency payments.
To quote Minister Quayle, “Firstly, we must decide whether the priority is to balance the budget or to protect the vulnerable.”[vii]
He appears to have chosen to balance the budget.
The following figures were researched and reported to the Onchan Board in May 2013. The rent values given here do not include LA rates, Government Rates, Burial Rates, Sewerage charge etc. These additional charges add about 17.5% to the total. For 2015-16, the average rent, all properties including rates, will be £94.72 (£410.45 per month). The highest rent including rates will be £124.25 (£538.41 pm)
Public housing is supposed to be ‘affordable’ housing. The Department of Economic Affairs show average manual weekly earnings (m+f) of £478.20 in 2012. One-sixth of this (17%) would be £79.70 per week. 163 of our properties are currently within +/-10% of this figure. Onchan’s highest rent is £96.33, or 20% of the average weekly wage.
The Department of Communities and Local Government in the UK say, ‘Renting is affordable if it is no more that 25% of gross household income.’ In fact, Guernsey’s housing system limits public housing rents to between 14% and 25% of gross income.
Obviously, our rents are within this guideline for working tenants.
The situation is not substantially different for those who are retired.
42% of our tenants are over 65 years of age. A surprising 73% are over 55 years of age.
(Demographically, 30% of the island’s total population are over 55 and 18% are over 65).
43% of applicants on the waiting list are over 55 (and 40% are under 29). These are not wealthy people.
Research by the Prudential Insurance Company in 2013 suggests that the annual pension from all sources for all persons is an average of £15,300 per year. That suggests £3,825 (25%) is an affordable rent - £73.56 per week
Research in the Isle of Man reveals that the average annual pension for a retired male manual worker is £5,658.35 (Whitley Council 2011); that two-thirds of health workers get a pension of under £7,000 and that half of the civil service get a pension of under £7,000 (IoM TUC 2011).
On the assumption that these people receive the full state pension of £110 per week and the Manx supplement of £53 per week, their total pension from all sources is comparable to the Prudential Co figure. Their affordable rents would be in the region of £67.95 to £74.40 per week.
Onchan’s average 2bh rent 2013 is £70.21per week. Average rent, all properties, is £72.89 per week.
This suggests that our current social housing rents are pitched correctly. Not on the amenity value of a particular property, but on the average working wage; this was the intention of public housing from the outset. The UK Department of Communities and Local Government continue to stress that rents must be determined with regard to local incomes.
Unfortunately, DHSC Ministers are determining rents by how quickly they can reduce the government’s deficit.
Minister Robertshaw said that public housing rents are not market led. But isn’t valuing on the basis of amenities and modernity a market solution? Isn’t basing social rent on private rent levels a market solution? And, against what Tynwald decided in 1974?
Yes, there will be people and families who can afford to pay more, perhaps much more, than is suggested here, (and this was recognised as a problem way back in 1974), but such a decision should be based on means testing. It is not fair to increase rents for the vulnerable, the pensioners and others on fixed incomes just because a very small proportion of tenants (about 5% according to Minister Robertshaw[viii]) have a greater income than most.
Equally, there will be those who cannot afford to pay even those rents suggested here and who must be financially supported by the DSC.
Whitley Council state that the average female pension is £2,334.94. Assuming, again, full state pension (which for most women is unlikely), their rent would be 35% of their gross income.
Of what benefit is it to increase their rents?
Could Onchan raise rents to the maximum ‘affordable’ level of 25% of average manual workers wage, i.e. £119.55?
Yes, of course. This could be achieved by increasing the rent 10% per year for 5 years. But the question remains, why?
The result for Onchan would be a surplus of £750,000 per year whilst the majority of tenants would be paying 40%-58% of their gross income in rent.
That is not fair and equitable.
[i] Mr Quayle says “The statement was made as an illustration of how much of an increase would be required to maintain the properties with the investment programme identified at that point in time”
ODC: This infers that every time investment is made the rents have to go up.
[ii] Mr Quayle says “The £3.7m 11/12 DSC rental income is less the deduction of rates paid out whereas the £5.4m 13/14 rental figure is before the deduction of rates paid…an increase of 30.4% rather than the 46% as you have stated”
[iii] Mr Quayle claims this is not accurate because the Housing Division functions are much wider than simply public sector housing management and maintenance. The costs associated with these functions are included in the Department’s budget.
ODC would have to question why those ‘wider functions’ are being funded from public sector rents?
[iv] Mr Quayle says that “much of this relates to Housing Deficiency monies payable to Local Authorities which are accrued at year end and are subject to the timings of individual Authority’s claims”
ODC responds: the figures that make up the £4.5m are taken directly from the Isle of Man Government financial statements. As the accounts of both the Local Authorities and the Government are prepared on an accrual basis, then there should be no timing issues between them.
[v] Mr Quayle says “the Department is required to pay loan charges to the Treasury for this facility”
[vi] Mr Quayle says “access to good quality housing is a basic human need and it is the Government’s strategic responsibility to ensure this is delivered consistently across the Sector. It is not – nor should it be – dependent on the individual financial viability of each of the Islands 16 Housing Authorities.”
ODC comments: it is not dependent on the financial viability of the housing authorities. It is dependent upon the Government’s ability to provide deficiency payments.
[vii] Tynwald Q23, 20th January 2015
[viii] This figure was subsequently put in doubt by Minister Quayle and reported by IoM Newspapers “Government figures on council house incomes wrong” on 24th September 2014. , “The figures I have been provided with are different from those that the previous minister had been working to. We need to go away and make sure everything is correct.”