Our ref: A Revised and re-issued 6 May Dear Director of Finance, PILOT TAX INCREMENTAL FINANCING (TIF) PROJECTS

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1 Local Government and Communities Directorate Local Government Division T: E: Local Government Finance Circular No. 4/2014 Directors of Finance of Scottish Local Authorities Audit Scotland Convention of Scottish Local Authorities (COSLA) In 2014 Scotland Welcomes the World Our ref: A Revised and re-issued 6 May 2014 Dear Director of Finance, PILOT TAX INCREMENTAL FINANCING (TIF) PROJECTS Scottish Ministers have agreed to a maximum of six TIF pilot projects. Taking these projects forward gave rise to a number of questions in relation to the calculation of TIF debt and the repayment of TIF debt from TIF Revenue (retained Non-Domestic Rates (NDR). The terms and conditions of pilot TIF projects define both TIF Debt and TIF Revenue and how these are to be calculated and repaid. These arrangements are separate, and distinct, from the statutory arrangements for local authority borrowing and the statutory repayment of that borrowing as set out in Schedule 3 of the Local Government (Scotland) Act 1975 (the loans fund provisions). The purpose of this non-statutory guidance is to set out the arrangements for the TIF Debt to be repaid from TIF Revenue (as set out in the TIF pilot project agreements) and to consider the associated statutory loan fund advances and repayments. In doing so we wish to ensure there is clarity on the two separate, but linked, arrangements. The guidance is in 2 sections: SECTION 1: Calculating the borrowing costs for a TIF scheme which is the amount that will be met from the retained incremental NDR (TIF Revenue) as set out in a TIF pilot project agreement; and SECTION 2: The statutory loan fund advances made for a TIF project.

2 Some general comments on this guidance This guidance does not provide any guidance on proper accounting practices. This is provided by the Code of Practice on Local Authority Accounting in the UK (the Code). Should additional accounting guidance be required this will be provided either as a Code update or by the issue of LASAAC guidance. Expenditure incurred on the infrastructure associated with a TIF project is in accounting terms no different from any other expenditure. The Code sets out the tests to determine if expenditure is capital and these remain relevant for a TIF project. If expenditure on a TIF project meets the tests for capital expenditure it should be accounted for on the same basis as any other capital expenditure and treated as a non-current asset as required by the Code. Capital expenditure on TIF projects will require financing. As with any other capital project, there may be a number of sources of finance, which may include grants, developer or other third party contributions. It is, however, expected that the main sourcing of finance will be borrowing. The Code provides guidance of the accounting treatment and presentation of grants, borrowing and third party contributions. These are no different for a TIF project. Councils should continue to manage external borrowing in accordance with their treasury management strategy. There is no requirement for councils to enter into external borrowing arrangements which mirror the TIF debt borrowing calculations /loan fund advances for a TIF project. Councils should continue to borrow, repay and reschedule external borrowing loans in accordance with sound management principles and based on their capital financing requirement. I trust you will find this guidance helpful. Yours faithfully Hazel Black Head of Local Authority Accounting

3 SECTION 1 Calculating the TIF Debt to be funded from TIF Revenue 1. Both TIF Debt and TIF Revenue are defined in the individual TIF pilot project agreements. The agreement sets out the calculation, which includes the interest rate to be applied (and which is also detailed below), to determine the value of TIF Debt which is to be funded from TIF Revenue. 2. TIF Revenue is the incremental Non Domestic Rate (NDR) income. This means, in any relevant year during the TIF Project Period a (pro-rate) amount of NDR equal to the amount (if any) by which the Collected Amount exceeds the Collectable Amount. 3. TIF Debt is the value of debt which is to be funded from TIF Revenue. This debt is calculated in accordance with the agreement, which requires: 3.1 TIF Debt to be calculated as a fixed rate loan / series of loans, where the rate of interest is fixed for the life of the loan and interest is payable at either yearly or half-yearly intervals. The period of each loan will be aligned to the requirement to repay the loan within the 25 year TIF period, and will reflect the timing of expenditure within that 25 year period. 3.2 For the purposes of calculating the interest on the TIF Debt, the Council applies the relevant interest rate. The relevant interest rate means the lower of (i) the Council s statutory loans fund pool interest rate for the financial year in which the borrowing occurs; and (ii) the average of the Public Works Loan Board (PWLB) interest rate across the Financial Year in which the borrowing occurs. 3.3 The PWLB interest rate to be used to calculate the average PWLB rate must match the loan period and repayment method permitted by this approval as set out in this section. The average PWLB interest rate shall be calculated using the arithmetic mean method. The PWLB makes available the historic standard interest rates for new loans for both EIP and Annuity. These can be downloaded from the PWLB website by date range and provides the rates offered each day. The calculation of the arithmetic mean is calculated by summing all the PWLB rates for the financial year for the relevant loan period and type of loan and dividing the result by the number of times the rate was published. For example, in the PWLB published interest rates for EIP loans for 24½-25 years 505 times (rates are usually published twice a day but not published for weekends or public holidays). Adding all the rates together total providing an average interest rate for the year of % which rounded to 2 decimal places provides an average interest rate of 3.91%. Where a Council has access to the PWLB certainty rate or project rate the published rates will need to be adjusted by the relevant discount to the standard rate.

4 3.4 Where the Council is entitled to borrow from the PWLB at the PWLB Certainty Rate of interest, or other special rates, the lower rate must be used to calculate the average PWLB interest rate. 3.5 Where the Council borrows specifically for this project and this is not from the PWLB, the relevant interest rate must be specifically agreed with the Scottish Government. 3.6 Each TIF drawdown shall be calculated as repayable by either (i) Annuity or Equal Repayments (ER) where there are fixed yearly or half yearly payments to include principal and interest; or (ii) Equal instalments of principal (EIP) where there are yearly or half-yearly instalments of principal together with interest on the balance outstanding at the time. 3.7 The TIF Debt which may be met from TIF Revenue is equal to the sum of the repayments for each TIF drawdown calculated for each Financial Year (i.e. the sum of the future principal and interest payments related to each TIF drawdown and as calculated under 3.6). 3.8 The final cost of TIF Debt (repayment and interest) for the 25 year TIF period will be fixed in the financial year where the final TIF loan is drawn down. Thereafter, there will be no adjustment to TIF Debt which may be met from TIF Revenue (i.e. there will be no recalculation of interest costs). 4. A worked example of calculating the base TIF Debt is detailed in Annex A using an annuity loan method. Councils will wish to note that the calculation allows for interest to be charged for capital expenditure incurred prior to the loan advance. In the example TIF Debt equals 85.9m. This is based upon initial TIF drawdowns of 50.0m and related interest calculated at 35.9m over the 25 year TIF period, which together form the TIF Debt sum of 85.9m. Please note the interest rate used is for illustration only. For actual TIF projects the interest rate to be used for each drawdown is the relevant interest rate as detailed in 3.2 to 3.4 above. A copy of the spreadsheet calculation is available as a separate document published with this guidance. 5. The Council is required to keep a record of each individual TIF Debt calculation. Each individual debt calculation is then added together to provide the value of total TIF Debt to be funded from TIF Revenue. 6. Please note that the calculation of TIF Debt is a stand-alone exercise undertaken to calculate the value of TIF Debt. It is a memorandum account only and does not require any accounting entries or statutory accounting adjustments in the statutory accounts. Repayment of TIF Debt from TIF Revenue 7. Following the calculation of the TIF Debt, the calculation of the repayment of the TIF Debt is a stand-alone exercise and does not require any accounting entries

5 for statutory accounts purposes. Each financial year the TIF Debt will be written down by the amount of TIF Revenue recognised (i.e. the pro-rata amount of NDR equal to the amount (if any) by which the Collected Amount exceeds the Collectable Amount). 8. It should be noted as per the TIF Agreement that all TIF Revenue should be used towards the repayment of TIF Debt, until fully repaid. 9. Using the worked example in paragraph 4 this will be a simple record as follows: Financial Year Opening TIF Debt New TIF Debt (+) TIF Revenue (-) Closing TIF Debt ,186, ,186, ,186,032 17,251, ,437, ,437,501 16,913,512 69,351, ,351,013 16,579,182 85,930, ,930, (250,000) 85,680, ,680,195 0 (3,100,500) 82,579, ,579,695 0 (6,200,000) 76,379, This record will continue until either (1) the TIF Debt is fully paid giving rise to a requirement to pass to the Scottish Government 50% of the TIF Revenue, or (2) the TIF period (i.e. the 25 year period) is complete. Examples of these scenarios are outlined below. 11. Situation 1 - The TIF Debt is fully paid and 50% of TIF Revenue is payable to the Scottish Government. In , TIF Revenue exceeds the total amount of TIF Debt outstanding. TIF Revenue is used to reduce TIF Debt to zero, with 50% of the balance being retained by the Council (350,000), and 50% being paid to the NDR pool (350,000). In , the final TIF year, all TIF revenue is surplus and shared 50/50 with the Scottish Government. From all NDR is payable to the NDR pool. Illustration see next page: 1 The maximum TIF Debt position reflects the output of the example calculation in the Calculating the TIF Debt to be funded from TIF Revenue section above.

6 Financial Year Opening TIF Debt New TIF Debt (+) TIF Revenue (-) Closing TIF Debt ,700,000 0 (6,200,000) 5,500, ,500,000 0 (6,200,000) 0 Surplus TIF Revenue Retained by Council Paid to NDR pool , , , ,200,000 3,100,000 3,100,000 Final TIF year 12. Situation 2 the TIF period is complete, but TIF Debt remains outstanding. From all NDR is payable to the NDR pool. Illustration: Financial Year Opening TIF Debt New TIF Debt (+) TIF Revenue (-) Closing TIF Debt ,700,000 0 (6,200,000) 14,500, ,500,000 0 (6,200,000) 8,300, ,300,000 0 (6,200,000) 2,100, Any TIF Debt remaining at the end of the TIF period represents a Council contribution to the project. There is no accounting entries required to clear this balance as it is memorandum only. 14. The guidance in this section reflects the TIF agreement for calculating and repaying debt. It does not apply to statutory loans fund advances made for a TIF project, which must be advanced and repaid in accordance with the statutory provisions set out in the Local Government (Scotland) Act This is covered in Section 2. Repaying TIF Debt where a TIF business case identifies other income being generated from the project which is to be used to fund the repayment of TIF Debt 15. Income to a TIF project will take two main forms. The first type of income is a contribution to the capital cost of the project and the second type is an income stream which arises due to the investment made in the project and which will be received over the 25 year period of the project. A developer contribution is an example of the first type of income. TIF Revenue is an example of the second type of income. Other examples of an income stream from the project may include car park income or other fees which will be received by the Council (or a Council armslength organisation (ALEO).

7 16. Contributions to the capital cost of a project, such as developer, council or third party contributions, will be used to offset the capital cost of the project. By applying these contributions to the project the amount which is required to be funded from borrowing will reduce. The TIF Debt calculation will be based on the cost to be met from borrowing after applying the capital contribution. 17. Other income which arises or is generated by the project over the 25 TIF project period, such as additional car park fees, is available to fund borrowing costs. This income needs to be reflected in the repayment of the TIF Debt. 18. The total value of income to be generated over the lifetime of the project as identified in a Council s business case should be reflected in the repayment record as that income is generated. Illustration: Financial Year Opening TIF Debt New TIF Debt (+) Other Income (-) TIF Revenue (-) Closing TIF Debt ,186, ,186, ,186,032 17,251, ,437, ,437,501 16,913,512 69,351, ,351,013 16,579,182 85,930, ,930, (35,000) (250,000) 85,645, ,645,195 0 (50,000) (3,100,500) 82,494, ,494,695 0 (55,000) (6,200,000) 76,239,695 2 The maximum TIF Debt position reflects the output of the example calculation in the Calculating the TIF Debt to be funded from TIF Revenue section above.

8 SECTION 2 Statutory loan fund advances made for a TIF project 19. The value of each statutory loan fund advance should mirror the value of each advance included in the calculation of TIF Debt. Using the example provided in section 1 the statutory loan fund advances would be: Financial Year Advance from loans fund ,000, ,000, ,000, ,000, The repayment periods (fixed periods) for each advance should be the same as those used for the calculation of TIF Debt. Whilst debt for infrastructure projects would normally be repayable over a longer period, TIF Debt is funded from TIF Revenue. As such it is prudent to match the funding to the repayment periods. 21. The Local Government (Scotland) Act 1975 permits a Council to calculate the repayment of a loans fund advance in two ways, being equal instalments of principal or by annuity. This statutory provision continues to apply to TIF loan fund advances. 22. If using the annuity method to calculate the value of repayment a Council is not obliged to use the same interest rate used to calculate the TIF Debt, but may consider it appropriate to do so. Repayment of loan fund advances 23. A TIF loan fund advance and the repayment of that advance is treated the same as other loan fund advance made for a Council capital project. 24. Advances made from the loans fund for the TIF project will provide a profile of principal repayments to be charged to the General Fund each financial year. The 1975 Act requires the first repayment of the loans fund advance to be made within 12 months, or where the repayments are half-yearly instalments, within 6 months. This statutory requirement applies to a loans fund advance made for a TIF project. 25. It is unlikely that the profile of debt repayments will exactly match the receipt profile of TIF Revenue. In the early years it is likely that TIF Revenue will be insufficient to fund the debt costs in full. In later years TIF Revenue may exceed the debt repayment value. 26. Unless the TIF agreement with Scottish Ministers includes a provision for the statutory provision for debt repayment to be varied, a Council must comply with the legislation. A Council will therefore need to fund any shortfall between TIF Revenue and debt costs in any financial year. Where TIF Revenue exceeds the debt cost in

9 any year a Council is not required to make an additional repayment of debt to match the TIF Revenue received. 27. The annual interest cost charged to the General Fund each year for the TIF project is calculated in accordance with each Council s policy for allocating interest costs. The annual interest cost charged to the General Fund may therefore differ from the annual interest costs calculated for the TIF Debt. 28. TIF Revenue is recorded within the Councils statutory accounts in accordance with proper accounting practices. No TIF Revenue is to be applied directly to the statutory loans fund, that is, the statutory repayment of debt recorded in the statutory accounts is not reduced by the amount of TIF Revenue. Scottish Government Local Government Division 6 May 2014

10 Illustration of the calculation of TIF Debt see paragraph 4 of the guidance. Annex A TIF Debt the cumulative value of 4 individual TIF loans to fund capital expenditure over a 4 year period. TIF DEBT Capital Expenditure 50,000,000 Annuity Method end of year annuity based Period of repayment 24 years Borrowing Rate per individual loan Repayment Schedule Annual Year Payment Interest Capital Total Balance 2014/15 1 1,000, ,418 1,449,418 49,550, /16 2 1,477, ,257 2,190,786 48,837, /17 3 1,941,866 1,008,625 2,950,491 47,828, /18 4 2,391,435 1,339,017 3,730,452 46,489, /19 5 2,324,484 1,405,968 3,730,452 45,083, /20 6 2,254,186 1,476,267 3,730,452 43,607, /21 7 2,180,372 1,550,080 3,730,452 42,057, /22 8 2,102,868 1,627,584 3,730,452 40,429, /23 9 2,021,489 1,708,963 3,730,452 38,720, / ,936,041 1,794,411 3,730,452 36,926, / ,846,320 1,884,132 3,730,452 35,042, / ,752,114 1,978,339 3,730,452 33,063, / ,653,197 2,077,255 3,730,452 30,986, / ,549,334 2,181,118 3,730,452 28,805, / ,440,278 2,290,174 3,730,452 26,515, / ,325,770 2,404,683 3,730,452 24,110, / ,205,535 2,524,917 3,730,452 21,585, / ,079,290 2,651,163 3,730,452 18,934, / ,731 2,783,721 3,730,452 16,150, / ,545 2,922,907 3,730,452 13,228, / ,400 3,069,052 3,730,452 10,158, / ,947 3,222,505 3,730,452 6,936, / ,822 3,383,630 3,730,452 3,552, / ,641 3,552,812 3,730, ,930,196 50,000,000 84,930,196 Interest on capital expenditure in year incurred 1,000,000 1,000,000 TIF Debt = 35,930,196 50,000,000 85,930,196 Check 35,930,196 50,000,000 85,930,196

11 The summary above is the product of adding together the following 4 separate loan calculations LOAN 1 - First Repayment within 12 months after expenditure (24 year repayment) Amount to be invested 20,000,000 Annuity Method end of year annuity based Period of repayment 24 years Change this cell to reflect the interest rate you want Borrowing Rate 5.000% Repayment Schedule Annual Year Payment Interest Capital Total Balance 2014/15 1 1,000, ,418 1,449,418 19,550, / , ,889 1,449,418 19,078, / , ,483 1,449,418 18,583, / , ,258 1,449,418 18,062, / , ,270 1,449,418 17,516, / , ,584 1,449,418 16,943, / , ,263 1,449,418 16,340, / , ,376 1,449,418 15,708, / , ,995 1,449,418 15,044, / , ,195 1,449,418 14,347, / , ,055 1,449,418 13,615, / , ,657 1,449,418 12,846, / , ,090 1,449,418 12,039, / , ,445 1,449,418 11,192, / , ,817 1,449,418 10,302, / , ,308 1,449,418 9,367, / , ,023 1,449,418 8,386, / ,344 1,030,074 1,449,418 7,356, / ,840 1,081,578 1,449,418 6,275, / ,761 1,135,657 1,449,418 5,139, / ,978 1,192,440 1,449,418 3,947, / ,356 1,252,062 1,449,418 2,695, / ,753 1,314,665 1,449,418 1,380, / ,020 1,380,398 1,449, ,786,032 20,000,000 34,786,032 Add Year 1 Interest 400, ,000 15,186,032 20,000,000 35,186,032 TIF debt

12 LOAN 2 - First Repayment within 12 months after expenditure (23 year repayment) Amount to be invested 10,000,000 Annuity Method end of year annuity based Period of repayment 23 years Change this cell to reflect the interest rate you want Borrowing Rate 5.000% Repayment Schedule Annual Year Payment Interest Capital Total Balance 2015/ , , ,368 9,758, / , , ,368 9,505, / , , ,368 9,239, / , , ,368 8,959, / , , ,368 8,666, / , , ,368 8,358, / , , ,368 8,034, / , , ,368 7,695, / , , ,368 7,338, / , , ,368 6,964, / , , ,368 6,570, / , , ,368 6,158, / , , ,368 5,724, / , , ,368 5,269, / , , ,368 4,791, / , , ,368 4,289, / , , ,368 3,762, / , , ,368 3,209, / , , ,368 2,628, / , , ,368 2,018, / , , ,368 1,378, / , , , , / , , , ,051,469 10,000,000 17,051,469 Add Year 1 Interest 200, ,000 7,251,469 10,000,000 17,251,469 TIF Debt

13 LOAN 3 - First Repayment within 12 months after expenditure (22 year repayment) Amount to be invested 10,000,000 Annuity Method end of year annuity based Period of repayment 22 years Change this cell to reflect the interest rate you want Borrowing Rate 5.000% Repayment Schedule Annual Year Payment Interest Capital Total Balance 2016/ , , ,705 9,740, / , , ,705 9,467, / , , ,705 9,181, / , , ,705 8,880, / , , ,705 8,564, / , , ,705 8,233, / , , ,705 7,885, / , , ,705 7,520, / , , ,705 7,136, / , , ,705 6,733, / , , ,705 6,310, / , , ,705 5,866, / , , ,705 5,399, / , , ,705 4,910, / , , ,705 4,395, / , , ,705 3,856, / , , ,705 3,289, / , , ,705 2,693, / , , ,705 2,068, / , , ,705 1,412, / , , , , / , , , ,713,512 10,000,000 16,713,512 Add Year 1 Interest 200, ,000 6,913,512 10,000,000 16,913,512 TIF Debt

14 LOAN 4 - First Repayment witjhin 12 months after expenditure (21 year repayment) Amount to be invested 10,000,000 Annuity Method end of year annuity based Period of repayment 21 years Change this cell to reflect the interest rate you want Borrowing Rate 5.000% Repayment Schedule Annual Year Payment Interest Capital Total Balance 2017/ , , ,961 9,720, / , , ,961 9,426, / , , ,961 9,117, / , , ,961 8,793, / , , ,961 8,453, / , , ,961 8,095, / , , ,961 7,720, / , , ,961 7,326, / , , ,961 6,912, / , , ,961 6,478, / , , ,961 6,022, / , , ,961 5,543, / , , ,961 5,041, / , , ,961 4,513, / , , ,961 3,958, / , , ,961 3,376, / , , ,961 2,765, / , , ,961 2,124, / , , ,961 1,450, / , , , , / , , , ,379,182 10,000,000 16,379,182 Add Year 1 Interest 200, ,000 6,579,182 10,000,000 16,579,182 TIF Debt