The level of the council's general reserves
Reserves are sums set aside to meet possible future costs where there is no certainty about whether or not the costs will actually be incurred. They provide the council with a safeguard against any unforeseen circumstances.
Section 25(1)(b) of the Local Government Act 2003, which came into effect for the 2004/05 revenue budget, requires the chief financial officer to report to the authority on the adequacy of the proposed financial reserves and guidance from the Chartered Institute of Public Finance and Accountancy (CIPFA) who are the leading professional accounting body for public services is that local authorities, on the advice of their chief finance officers, should make their own judgment on a minimum level of reserves. CIPFA states that a well-managed authority with a prudent approach to budgeting should be able to operate with a relatively low level of general reserves and that chief financial officers should take account of the strategic, operational and financial risks facing the authority.
A risk assessment has therefore been undertaken to establish what should be a minimum level of general reserves for Salford. Details of this risk assessment are given in the revenue estimates and capital programme booklet available from this website. Whilst the assessment is not an exact science, and views may differ on what constitute key financial risks and their evaluation, it indicates that the minimum level of general reserves during 2007/08 should be in the region of £3.6m and the desirable level is £7.7m.
2006/07 budget performance
The level of the council’s general reserves at 31st March 2006 was £10.2m and allowed for a planned use of reserves in 2006/07 as follows:
£0.5m relating to service underspends in 2005/06 carried forward for use by services in 2006/07 under the terms of the scheme for the delegated management of budgets.
£2.0m in general support of the revenue budget.
This left a budgeted level of reserves of £7.7m in excess of the level required based on the minimum risk assessment of our budget risks for 2006/07 (£6.2m).
The review of the 2006/07 budget reveals that generally service overspends will be managed within existing budgets. However, the cost of the settlement of equal pay claims partially offset by the use of surplus provisions has required a contribution from reserves of £0.418m. This gives a revised expected level of reserves at 31st March 2007 of £7.2m.
2007/08 proposed use of reserves
The effect of having to use reserves to fund part of the cost of equal pay claims requires a strategy to be developed to replenish reserves to an acceptable level. The 2007/08 budget proposals provide for a contribution from reserves of £0.560m, with contributions to reserves of £0.348 and £0.7m planned in 2008/09 and 2009/10 respectively.
The approach to the risk assessment for determining an appropriate level of reserves required to be held against spending over-shooting the budget has been modified this year to provide a range for a minimum and desirable level of reserves which should be held commensurate with the perceived level of risk, rather than have a single “target” value for each risk.
Using this approach, it would be appropriate to adopt a strategy whereby reserves must not fall below the minimum level, whilst the desirable level should be seen as the target to aim for in a 3-year strategy.
The table below illustrates how this strategy can be managed without reducing reserves to a vulnerable level and over-burdening any one year’s budget with an excessive contribution to reserves.
| Description | Amount |
|---|---|
| Actual reserves as at 31st March 2006 | £10.160m |
| Less planned use in 2006/07 | |
| - carry forward of service underspends from 2005/06 | £-0.529m |
| - general support to the revenue budget | £-2.000m |
| £-2.529m | |
| Less required use 2006/07 | |
| - cost of the settlement of equal pay claims | £-1.919m |
| - use of surplus provisions | £1.500m |
| £-0.419m | |
| Anticipated reserves 31st March 2007 | £7.212m |
| Less planned use in support of th 2007/08 revenue budget | £-0.560m |
| Estimated reserves as at 31st March 2008 | £6.652m |
| Planned contribution to reserves provided for in our financial projections | |
| - in 2008/09 | £0.348m |
| Estimted reserves as at 31st March 2009 | £7.000m |
| - in 2009/10 | £0.700m |
| Estimated reserves as at 31st March 2010 | £7.700m |
This page was last updated on 26 March 2008
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