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, 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 the council. Details of this risk assessment is 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 2008/09 should be in the region of £5.3 million and the desirable level is £9.7 million. However, it should be noted that the risk assessment for 2008/09 includes £1.2 million relating to the cost of a delay in the proposed transfer of some of our housing stock. This is a one off risk which would not recur after 2008/09 assuming the transfer is completed satisfactorily within the year. It would therefore be appropriate to plan for a desirable level of reserves of around £8.5 million in the longer term.
2007/08 budget performance
The level of the council’s general reserves at 31st March 2007 was £12.5 million and allowed for a planned use of reserves in 2007/08 as follows:
| Movement in reserves 2007/08 | (Million pounds) | (Million pounds) |
|---|---|---|
| Actual reserves as at 31st March 2007 | 12.5 | |
| Less planned use for 2007/08 | ||
| - carry forward of service underspends from 2006/07 | -1.4 | |
| - general support to the revenue budget | -0.6 | |
| - cost of the settlement of equal pay claims | -2.1 | |
| -4.1 | ||
| Original projection of reserves 31st March 2008 | 8.4 |
The 2007/08 projected outturn figures revealed a net under-spending of £1.2 million on the revenue budget which would increase reserves to £9.6 million at 31st March 2008. This allowed some flexibility to use reserves in support of the 2008/09 revenue budget.
2008/09 proposed use of reserves
The council were determined to balance its budget in 2008/09 by means other than cuts in service and/or raising the level of council tax beyond the 3% increase included in the budget strategy. Whilst service efficiencies totalling £7.2 million meant that £4.3 million was required from reserves to approve a balanced budget where expenditure matched resources. Part of that requirement will come from using the £1.2 million under-spend projected in 2007/08 and therefore will not impact on the overall level of reserves held. The balance of £3.1 million is linked to a strategy to replenish reserves to an acceptable level. In summary the 2008/09 budget proposals provide for a total contribution from reserves of £4.3 million, with contributions to reserves of £1.6 million planned in both 2009/10 and 2010/11 respectively. The impact on the overall level of reserves held is as follows:-
| Estimated reserves for unforeseen circumstances | (Million pounds) | (Million pounds) |
|---|---|---|
| Actual reserves as at 31st March 2007 | 12.5 | |
| Less planned use in 2007/08 | -4.1 | |
| Original projection of reserves 31st March 2008 | 8.4 | |
| Add 2007/08 budget under-spend | 1.2 | |
| Estimated reserves as at 31st March 2008 | 9.6 | |
| Less planned contributions from reserves 2008/09 | ||
| - use of 2007/08 budget under-spend | -1.2 | |
| - general use of reserves | -3.1 | |
| -4.3 | ||
| Estimated reserves as at 31st March 2009 | 5.3 | |
| Planned contribution to reserves provided for in our financial projections | ||
| - in 2009/10 | 1.6 | |
| Estimated reserves as at 31st March 2010 | 6.9 | |
| - in 2001/11 | 1.6 | |
| Estimated reserves as at 31st March 2011 | 8.5 |
The budgeted level of reserves as at 31st March 2009 of £5.3 million is the minimum level of reserves that should be held for the key financial risks facing the council as given in the risk assessment.
The strategy for the use of reserves is that the amount held 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 shown above indicates that the projected level of reserves meets this criteria and 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.
This page was last updated on 19 March 2008
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