Agenda item

The Fire Authority held reserves to meet potential future expenditure requirements. The reserves policy was based on guidance issued by the Chartered Institute of Public Finance and Accountancy (CIPFA). It explained the difference between general reserves (those held to meet unforeseen circumstances), earmarked reserves (those held for a specific purpose) and provisions (where a liability existed but the extent and/or timing of this was uncertain). In addition, the policy identified how the Authority determined the appropriate level of reserves and what these were. The policy confirmed that the level of, and the appropriateness of reserves would be reported on as part of the annual budget setting process and as part of the year end accounting process.

Reserves and Balances Policy

The draft National Framework published in December included a section of reserves. The main components of which were that:-

·        General reserves should be held by the fire and rescue authority and managed to balance funding and spending priorities and to manage risks. This should be established as part of the medium-term financial planning process.

·        Each fire and rescue authority should publish their reserves strategy on their website. The reserves strategy should include details of current and future planned reserve levels, setting out a total amount of reserves and the amount of each specific reserve that is held for each year. The reserves strategy should provide information for at least two years ahead.

·        Sufficient information should be provided to enable understanding of the purpose for which each reserve is held and how holding each reserve supports the fire and rescue authority’s medium term financial plan.

·        Information should be set out in a way that is clear and understandable for members of the public, and should include:-

Ø  how the level of the general reserve had been set;

Ø  justification for holding a general reserve larger than five percent of budget;

Ø  whether the funds in each earmarked reserve were legally or contractually committed, and if so what amount was so committed; and

Ø  a summary of what activities or items would be funded by each earmarked reserve, and how these supported the fire and rescue authority’s strategy to deliver good quality services to the public.

As such this year’s reserves policy had been amended to reflect these draft requirements.

General Reserves

Review of Level of Reserves

In determining the appropriate level of general reserves required by the Authority, the Treasurer was required to form a professional judgement on this, taking account of the strategic, operational and financial risk facing the Authority. This was completed based on guidance issued by CIPFA, and included an assessment of the financial assumptions underpinning the budget, the adequacy of insurance arrangements and consideration of the Authority’s financial management arrangements. In addition, the assessment should focus on both medium and long-term requirements, taking account of the Medium Term Financial Strategy (as set out in the draft budget report discussed later on the agenda). For Lancashire Combined Fire Authority this covered issues such as: uncertainty surrounding future funding settlements and the potential impact of this on the revenue and capital budget; uncertainty surrounding future pay awards and inflation rates; the impact of proposed changes to pension schemes; demand led pressures, risk of default associated with investments as set out in the Treasury Management Strategy, cost associated with maintaining operational cover in the event of Industrial Action etc.

The draft Local Government Finance Settlement for 2018/19 maintained the current 4?year settlement, hence barring exceptional circumstances; the Government expected these amounts to be presented to Parliament each year, up to 2019/20.  This provided much greater certainty however, it was noted that there were only 2 years of the current multi-year settlement remaining before the Government aimed to implement greater business rates retention and the fair funding review of relative needs and resources.  The actual details, and hence the impact of these were still unknown.  Furthermore, the impact of Brexit on the national economy was still unknown.  Therefore there was still a considerable degree of uncertainty over longer?term funding. 

However, given the continuation of the 4?year settlement, the Treasurer considered it prudent to set the minimum target reserves level at £2.5m, 4.5% of the 2018/19 net revenue budget.

Should reserves fall below this minimum level the following financial year's budget would contain options for increasing reserves back up to this level. (Note, this might take several years to achieve.)

Given the limited scope to increase council tax without holding a local referendum the ability to restore depleted reserves in future years was severely limited.  Hence any maximum reserve limit must take account of future anticipated financial pressures and must look at the long term impact of these on the budget and hence the reserve requirement.  Based on professional judgement, the Treasurer felt that this should be maintained at £10.0m.  Should this be exceeded the following year’s budget would contain options for applying the excess balance in the medium term, i.e. over 3?5 years.

Level of General Reserves

The overall level of the general fund balance, i.e. uncommitted reserves, anticipated at the 31 March 2018 was £7.8m, providing scope to utilise approx. £5.3m of reserves.

Based on current assumptions and assuming council tax was increased by 3% each year, further drawdowns of £1.2m would be required to balance the revenue budget over the next 2 years, i.e. the remainder of the multi-year settlement. This would reduce our overall general reserve level to £6.6m at 31 March 2020, still within our target range.  Based on this the Treasurer considered these were at an appropriate level to meet future expenditure requirements in 2018/19 and 2019/20.

It was noted that reserves were being used to fund recurring expenditure and hence this could only be a short term solution, with recurring savings being required in the longer term to offset the shortfall.

The report showed that allowing for a 3% council tax increase the level of general reserve at the end of March 2020 would be £2.7m, marginally above the minimum level, but would fall below this the following year.  Hence over the medium term the general reserve would potentially fall below the 5% threshold identified by the Home Office.

Earmarked Reserves

Level of Earmarked Reserves

The earmarked reserves forecast at 31 March 2018 were £7.4m and a breakdown of these was considered by Members.  It was noted that over half of the forecast anticipated balance of £6.9m as at 31 March 2023 related to the Private Finance Initiative reserve.

Based on this the Treasurer believed these adequate to meet future requirements in the long term.

Capital Reserves and Receipts

Capital Receipts had been created from underspends on the revenue budget in order to provide additional funding to support the capital programme in future years; as such they could not be used to offset any deficit on the revenue budget, without having a significant impact on the level of capital programme that the Authority could support. 

Capital Receipts were generated from the sale of surplus assets, which had not yet been utilised to fund the capital programme. Under revised regulations, receipts generated between April 2016 and March 2019 could be used to meet qualifying revenue costs, i.e. set up and implementation costs of projects/schemes which were forecast to generate on-going savings. The on-going costs of such projects/schemes did not qualify. Whilst the Authority currently held £1.6m of capital receipts only £70k of this arose in the relevant time period.  Given the small amount eligible we did not currently have any plans to use this in line with the new regulations and hence for the purposes of planning all capital receipts would be used to meet future capital costs, not qualifying revenue expenditure.

At 31 March 2018 the Authority anticipated holding £19.0m of capital reserves and receipts.  It was anticipated that £6.7m of this would be used in respect of slippage from the 2017/18 capital programme; the most significant element of which related to Preston Fire Station where a joint Fire and Ambulance station was being pursued; although progress on agreeing this had been slow.    Based on the capital programme presented elsewhere on the agenda, it was anticipated that a further £10.9m would be utilised by 31 March 2023, leaving a balance of £1.4m to fund future capital programmes.  Based on this the Treasurer believed these adequate to meet future requirements in the medium term.

It was noted that no allowance had been built into the capital programme for the potential relocation of Service Headquarters.  If this was included in the 5?year capital programme then all capital reserves and receipts would be utilised to fund this, as well as potentially requiring additional borrowing.

Provisions

The Authority had two provisions to meet future estimated liabilities:-

Insurance Provision

This covered potential liabilities associated with outstanding insurance claims. Any claims for which we had been notified and where we were at fault would result in a legal commitment, however as the extent of these could not be accurately assessed at the present time this provision was created to meet any element of cost for which we were liable, i.e. which were not reimbursable from insurers as they fell below individual excess clauses and the annual self-insured limits.  This provision of £0.4m fully covered all estimated costs associated with outstanding claims.

Business Rates Collection Fund Appeals Provision

This covered the Authority’s share of outstanding appeals against business rates collection funds, which was calculated each year end by each billing authority within Lancashire based on their assumptions of outstanding appeal success rates, as part of their year-end accounting for the business rates collection fund. At 31 March 2017 this provision stood at £0.7m to cover anticipated costs of outstanding business rates appeals.

The Treasurer felt that the level of provisions was sufficient to meet future requirements in the medium term.

Summary Reserve Position

The anticipated position in terms of reserves and balances showed the overall level reducing to approximately £17m by 31 March 2020, the end of the current four-year settlement period and reducing down to £8m by March 2023.  Up to 31/3/2020 the Authority remained in a healthy position.  The reduction in the level of reserves became more of a concern thereafter with the general reserves potentially falling below the minimum target level, but this position would be subject to significant change as funding, inflation, pay awards and other pressures all became clearer in future years. The annual refresh of this policy would identify the impact of any changes as they developed.

RESOLVED: - That the Authority approved the Reserves and Balances Policy and the level of reserves included within it.