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.

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.

2019/20 was the final year of the current 4 year settlement. This meant that funding beyond 2019/20 was subject to the outcome of next year’s Spending Review, as well as the outcome of the fair funding review of relative needs and resources and the Government intention to move to greater retention of Business Rates, as opposed to maintaining Revenue Support Grant. Furthermore the impact of Brexit on the national economy was still unknown. Therefore there was greater degree of uncertainty over long term funding than in recent years.

As such the Treasurer considered it prudent to increase the minimum target reserves level to £3.2m, 5.7% of the 2019/20 net revenue budget, reflecting the increasing level of uncertainty. This was broadly in line with the 5% threshold identified by the Home Office above which the Authority was required to justify why it held the level of reserves.  Should reserves fall below this minimum level the following financial year's budget would contain options for increasing reserves back up to this level, which it was noted may take several years to achieve.

Whilst this exercise set a minimum level of reserves it did not consider what, if any, maximum level of reserves was appropriate. In order to do this the level of reserves held should be compared with the opportunity cost of holding these, which in simple terms meant that if you held reserves that were too high you were foregoing the opportunity to lower council tax or invest in further service improvements.

However, 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 financial 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 2019 was £8.0m, providing scope to utilise approx. £4.8m of reserves.

The proposed drawdown of £0.3m in 19/20 would reduce the general balance to £7.7m and the Treasurer considered these were at an appropriate level to meet future expenditure requirements in 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.

Future requirements were less clear as multi-year settlements would have ended and the budget forecasts became less accurate as there were a whole host of assumptions underpinning these projections, particularly around funding, vacancy profiles, pension costs, future inflation and pay awards and council tax increases. The report showed the point at which general reserves dipped below minimum requirements, and the point at which they were exhausted, based on various council tax options. 

General reserves were sufficient to balance the budget next year. However they were only a short term solution, and based on the current assumptions included in the budget, even allowing for a 2% council tax increase each year, they would fall below our minimum level during 2023/24. Hence over the medium term the general reserve would potentially fall below the 5% threshold identified by the Home Office. Furthermore the utilisation of reserves would still leave a recurring funding gap that would need to be offset by savings at a future point in time, and as highlighted earlier the scope to do so was limited.

Earmarked Reserves

Level of Earmarked Reserves

The earmarked reserves forecast at 31 March 2019 were £7.6m and a breakdown of these was considered by Members.  It was noted that over half of the forecast anticipated balance of £6.2m as at 31 March 2024 related to the Private Finance Initiative reserve.

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

Capital Reserves and Receipts

Capital Reserves had been created from underspends on the revenue budget in order to provide additional funding to support the capital programme in future years. 

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 £140k 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 2019 the Authority anticipated holding £18.2m of capital reserves and receipts. Based on the capital programme presented elsewhere on the agenda it was anticipated that a further £16.2m would be utilised by 31 March 2024, leaving a balance of £2.0m to fund future capital programmes.

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

It was noted that no allowance had been built in the capital programme for the potential relocation of SHQ. 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 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 fully covered all estimated costs associated with outstanding claims.

The provision stood at £0.5m at 31 March 2018. Given the uncertainty in terms of future insurance claims it had been assumed that the provision would be maintained at this level throughout the 5 year period. There were no existing legal obligations associated with this provision, as the legal obligation only arose when settlement of outstanding claims was agreed.

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 2018 this provision stood at £0.6m to cover anticipated costs of outstanding business rates appeals. Whilst a significant element of this would be utilised in the current financial year, reflecting the settlement of outstanding appeals, it was impossible to accurately predict the extent of this usage or the need for any additional provision to meet appeals that arose in year, until such time as a full review was undertaken as part of the financial year end process. Therefore for the purpose of this report it had been assumed that the level of business rates appeals provision remained unchanged. Until the outcome of any appeal was known there was no legal obligation arising from the appeal.

The Treasurer felt that the levels of provisions were 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 £12m by 31 March 2024. 

Up to 31/3/2020, the end of the current multi-year settlement period, the Authority remained in a healthy position. The reduction in the level of reserves became more of a concern thereafter with 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 become clearer in future years. The annual refresh of this policy would identify the impact of any changes as they developed.

In response to a question raised by Councillor Blackburn, the Director of Corporate Services confirmed that the PWLB loan repayment penalty earmarked reserve of £0.9m was part of the investment held with Lancashire County Council’s call account.  The amount was notional as any penalties incurred would depend on the forecast interest rates and the time to maturity. In the Treasury Management policy report earlier on the agenda it had been estimated that if the interest rates on investments were at 1.25% over the remaining period of the loan, repaying the loan would be broadly neutral however, the Director of Corporate Services thought it would be higher than 1.25% which would then be more costly over the period.

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