Agenda item

The Director of Corporate Services presented the report.  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 judgment 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 changes to pension schemes, both in terms of pensionability of allowances and the remedy for the McCloud judgment; 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 a four-year settlement. This meant that funding for 2020/21 was subject to a one-year settlement, with a further four-year Spending Review planned for 2021/22.  As per the Local Government Finance Settlement we would receive a 1.6% inflationary increase for 2020/21.

There was greater degree of uncertainty over long term funding than in recent years 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 would take effect. Furthermore, the impact of Brexit on the national economy was still unknown.

As such the Treasurer considered it prudent to maintain the minimum target reserves level at £3.0m, 5.2% of the 2020/21 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.

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 judgment, 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 2020 was £8.2m, providing scope to utilise approx. £5.2m of reserves.

The proposed drawdown of £0.4m in 20/21 would reduce the general balance to £7.8m. Discussions were on-going both locally and nationally in respect of Fire-fighter pensions and until such time as these concluded it was not clear whether any backdating costs would be incurred, hence at the present time no allowance had been made for these. Based on this the Treasurer considered these were at an appropriate level to meet expenditure requirements in 2020/21.  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 to offset the shortfall.

Future requirements were less clear as multi-year settlements would have ended and the budget forecasts become less accurate as there were a whole host of assumptions underpinning these projections, particularly around pension costs, funding, vacancy profiles, future inflation and pay awards and council tax increases.

General reserves were sufficient to balance the budget throughout the next year. However, dependent upon which scenario was considered reserves would not be sufficient to meet the current anticipated funding gap over the next 5 years and hence significant additional savings would be required.

Earmarked Reserves

Level of Earmarked Reserves

The earmarked reserves forecast at 31 March 2020 were £7.2m and a breakdown of these was considered by Members.  It was noted that as at 31 March 2019 the Authority held £0.9m to meet the potential penalty costs associated with the repayment of the remaining PWLB loans.  Given the reducing likelihood of repaying the loans with such a large penalty, it was proposed that this balance be transferred into the Capital Funding Reserve to meet the costs of the future capital programme as referred to later in the report.  It was also noted that of the anticipated balance of £5.4m at 31 March 2025, almost £4m 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 under spends 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 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 2020 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 £0.2m 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 new regulations and hence for the purpose of planning all capital receipts would be used to meet future capital costs, not qualifying revenue expenditure. 

At 31 March 2020 the Authority anticipated holding £18.7m of capital reserves and receipts. Based on the capital programme presented elsewhere on this agenda it was anticipated fully utilising these by 31 March 2025. Of the total reserve £0.6m was contractually committed.

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

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 2019. 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 2019 this provision stood at £0.8m 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 summary anticipated position in terms of reserves and balances showed the overall level reducing to approx. £13m by 31 March 2025, after allowing for potential backdating of pensionability of allowances.

It was noted that reserves fell dramatically over the programme reflecting the scale of the draft capital programme. Furthermore, this position would be subject to significant change as pension costs, 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. 

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