Agenda item

The Director of Corporate Services / Treasurer 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.

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 elsewhere on this 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 and the remedy for the McCloud judgement; 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.

Funding for 2021/22 was subject to a one-year settlement, with a further four-year Spending Review planned for 2022/23.  Based on December’s Local Government Finance Settlement, the Authority would receive a 0.2% inflationary increase for 2021/22.

There was greater degree of uncertainty over long term funding than in recent years as the impact of both Brexit and the Pandemic on public finances and the national economy were still unknown. Furthermore, 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 over the next Spending Review period.

As such the Treasurer considered it prudent to increase the minimum target reserves level at £3.5m, 6% of the 2021/22 net revenue budget, reflecting the increasing level of uncertainty. This was slightly higher than the 5% threshold identified by the Home Office above which the Authority was required to justify why it held the level of reserves, reflecting the increasing uncertainty about future funding, pension costs and pay awards.

Should reserves fall below this minimum level the following financial year's budget would contain options for increasing reserves back up to this level. 

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 2021 was £6.0m, providing scope to utilise approx. £2.5m of reserves.

The proposed drawdown of £0.3m in 21/22 would reduce the general balance to £5.7m.  After allowing for this the Treasurer considered these were at an appropriate level to meet expenditure requirements in 2021/22. (No allowance has been made in the revenue budget shortfall for potential costs arising from the McCloud pension remedy, as it assumed these were reflected in future changes to pension contribution rates.)

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 but based on the existing draft revenue budget, general reserves were sufficient to balance the budget over the next 3 years, falling below the current minimum level by 31 March 2024, however that was subject to a great deal of uncertainty, particularly around pension costs, funding, vacancy profiles, future inflation and pay awards and council tax increases.

Earmarked Reserves

Level of Earmarked Reserves

The earmarked reserves forecast at 31 March 2021 were £10.2m and a breakdown of these was considered by Members.  The Director of Corporate Services highlighted earmarked reserves (as set out on pages 70 and 71) which were held for:

·         Section 31 Business Rate Relief Grant of £1.9m;

·         Carried forward 2020/21 underspend relating to timing of activities delayed by the pandemic of £0.5m;

·         Specific grant carried forward in respect of Protection Uplift Grant; Building Risk Review Grant and Grenfell Infrastructure Grant of £0.2m;

·         Covid funding to meet costs associated with the pandemic of £0.2m.

It was noted that of the anticipated balance of £5.1m at 31 March 2026, £3.7m 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.

At 31 March 2021 the Authority anticipated holding £20.4m of capital reserves and receipts, after allowing for the transfer of the anticipated £0.5m year-end underspend into this reserve. Based on the capital programme presented elsewhere on this agenda it was anticipated fully utilising these by 31 March 2025. Of the total reserve £3.5m 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 cannot 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 fall below individual excess clauses and the annual self-insured limits. This provision fully covered all estimated costs associated with outstanding claims.

This provision stood at £0.5m at 31 March 2020. 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 2020 this provision stood at £1.0m 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 by billing authorities 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 reserve position showed, next year the Authority remained in a healthy position.  The reduction in the level of reserves became more of a concern thereafter with the overall level reducing by over £20m over the next three financial years. With the general reserve potentially moving below the minimum target level from April 2024 onwards. However, 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. 

In response to a question by Councillor Williams regarding a breakdown of how the innovations fund was being utilised, the Director of Corporate Services advised that there was a bidding process to use the fund which may include capital (ie: there may be some equipment in the capital programme which could potentially be charged to this fund), however, this process had not yet been carried out therefore this fund had not yet been utilised. 

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