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.

There remained a great deal 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. As a result, the anticipated multi-year settlement had been postponed again, hence the draft settlement only covered 2022/23. As a result of the Local Government Finance Settlement the Authority will receive a 1.1% inflationary increase for 2022/23.

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 had also been postponed, and hence were likely to take effect over the next settlement period, which it was anticipated would be a multi-year settlement.

The position in terms of pension costs was also extremely uncertain with guidance relating to Immediate Detriment being issued, and subsequently withdrawn, and with there being no clear decision as to where the costs of implementing this would fall.

As such the Treasurer considered it prudent to increase the minimum target reserves level to £4.0m, 6.5% of the 2022/23 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 which 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.

Whilst the settlement provided greater flexibility to increase council tax in 2022/23, this was a one-off relaxation of the referendum principles and would not be repeated in future years. Hence the scope to increase council tax in future years to restore depleted reserves was limited, without holding a local referendum. Therefore, 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 2022 was £6.0m, providing scope to utilise approx. £2.0m of reserves. The draft budget (as presented elsewhere on the agenda) did not require any drawdown of reserves in 2022/23. The Treasurer therefore considered this reserve was at an appropriate level.

Looking at the medium term the need to drawdown reserves would be affected by:-

·         Council tax – The revenue budget assumed that council tax was increased by the maximum permissible each year, enabling the Service to deliver a balanced budget each year. If this was not the case, then there may be a need to utilise reserves in future years to balance the budget;

·         Emergency Cover Review (ECR) - The revenue budget assumed that the outcome of the ECR was cost neutral. If this was not the case and the ECR/cessation of DCP required significant investment, then reserves would need to be utilised to fund this;

·         Pension costs – the revenue budget assumed that the only pension costs that fell on the Service were employer contributions, and that all other costs were met by the Government via the Pension Holding Account. If this was not the case, then reserves would be required to meet these one?off costs which would be very significant;

·         Future funding - The revenue budget assumed future funding increased by 1% each year, in line with this year’s settlement. If that was not the case and it was frozen, this would reduce funding levels by £0.3m, if that was the case for 4 years the cumulative effect would be a £1m reduction in overall funding, which may impact on the need to drawdown reserves;

·         Future inflation - The revenue budget assumed future inflation, including pay awards, returned to the Government’s 2% target. If this was not the case each 1% more than this increased the recurring budget requirement by £0.5m, ie £2.5m over the next 5 years, which may impact on the usage of reserves.

Earmarked Reserves

The earmarked reserves forecast at 31 March 2022 was £9.23 and a breakdown of these was considered by Members.  The Director of Corporate Services highlighted earmarked reserves held for:

·         As a result of higher inflation rates, the amount of PFI Reserve held needed to increase to £5.2m in order to smooth out the annual net cost to the Authority of the existing PFI scheme and would be required to meet future contract payments.

It was noted that of the anticipated balance of £6.1m at 31 March 2027, £4.0m (66%) 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 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. 

At 31 March 2022 the Authority anticipated holding £18.4m of capital reserves and receipts, after allowing for the transfer of £0.4m of earmarked reserves and £0.4m of the year-end underspend. Based on the capital programme presented elsewhere on this agenda it was anticipated fully utilising these by 31 March 2025. Of the total reserve £1.5m was contractually committed.

Based on this the Treasurer believed these were adequate to meet future requirements in the short to medium term but recognised that they would be exhausted in March 2025.

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 2021. 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 2021 this provision stood at £1.1m 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 anticipated position in terms of reserves and balances was set out in a graph on page 92 of the agenda pack with a more detailed year on year analysis by reserve set out in appendix 1, as now considered by Members.

The level of reserves reduced by over £20m over the next 3 financial years reflecting the scale of the capital programme.  The general reserve remained above the minimum requirement throughout the period, reflecting the increase in council tax included in the revenue budget report (reported elsewhere on the agenda).  The position would be subject to significant change as pension costs, funding, inflation, pay awards etc became clearer in future years.  The annual refresh of this policy would identify the impact of any changes ad they developed. 

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