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, cost associated with maintaining operational cover in the event of Industrial Action etc.

 

There remained a great deal of uncertainty over long term funding, as a result, the anticipated multi-year settlement had been postponed again.  The Local Government Finance Settlement only covered 2023/24, although the policy statement that accompanied it stated “The core settlement will continue in a similar manner for 2024-25.  The major grants will continue as set out for 2023-24: Revenue Support Grant will continue and be uplifted in line with Baseline Funding Levels”.  Whilst this provided a basis for estimating future funding increases, as set out in the revenue budget paper, it did not provide any certainty.

 

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.

 

The position in terms of pension awards had still not been resolved however, the likelihood of this being significantly higher than budgetary allowance and the likelihood of industrial action had both reduced as a result of the latest pay offer.

 

Whilst future pension costs remained uncertain, with authorities still awaiting definitive guidance on how to implement changes following the McCloud judgement, and with the next re-valuation of the firefighter pension scheme being due this year, the draft budget for 2024/25 already included a 3% allowance for this.

 

As such the Treasurer considered it prudent to reduce the minimum target reserves level to £3.75m, 5.5% of the 2023/24 net revenue budget, reflecting the level of uncertainty. It was noted that it may be possible to reduce this minimum level further if the current grey book 2-year pay offer was accepted.  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 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.

 

Based on professional judgement, the Treasurer felt the maximum level of general reserves 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 2023 was £4.0m, providing scope to utilise approx. £0.25m of reserves. The draft budget (as presented elsewhere on the agenda) identified a funding gap of £0.3m in 2023/24, which could be met from a combination of drawdown against this reserve and additional in-year savings.  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, after allowing for relatively low level of reserve drawdown / additional savings. If this was not the case, then there may be a need to utilise reserves in future years to balance the budget;

·         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.  Furthermore, it assumed that the employer contribution rate would increase by 3% following the next tri-annual re-valuation exercise., but at the present time no details were available, hence contribution rates could increase by a greater amount;

·         Future funding - The revenue budget assumed future funding increased by 5% in 2024/25 followed by 2% increases thereafter.  If that was not the case and it was frozen as part of the next multi-year settlement, this would reduce funding levels by £0.6m each year, a cumulative reduction of £1.9m over the medium-term financial strategy, and this would impact on the need to drawdown reserves;

·         Future inflation - The revenue budget assumed future pay awards at 5% in 2023/24 before returning to the Government’s 2% target. If this was not the case each 1% more than this increased the recurring budget requirement by £0.4m, i.e. £2.9m over the next 5 years, which may impact on the usage of reserves.

 

At the present time, the Medium-Term Financial Strategy (MTFS) identified funding gaps in the next 4 years. Assuming 50% of these were met by additional in-year savings with the balances being drawdown form this reserve, the Authority would potentially see this reserve falling to £3.2m by March 2027. This was below the current minimum requirement. However, the forecasts were subject to a number of variable factors, as set out in the report, and these would continue to be reviewed to refine forecasts and ensure that reserves remained above the minimum threshold throughout the duration of the MTFS.

 

Earmarked Reserves

 

The earmarked reserves forecast at 31 March 2023 was £2.6m and a breakdown of these alongside the forecast anticipated position at 31 March 2028 was considered by Members. 

 

The Director of Corporate Services highlighted earmarked reserves held for:

 

·         Page 135 - Insurance Aggregate Stop Loss reserve which related to both the Authority’s combined liability insurance policy and its motor policy.;

·         Page 136 – Innovation Fund which detailed money set aside to meet costs arising from new initiatives / developments with improved service delivery or firefighter safety.

 

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

 

PFI Reserve

 

At 31 March 2023 the Authority anticipated holding £4.9m of PFI reserve.  The reduction of this reserve in subsequent years reflected its drawdown to offset future charges, with the reserve reducing to £3.7m by March 2028.  Assuming the retail price index returned to 3% in future years the whole of this reserve was contractually committed over the next 20 years.  Based on this the Treasurer believed that was adequate to meet future requirements.

 

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 2023 the Authority anticipated holding £20.3m of capital reserves and receipts. Based on the capital programme presented elsewhere on this agenda it was anticipated fully utilising these by 31 March 2027. Of the total reserve £5.0m 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.

 

Summary Reserve Position

 

The anticipated position in terms of reserves and balances was set out in a graph on page 139 of the agenda pack with a 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 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 as they developed. 

 

Provisions

 

In addition, 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 £0.6m at 31 March 2022. 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 2022 this provision stood at £0.9m 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.

 

In response to a question raised by CC Mein, the Director of Corporate Services confirmed that the Authority’s share of outstanding appeals against business rates collection funds was 1%.  This was calculated nationally each year with the Authority’s share being set nationally at 1% of each billing authorities estimate.

 

In response to a question from CC S Singleton the Director of Corporate Services confirmed that the reduction in the innovation budget reflected the estimated use of that fund over the period 2023-28.

 

Resolved:  The Authority approved the policy and noted the Treasurer’s advice on the level of reserves included within it.