Agenda item

The Fire Authority held reserves to meet potential future expenditure requirements. The reserves policy was based on guidance issued by CIPFA.  It explained the difference between general reserves (those held to meet unforeseen circumstances) and earmarked reserves (those held for a specific purpose). 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, 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 etc.

The Treasurer considered it prudent to reduce the minimum target reserves level to £2.8m, 5.0% of the 2017/18 net revenue budget, a reduction on previous years due to indicative four year settlements but still maintained at a reasonable level to reflect on-going economic uncertainty and the underlying risks within the budget.

Should reserves fall below this minimum level the following financial year's budget would contain options for increasing reserves back up to this level.  (Note, this may take several years to achieve.)

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 based on professional judgement, the Treasurer felt that the maximum level 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.

Current level of General Reserves

The overall level of the general fund balance, i.e. uncommitted reserves, anticipated at the 31 March 2017 was £10.2m. The draft capital programme allowed for a further transfer of £2.6m from general reserve to the capital programme in 2017/18, leaving a forecast balance of £7.6m, providing scope to utilise approx. £4.8m of reserves.

Based on current assumptions, and dependent upon council tax decisions, further drawdowns of between £0.7m and £4.1m might be required to balance the revenue budget over the next 3 years, i.e. the remainder of the multi-year settlement. This would reduce our overall general reserve level to between £6.9m and £3.5m, still within our target range.

Thereafter the position was less clear as multi-year settlements ended and the budget forecasts become less accurate as there were a whole host of assumptions underpinning these projections, particularly around vacancy profiles, pension costs, future inflation and pay awards.

Assuming general reserves were used to balance the overall position each year this would deliver a sustainable position throughout the period based on a 2% increase in council tax  each year, whereas reserves would run out in 2020/21 if council tax was frozen each year.

Earmarked Reserves

The Authority held £9.5m of earmarked reserves at 31 March 2016.  The forecast of the anticipated position as at 31 March 2022 was detailed in the report.  It was noted that of the anticipated balance of £5.3m, £3.1m related to the Private Finance Initiative reserve with a further £1.4m relating to the insurance reserve.

Capital Reserves and Receipts

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.

The Authority currently held £1.5m of capital receipts all of which pre-dated the new regulation and hence could not be used in this way. Furthermore the Authority only had one surplus capital asset, a small piece of land in South Ribble, on which it was currently reviewing disposal options; however it was not anticipated that this would generate significant capital receipts. Hence for the purpose of planning we had not assumed any capital receipts would be used to meet qualifying revenue expenditure. 

At 31 March 2016 the Authority held £11.8m of capital reserves and receipts. We anticipated utilising £2.5m of this in 2016/17; however we also anticipated transferring a further £4.3m into this from the restructuring reserve and from the in?year underspend. As such we anticipated a year-end balance of £13.6m. Based on the capital programme presented elsewhere on the agenda we anticipated utilising a further £10.6m by 31 March 2022, leaving a balance of £3.0m to fund future capital programmes.

Provisions

The Authority had three provisions to meet future estimated liabilities:-

Insurance Provision

This covered potential liabilities associated with outstanding insurance claims. The precise costs of these were uncertain but 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. Until such time as the year-end position was known it was not possible to estimate, with any accuracy, the likely changes to this provision. As such this was not available to meet other budget pressures. At 31 March 2016 this provision stood at £1.2m to cover anticipated costs of outstanding insurance claims.

Retained Fire-fighters’ Provision

This covered potential liabilities associated with Retained Fire-fighters’ claims (under the Part-Time Workers (prevention of less favourable treatment) Regulations 2000) concerning employment terms and eligibility to be part of the Fire-fighters’ Pension Scheme, which was subject to negotiation at a national level. As such this was not available to meet other budget pressures.  At 31 March 2016 this provision stood at £0.1m.

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 2016 this provision stood at £0.7m to cover anticipated costs of outstanding business rates appeals.

Summary Reserve Position

The anticipated position in terms of reserves and balances showed the overall level reducing to approximately £11m by 31 March 2022.  For the purposes of forecasting we had allowed for a council tax freeze in 2017/18 and 2% increases thereafter and had assumed that all funding gaps were met from utilisation of general reserves which showed that at the end of the current multi-year settlement period (31 March 2020) the Authority was in a healthy position.  The reduction in the level of reserves became more of a concern thereafter but this position would be subject to significant change as funding, inflation, pay awards and other pressures all became clearer in future years.

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