Medium Term Financial Strategy (MTFS) 2022/23- 2026/27
Appendix 2 - reserves
Local authorities must consider the level of reserves needed to meet estimated future expenditure when calculating the budget requirement. The Strategic Director, Resources and Digital is required, as part of the budget setting process each year, to provide a statement on the adequacy of reserves that is subject to an external audit review to assess value for money and a going concern opinion.
The Council keeps a level of reserves to protect against the risk of any uncertainties or unforeseen major one-off events. This is considered best practice and demonstrates sound financial planning. The use of financial reserves will not in itself resolve a budget problem, but it can allow for smoothing of impacts or allow the Council time to address issues.
The audited statement of accounts shows all the reserves balances held by the Council, but it should be noted that not all of these can be used to support the budget. Reserves can be;
- held for accounting purposes. These are not true cash balances and are unable to be used to support the budget and are classed as unusable in the Council's statement of accounts and therefore will not be detailed in the sections below
- the General Fund is split between a General Reserve and reserves attributable to schools (LMS Budget Share Reserve)
- strategic earmarked reserves the Council has chosen to hold for a specific purpose
- ring fenced reserves which can only be used for a specific purpose and are not available to support council tax or budget setting of general Council services
Reserves policy
The Council's policy on reserves is as follows:
- the Council will maintain its general reserve at a minimum of 3% of the net revenue budget to cover any major unforeseen expenditure. The Council will aim to balance its revenue budget over the period of the MTFS without reliance on the use of the general reserve
- the Council will maintain earmarked reserves for specific purposes which are consistent with achieving its key priorities. The use and level of earmarked reserves will be reviewed annually
- the council's general reserve is available to support budget setting over the period of the MTFS and usage should be linked to the achievement of financial sustainability over the medium term
Review of reserves
A review of reserves is undertaken twice a year and covers:
- the purpose for which the reserve is held
- an assessment of the appropriate level of the reserve to meet potential future liabilities, in line with the Council's reserves policy and aligned to the risk management framework
- procedures for the reserve's management and control
- a process and timescale for future reviews to ensure continuing relevance and adequacy
The balances as at 31 March 2021 remain subject to audit. As part of the MTFS refresh, a review of reserves has been undertaken and it is proposed that current reserves are realigned to supplement the Budget Sustainability Reserve creating £20m in funds to support a planned approach to achieve a balanced financial position over the next three years. The realignment is shown in the table below.
| Closing balance March 2021 £000s | Review MTFS October 2021 £000s | £000s | Proposed £000s | |
|---|---|---|---|---|
| General reserves | ||||
| General reserve | (13,967) | 5,929 | (8,036) | |
| School budget share reserve | (8,912) | (8,912) | ||
| Total general reserve | (22,879) | 5,929 | (16,950) | |
| Strategic earmarked reserves | ||||
| Financial risk and Resiliance | (14,329) | 4,356 | 0 | (9,973) |
| Business Rates reserve | (5,000) | 5,000 | 0 | |
| Insurance reserve | (3,000) | 1,000 | (2,000) | |
| Grant clawback | (1,000) | (2,000) | (3,000) | |
| Workforce development | (4,856) | 1,856 | (3,000) | |
| Commercial risk | 0 | (1,500) | (1,500) | |
| Budget flexibility | (473) | (473) | ||
| Economic, housing and environmental investment | (7,823) | 7,823 | (0) | |
| Poverty, health and equality investment | (6,892) | 6,892 | 0 | |
| Thrive | (10,000) | (10,000) | ||
| Economic, house and environmental investment | (5,000) | (5,000) | ||
| Poverty, health and equality investment | (5,000) | (5,000) | ||
| MTFS reallocation to Thrive priorities | (1,873) | (1,873) | ||
| Voluntary Sector reserve | (231) | (231) | ||
| Anti poverty reserve | (148) | (148) | ||
| Discretionary social fund | (436) | (436) | ||
| Strategic revenue investment | (2,312) | (2,312) | ||
| Budget sustainability | (5,000) | (15,000) | (20,000) | |
| Pandemic services impact | (17,991) | (17,991) | ||
| Pandemic collection fund impact | (28,239) | (28,239) | ||
| Ringfenced reserves | ||||
| Developers' contributions | (2,131) | (2,131) | ||
| Unapplied revenue grants | (1,311) | (1,311) | ||
| Public Health reserve | (1,872) | (1,872) | ||
| DSG reserve | (2,241) | (2,241) | ||
| Total earmarked reserves | (87,829) | 9,071 | (15,000) | (93,758) |
| Total reserves | (110,708) | 15,000 | (15,000) | (110,708) |
A breakdown of each reserve following review and the reason it is needed is outlined below;
| Reserve | Why needed | Available to support council budget | Balance as at 31 March 2021 |
|---|---|---|---|
| Council general reserve | This is a statutory fund that acts as a contingency and allows the Council to meet any unforeseen costs. If the council overspends in a year this fund will meet that liability. The minimum balance on the reserve is 3% of the net revenue budget | Yes (subject to minimum levels being maintained) | £8.038m |
| Schools balances | Use of this reserve is ring-fenced to schools and there is a duty to report planned use to Schools Forum. The balance is for schools collectively, but this includes both surplus and deficit balances of individual schools | No - ringfenced for to schools | £8.912m |
The Strategic Director, Resources and Digital has reviewed the level of the general reserve and it is considered that a 3% minimum level should be retained given the current level of risk and uncertainty.
| Reserve | Why needed | Available to support council budget | Balance as at 31 March 2021 |
|---|---|---|---|
| Financial risk and resilience | This reserve was created to set aside funds in respect of key financial risks identified through the risk management process and the savings required as part of the Council MTFS. Risks have been assessed and realigned as part of the review and now include Insurance (£2m), grant claw back (£3m), workforce development costs (£3m), commercial risk (£1.5m) and budget flexibility (£0.5m) | Yes | £9.973m |
| Thrive (new) | This reserve will replace the two reserves to continue support to council thrive priorities of Economic, Housing and Environmental Investment (£5m) and Poverty, Health and Equality Investment (£5m) | Yes | £10.000m |
| Budget sustainability | This reserve was created in 2021 to help support the timings of achieving significant budget savings and Thrive outcomes whilst still dealing with pandemic impacts. Following review this reserve will increase by £15m | Yes | £20.000m |
| COVID | |||
| Pandemic services impact | This reserve is held to mitigate the budget impacts of the pandemic across all council services for the next two years | Yes | £17.991m |
| Pandemic collection fund impact | Specific grants provided by government to replace lost funding to council tax and business rates | Yes | £28.239m |
It is important to note that the position above includes significant temporary funding held to mitigate pandemic impacts. The impacts are expected to continue into this year and beyond, so the Council set aside £17.991m covid grant funding within reserves to cover cost pressures and lost income over the next two years. Grant funding of £28.239m were provided by government to specifically replace lost funding to council tax and business rates. This funding was included in financing of the 2021/22 budget to help achieve a balanced budget.
Ringfenced reserves
Ringfenced reserves balances are shown in the table below for information.
| Reserve | Why needed | Available to support council budget | Balance as at 31 March 2021 |
|---|---|---|---|
| Developer contributions | This reserve consists of developer contributions in respect of agreed regeneration schemes following Section 38 and 106 agreements. The movement on the reserve will fluctuate depending on the use of the contributions to support regeneration schemes such as play areas in new housing developments. | No | £2.131m |
| Unapplied revenue grants | This reserve was created to comply with accounting rules where unspent grants and contributions, without grant conditions are to be used in the following years. | No | £1.311m |
| Public Health reserve | The responsibility for Public Health transferred to local authorities on the 1 April 2013. The funding is for future Public Health use. | No | £1.872m |
| Dedicated schools grant reserve | This is for schools use and cannot be used for other priorities within the Council. Use of this reserve will be agreed by Schools Forum. | No | £2.241m |
| Housing revenue account | This fund is statutory to maintain a revenue account for local authority Council housing provision. It contains the balance of income and expenditure as defined by the Act that is available to fund future expenditure in connection with the Council's landlord function or (where in deficit) that is required to be recovered from tenants in future years. | No | £30.786m |
| Capital receipts reserve | This reserve holds the proceeds from the disposal of land or other assets, which are restricted by statute from being used other than to fund new capital expenditure or to be set aside to finance historical capital expenditure. The balance on the reserve shows the resources that have yet to be applied for these purposes at the yearend use and may be earmarked for use in the Council's capital programme. | No unless approved by government for transformation | £11.370m |
| Capital grants unapplied | This reserve holds the grants and contributions received towards capital projects for which the Council has met the conditions that would otherwise require repayment of the funds, but which have yet to be applied to meet expenditure. The balance is restricted by grant terms. | No | £5.037m |
Following review and realignment of earmarked reserves existing commitments will need to be reviewed and possibly reduced or removed.
For financial resilience the council may need to consider replenishment of the general reserve over the MTFS period.
The overall level of financial resources available to the council is finite and therefore the continued use of reserves above a certain level cannot be sustained in the longer term without placing the Council's financial position at risk. The MTFS recognises that the council's financial reserves are maintained at a prudent level to protect present and future Council services.
The Council accepts that while balancing the annual budget by drawing on general reserves can be in certain circumstances a legitimate short-term option it is not considered good financial management to finance recurrent expenditure in this way in the medium to long term. The Council recognises that usage of reserves is one-off in nature and must be linked with expenditure and income plans to support financial sustainability in the medium term.