Medium Term Financial Strategy (MTFS) 2020/21 - 2024/25
Reserves
Local authorities must consider the level of reserves needed to meet estimated future expenditure when calculating the budget requirement. The Strategic Director, Corporate Resources 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 expenditure. 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 sort out issues. Therefore, reserves are mainly used to:
- manage the impact of cuts over a longer period of time
- invest in schemes that allow services to be delivered cheaper
- take "one-off hits" for the council as a whole without the need to further reduce service budgets (e.g. changes to national insurance contributions or local tax regimes)
- provide capacity to absorb any non-achievement of planned budget reductions in each year
- to temporarily roll over unused portions of grants that can legally be used at a later date
- to insure against major unexpected events (such as flooding)
- to guard against general risk (i.e. saving up for unexpected events)
- to guard against emergent specific risks, such as business rate appeals, council tax support funding cuts and welfare reform. These risks are predicted to continue to increase
Reserves policy
The council's policy on reserves is outlined within the MTFS principles 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 2018/19 Revenue Outturn position was reported to Cabinet on 25 June 2019, showing the balance of usable reserves of £52.9m (including ring fenced reserves of £12m) An explanation of each reserve and balances as at 31 March 2019 can be found in the council's audited statement of accounts for 2018/19.
General reserves total £21.056m, split £14.807m Council general reserve and £6.249m schools reserves.
- General Fund - £14.807m- The minimum balance on the reserve is 3% of the net revenue budget which equates to £6.210m, therefore £8.597m is available for reallocation to earmarked reserves
- Schools Reserves - £6.249m- The schools collectively have a balance of £6.249m, although it should be noted that this includes both surplus and deficit balances. It is currently estimated that all balances will be utilised by the end of 2021/22
The Council's earmarked reserves for specific purposes total £31.848m (£26.019m strategic and £5.829m ring fenced).
Earmarked reserves
The Strategic Director, Corporate Resources has reviewed the level of the general reserve and it is considered that a 5% minimum level should be retained given the current level of risk and uncertainty. It is proposed that £3.986m is transferred from the general reserve to earmarked reserves, leaving a balance of £10.821m which is circa 5% of the net revenue budget.
As part of the MTFS refresh, the earmarked reserves have been reviewed and it is proposed that the current reserves are realigned into four strategic reserves as follows:
- Financial Risk and Resilience- It is proposed that the insurance, grant clawback, business rates and budget flexibility reserves are merged to create a new Financial Risk and Resilience Reserve.
- Budget Sustainability- It is proposed that the strategic revenue investment and the workforce development reserves are merged to create a new Budget Sustainability Reserve.
- Economic, Housing and Environmental Investment- It is proposed that the economic growth, culture and place shaping reserve is renamed to create a new Economic, Housing and Environmental Investment Reserve.
- Poverty, Health and Equality Investment- It is proposed that the discretionary social fund, voluntary sector and anti-poverty reserves are merged to create a new Poverty, Health and Equality Investment Reserve.
The revised reserves balances following the realignment outlined in this report are shown in the table below for information.
| Revised balance September 2019 £000s | |
|---|---|
| General fund: | |
| General reserve | (10.821) |
| LMS budget share reserve (ringfenced for a specific purpose) | (6.249) |
| Total general fund reserve | (17.070) |
| Earmarked reserves: | |
| Strategic reserves | |
| Financial risk and resilience | (11.290) |
| Budget sustainability | (10.215) |
| Economic, housing and environmental investment | (5.000) |
| Poverty, health and equality investment | (3.500) |
| Ringfenced reserves: | |
| Developers' contributions (ringfenced for a specific purpose) | (1.706) |
| DSG reserve (ringfenced for a specific purpose) | (0.816) |
| Unapplied revenue grants (ringfenced for a specific purpose) | (1.115) |
| Public health reserve (ringfenced for a specific purpose) | (2.192) |
| Total earmarked reserves | (35.834) |
| Total reserves | (52.904) |
Reserves Summary 2019/20 to 2024/25
The following table illustrates the changes to balances following review and estimated use of all revenue reserves over the period to March 2025;
| Opening balance April 2019 £000s | MTFS reallocation £000s | Revised balance £000s | Estimated use 2019/20 £000s | MTFS projections 2020/21 £000s | MTFS projections 2021/22 £000s | MTFS projections 2022/23 £000s | MTFS projections 2023/24 £000s | MTFS projections 2024/25 £000s | Estimated remaining balance March 2025 £000s | |
|---|---|---|---|---|---|---|---|---|---|---|
| General fund: | ||||||||||
| General reserve | (14.807) | 3.986 | (10.821) | (10.821) | ||||||
| LMS budget share reserve | (6.249) | (6.249) | 2.585 | 3.270 | 394 | 0 | ||||
| Total general fund reserve | (21.056) | 3.986 | (17.070) | 2.585 | 3.270 | 394 | 0 | 0 | 0 | (10.821) |
| Earmarked reserves: | ||||||||||
| Strategic reserves: | ||||||||||
| Business rates reserve | (5.000) | 5.000 | 0 | 0 | ||||||
| Insurance reserve | (3.000) | 3.000 | 0 | 0 | ||||||
| Grant clawback reserve | (1.000) | 1.000 | 0 | 0 | ||||||
| Workforce development reserve | (6.009) | 6.009 | 0 | 0 | ||||||
| Discretionary social fund reserve | (0.535) | 0.535 | 0 | 0 | ||||||
| Budget flexibility reserve | (2.290) | 2.290 | 0 | 0 | ||||||
| Economic growth, culture and place shaping reserve | (2.885) | 2.885 | 0 | 0 | ||||||
| Strategic revenue investment reserve | (4.206) | 4.206 | 0 | 0 | ||||||
| Voluntary sector reserve | (0.377) | 0.337 | 0 | 0 | ||||||
| Anti poverty reserve | (0.757) | 0.757 | 0 | 0 | ||||||
| NEW financial risk and resilience | (11.290) | (11.290) | 2.290 | 2.000 | 2.000 | 2.000 | 2.000 | 1.000 | 0 | |
| NEW budget sustainability | (10.215) | (10.215) | 1.000 | 2.000 | 2.000 | 2.000 | 2.000 | 1.215 | 0 | |
| NEW economic, housing and environmental investment | (5.000) | (5.000) | 1.000 | 1.000 | 1.000 | 1.000 | 1.000 | 0 | ||
| NEW poverty, health and equality investment | (3.500) | (3.500) | 1.000 | 1.000 | 1.000 | 0.500 | 0 | |||
| Ringfenced reserves: | ||||||||||
| Developers' contributions | (1.706) | (1.706) | 0.750 | 0.350 | 0.350 | 0.256 | 0 | |||
| DSG reserve | (0.816) | (0.816) | 0.816 | 0 | 0 | |||||
| Unapplied revenue grants | (1.115) | (1.115) | 0.748 | 0.367 | 0 | 0 | 0 | 0 | 0 | |
| Public health reserve | (2.192) | (2.192) | 0.753 | 0.321 | 0.321 | 0.321 | 0.321 | 0.155 | 0 | |
| Total earmarked reserves | (31.848) | (3.986) | (35.834) | 8.357 | 7.038 | 6.671 | 6.077 | 5.321 | 2.370 | 0 |
| Total reserves | (52.904) | 0 | 10.942 | 10.308 | 7.065 | 6.077 | 5.321 | 2.370 | (10.821) | |
| Total ringfenced | (12.078) | 0 | (12.078) | 5.652 | 4.308 | 1.065 | 0.577 | 0.321 | 0.155 | 0 |
| No ring fence | (40.826) | 0 | (40.826) | 5.290 | 6.000 | 6.000 | 5.500 | 5.000 | 2.215 | (10.821) |
| (52.904) | 0 | (52.904) | 10.942 | 10.308 | 7.065 | 6.077 | 5.321 | 2.370 | (10.821) |
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. Where this approach is adopted the council will be explicit as to how such expenditure will be funded in the medium to long term to achieve financial sustainability. 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.