Supplementary memorandum by Communities
and Local Government (LAI 27A)
LOCAL AUTHORITY RESERVES
1. Following the hearing on 9 February
2009, the Select Committee made a request to the Audit Commission
for additional information on local authority reserves. The Audit
Commission has passed this request on to Communities and Local
Government, as the Department collects the data on local authority
reserves.
Context—The Prudential Framework for Local
Government
2. The requirement for local authorities
to hold financial reserves is acknowledged in statute.[10]
Reserves are one component of an authority's medium-term financial
planning—other components include revenue spending plans,
income forecasts, potential liabilities, capital investment plans,
borrowing and council tax levels. These decisions are inter-linked.
This means that, to ensure prudent financial management, some
authorities will need to maintain reserves at higher levels than
others.
3. These decisions are governed by the prudential
framework for local government, introduced in 2003. Under this
system, the Government sets the financial framework; the professional
experts (CIPFA) set the standards and provide guidance and training;[11]
and individual local authorities take responsibility for their
own financial decisions, scrutinised by their auditors and electorate.
4. The Local Government Act 2003 requires
chief finance officers to report to their authorities, when making
council tax decisions, on the robustness of the estimates and
the adequacy of the reserves allowed for in the budget. The authorities
must have regard to the report in taking their decisions, and
the overall level of reserves is agreed with the full council
at the start of the financial year.
5. The background to this is that, in 2002,
the Audit Commission reported that auditors considered that 12%
of English local authorities had inadequate reserves, and this
figure included 31% of London Boroughs and 21% of county councils.
These concerns were part of the justification for new financial
duties being imposed on local authorities and their chief finance
officers in the 2003 Act.
6. Holding adequate reserves is important
for contingency planning, and the capacity of authorities to respond
to unexpected events—such as the 2007 flooding, and
the collapse of the Icelandic banks—without affecting their
ability to deliver key services, pay staff and meet their contractual
obligations.
The Level of Reserves
7. The table below—produced from figures
published by the Department for Communities and Local Government—provides
a breakdown of English local authority reserves levels as at 31 March
2002 and 31 March 2008.
8. As highlighted above, there was an increase
in the level of reserves from 2003, following auditors' concerns
that the existing levels were not high enough.
9. The figures are broken down into unallocated
revenue reserves; school revenue reserves; and other earmarked
reserves. Earmarked reserves are sums set aside by local authorities
for known or predicted requirements. As can be seen from the table,
only £3.4 billion of the £14.6 billion total
revenue reserves at 31 March 2008 was unallocated.
10. Separate columns are provided for the
Greater London Authority figures, which in 2008 accounted
for some 13% of the total local authority revenue reserves.
11. In considering these aggregate figures,
it is important to recognise the significant variation from authority
to authority. This will vary according to the type of authority,
and will also depend on local circumstances and historical factors
(for example, the amount of capital receipts from the sale of
council house stock).
12. Shire district councils are likely to
have a proportionally higher level of reserves in relation to
expenditure than larger authorities, because of the lower level
of their overall budgets. Shire counties tend to have the largest
level of reserves in absolute terms, but proportionally some of
the lowest percentages in relation to the amount of expenditure.
Financial reserves levels 31 March 2002 and
31 March 2008
| 31 March 2002
(£m)2
| Of which GLA
(£m)2 | 31 March 2008
(£m)2
| Of which GLA
(£m)2 |
Unallocated revenue reserves | 1,662
| 39 | 3,418 | 187
|
| Schools reserves1 | 1,103 |
0 | 2,000 | 0 |
| Other earmaked reserves | 4,131
| 62 | 9,151 | 1,669
|
| Of which are earmarked for: |
| | | |
| Insurance purposes4 | 453 |
0 | N/A | N/A |
| Capital purposes4 | 1,660 |
7 | N/A | N/A |
| Service committees4 | 833 |
22 | N/A | N/A |
| Other financial reserves4 | 1,102
| 22 | N/A | N/A
|
| Total revenue reserves | 6,896
| 101 | 14,569 | 1,856
|
| Usable capital receipts | 2,062
| 56 | 4,243 | 83
|
| Pensions3 | N/A | N/A
| -123,040 | -19,200 |
Notes:
1 Schools' revenue reserves are shown as at 1 April 2002. The estimated levels for 31 March 2002 cannot be calculated as there is no data available to do this.
2 Estimated reserves as of 31 March 2002 and 2008 are calculated using the reserve levels stated as at 1 April 2001 and 2007 and the appropriations to and from the reserves during the financial year. These reserves figures are taken from the RS form for 2001-02 and 2007-08.
3 As required by the regulations on the local government pension scheme, monies not needed to pay pensions must be invested. Pension funds do hold some levels of cash, but that is for specific, transactional everyday purposes, and is limited in scale by the prudential limits set out in the extant regulations. Pensions reserves data for 31 March 2002 is not available.
4 CLG no longer collect the breakdown of types of earmarked revenue reserves. 2001-02 was the last year where this data was collected. These figures are shown as at 1 April 2001.
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Public Works Loan Board
13. The Committee also asked for "information on
the effect, if any, on the scale of local authority reserves of
the recent changes in the PWLB's lending terms, and in particular,
the change in the calculation of the premium on early debt repayment".
14. It is important to note that reserves cannot be viewed
as a cash measure. Early debt repayment by an authority will result
in a balanced change in assets and liabilities and therefore no
change to that authority's stated reserves. An authority may,
however, choose to reduce its level of investments in order to
make early debt repayments and will consider the terms of lending
as part of this decision.
February 2009
10
Sections 32 and 43 of the Local Government Finance Act
1992 require billing and precepting authorities in England
and Wales to have regard to the level of reserves needed for meeting
estimated future expenditure when calculating the budget requirement. Back
11
Professional advice on reserves has been provided by CIPFA since
1995 and was last revised in 2008. The guidance makes clear
that it is for each authority to make its own judgement on the
level of reserves, taking into account all relevant local circumstances. Back
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