Supplementary memorandum from the Audit Commission (LAI 37A)

 

The Communities and Local Government Select Committee have asked for information on the level of reserves held by English Local Authorities. This information is collected by the Department for Communities and Local Government which has provided a response directly to the Committee. This note adds some commentary.

 

Growth in reserves

The DCLG response notes the increase in local authority reserves in the period since 2002. There is a range of factors leading to the increase in reserves. The need to make provision for single status pay systems is one factor. There are a small number of cases when appointed auditors have commented on authorities' arrangements for determining and maintaining levels of reserves and, in some cases, authorities have increased the level of reserves in line with revised arrangements. Ultimately it is for authorities to set the reserves at the level they consider appropriate.

 

However, incentives for authorities to ensure they have adequate reserves are not due mainly to audit commentary on arrangements. There are now also specific statutory requirements:

 

· Under section 25 of the Local Government Act 2003, the chief financial officer is required to report to the council on the adequacy of proposed financial reserves when setting the budget for the year. Section 28 then requires an authority to review its budget periodically throughout the year and take any action considered necessary to correct a deterioration in its financial position.

 

· Section 26 of the Local Government Act 2003 introduced a concept of 'minimum reserves'. The Secretary of State or the Welsh Assembly Government are given a reserve power to make regulations identifying specified reserves as 'controlled reserves' and setting out how a minimum balance for these reserves should be calculated. To date no such regulations have yet been issued and no reserves have been designated as 'controlled'. However, the Government has undertaken to apply the power only to individual authorities in the circumstances where the authority does not act prudently, disregards the advice of its chief financial officer and is heading for serious financial difficulty.

 

Deposits and reserves

As the DCLG note points out, the relationship between reserves and cash deposits is not direct. Funds received from other bodies need to be banked before they are spent. In addition, there are two factors related to borrowing. First, it is arguably consistent with the prudential framework for authorities to borrow in anticipation of planned requirements, on a reasonable and prudent basis, but not to borrow specifically to invest or for speculative purposes. Second, as the Committee recognises, authorities may not repay debt and have a matched cash deposit.

 

In our work for our review of treasury management, we have been unable to make a quantitative assessment of the contribution to cash deposits from drawing down loans ahead of need or from not repaying debt despite having the cash to do so. However, we have some evidence that both of these factors are contributing to the level of cash on deposit. Several authorities, in particular, have highlighted the cost of repaying debt to the Public Works and Loans Board as a reason for holding cash deposits.

 

The Commission report is likely to comment on both of these factors.

 

27 February 2009