Reserves Strategy


NORTHAMPTONSHIRE POLICE, FIRE AND CRIME COMMISSION RESERVES STRATEGY

 

  1. Reserves Strategy

 

Reserves are a key part of medium-term financial planning – other components include revenue spending plans, income forecasts, potential liabilities, capital investment plans, borrowing and council tax levels. Decisions on these are inter-linked.  Consequently some organisations will need to maintain reserves at higher levels than others.

All publicly funded organisations should have a reserves strategy to demonstrate transparency and accountability, to comply with best practice financial management and to justify the levels of reserves held.

The PFCC maintains reserves to provide a measure of protection against risk. Without this protection, any unforeseen expenditure would have to be met either by increases in Council Tax or immediate savings (potentially through reductions in service levels).

 

 The term “reserves” has a variety of technical and every day meanings, depending on the context in which it is used. For the purposes of this Strategy it is taken to mean funds set-aside at the PFCC’s discretion for general or specific future purposes.

 

Reserves are required to protect and enhance the financial viability and in particular:

  • To maintain a degree of in-year financial flexibility;
  • to enable the PFCC to deal with unforeseen circumstances and incidents;
  • to set aside monies to fund major developments in future years;
  • to enable the PFCC to invest to transform and achieve improved service effectiveness and efficiency;
  • to set aside sums for known and potential liabilities;
  • to provide an operational contingency at service level.

 

Reserves should not be held to fund ongoing revenue expenditure as this is unsustainable in the long term; however they may be important in smoothing a major financial imbalance (revenue or capital) over a longer timescale. CIPFA guidance LAAP 99 published July 2014 states:

Balancing the annual budget by drawing on general reserves may be viewed as a legitimate short-term option. However, it is not normally prudent for reserves to be deployed to finance recurrent expenditure. CIPFA has commented that Councils should be particularly wary about using one off reserves to deal with shortfalls in current funding. Where such action is to be taken, this should be made explicit, and an explanation given as to how such expenditure will be funded in the medium to long term

 

  • The Northamptonshire Commissioner Fire and Rescue Authority (NCFRA) was established on the 1 January 2019 with no transfer of reserves agreed as part of the business case.
  • This strategy is the first reserves strategy for NCFRA and reflects the PFCC’s intention to build reserves over the short term to ensure a stable financial position for NCFRA moving forwards.
  • The strategy assumes that the Medium Term Financial Plan [MTFP] is broadly balanced on a sustainable basis across the five year planning period, recognising that savings may be required to facilitate this. Reserves should reflect the agreed financial strategy and should represent the quantified impact of risks and opportunities over the planning period, weighted for their probability.

 

  1. National Guidance and Compliance with Home Office Guidance

The 2014, CIPFA guidance included the establishment and maintenance of local authority reserves and balances, setting out the key factors that should be taken into account locally in making an assessment of the appropriate level of reserves and balances to be held.

  • On 31 March 2018, the Minister for Policing and the Fire Service published new guidance on the information that each PFCC must publish in terms of Police Reserves. This guidance has been adopted for the NCFRA to ensure consistency.
  • One of the key requirements is that the information on each reserve should make clear how much of the funding falls into each of the following three categories:
  • Funding for planned expenditure on projects and programmes over the period of the current medium term financial plan.
  • Funding for specific projects and programmes beyond the current planning period.
  • As a general contingency to meet other expenditure needs held in accordance with sound principles of good financial management.

 

  • This information is summarised across the Home Office headings as at 31/3/19 as follows:

 

 

Reserve

Forceast

Balance as at 31/3/19

£m

Planned Expenditure on projects and programmes over next 3 years

£m

Funding for specific projects and programmes beyond 2021/22

£m

As a general contingency or resource to meet other expenditure needs

£m

General

0.450     0.450

Earmarked

Insurance

0.250

0.250
Total Earmarked 0.250 0.250
Total Reserves 0.700     0.700

 

  1. General Reserve

 

In order to assess the adequacy of the unallocated general reserve when setting the budget the PFCC, on the advice of the chief finance officer, should take account of the strategic, operational and financial risks facing the authority. This assessment of risk should include external risks, as well as internal risks, for example the ability to deliver planned efficiency savings.

 

Whilst there is no prescribed level of reserves that PFCCs should hold; it is influenced by individual discretion, local circumstances, advice from external auditors, risk management arrangements and risk appetite. CIPFA guidance in LAAP Bulletin 99 (2014) specifically cautions against prescriptive national guidance for a minimum or maximum level of reserves and states:

 

The many factors involved when considering appropriate levels of reserves can only be assessed properly at a local level. A considerable degree of professional judgement is required. The chief finance officer may choose to express advice on the level of balances in cash and/or as a percentage of budget (to aid understanding) so long as that advice is tailored to the circumstances of the authority

 

However, the minimum level of reserves may be set for the authority by the Ministers in England and Wales where an authority doesn’t act prudently, disregards the advice of its chief finance officer or is heading for financial difficulties. LAAP Bulletin 99 (2014) specifies that minimum level of reserves can be imposed on specific circumstances:

 

“Minimum level of reserves will only be imposed where an authority is not following best financial practice”

 

CIPFA indicate a general reserve level is typically between 2% and 3% of net budget requirement and this is consistent with the results of a survey by the PACCTS Technical Support Team where the majority of PCC’s(and PFCC’s)  across the country reporting a Strategy of holding minimum general reserves at 3% net revenue expenditure.

 

In determining the PFCC’s position, Appendix A outlines how Northamptonshire currently comply with the 7 key CIPFA principles which can be used to assess the adequacy of reserves.

 

Given that the PFCC is required to meet the first 1% of any special grant requirement and the NCFRA was established without the transfer of any reserves, it would be prudent to build reserves as considered by the Minister in the Business Case.

 

The Chief Finance Officer advises that it would be prudent to work towards building general reserves to a guideline level of 3%

 

3.8      At present, there are plans to build the General Reserve during the period of the MTFP, therefore, the forecast level of equates to the following (at 2018/19 budget levels):

 

  • 31/3/19 £0.450m   (reserves established post transfer)
  • 31/3/20 £0.700m   (maintenance level established)
  • 31/3/21 £0.700m   (maintenance level established)
  • 31/3/22 £0.700m   (maintenance level established)
  • 31/3/23 £0.700m   (maintenance level established)

 

Whilst these plans are challenging to build reserves from a zero base, they are essential to ensure a stable financial basis for the authority moving forwards.

 

These levels will be reviewed on a regular basis and opportunities to increase general reserve levels further, taken.

 

4.       Earmarked Reserves

 

In addition to the General reserve, the PFCC will need to build a number of reserves which will be earmarked for specific purposes.

 

The predicted position for each earmarked reserve as at 31/3/19, together with an outline of its specific purpose is attached at Appendix B

 

At the 31/3/19, it is estimated that the PFCC will hold £0.250m in Earmarked Reserves which are as follows:

 

Insurance £0.250m – this reserve needs to be established to hold funds set aside where considered prudent for Civil Claims (Public and Employer liability) in line with professional advice. This advice has identified a reserve requirement on transfer of £0.250m and will be reviewed regularly.

 

The forecast balance on the reserves, taking into account a prudent estimate of timings for proposals which are currently being developed is detailed within Appendix C.

 

  1. Provisions

 

The CIPFA Statement of Recommended Practice is prescriptive about when provisions are required (and when they are not permitted). Basically, a provision must be established for any material liabilities of uncertain timings or amount, to be settled by the transfer of economic benefits. In accordance with this statutory guidance, Northamptonshire established an ‘Insurance Provision’ which is reviewed as part of the closedown process for each year.

 

6.             Procedures for management and control

 

Any drawdown from Reserves is subject to the approval of the PFCC, on advice from the PFCC’s Chief Finance Officer (CFO); or under the delegated authority of the OPFCC CFO.

 

The Local Government Act 2003 requires the s151 officer to report annually on the adequacy of the reserves and this is included within the statement on the robustness of the estimates used for the budget and the adequacy of the proposed financial reserves. .

 

The Strategy will be reviewed annually by the OPFCC CFO as part of the Budget and Precept process.

 

 

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