Budget Scrutiny Planning Group Information 25 August 2017 Council Reserves Background Papers

Transcription

1 ANNEX A Budget Scrutiny Planning Group Information 25 August 2017 Council Reserves Background Papers Purpose This paper pulls together the key issues and supporting documents that were requested at the Budget Scrutiny Planning Group briefing (BSPG) on 28 June At the Briefing the following areas were identified within scope of the review: 1. Difference between managed risks and reserves. 2. Different types of reserves. 3. Why reserves are held and have been built up over time. 4. Methodology for setting the level of reserves. 5. What is the best approach, i.e. to have one large reserve covering everything, or lots of smaller reserves to cover off individual risks? 6. Transparency of reserves. 7. What are the trends over the past few years? 1. Difference Between Managed Risks and Reserves The Council has an approved Risk Management Strategy which defines risk as: A risk is an uncertain event or set of events which, should it occur, will have an effect on the achievement of objectives. Risks can be both positive and negative. The Strategy goes on to identify risk categories which should be considered by the Council. Assets Economic & Financial Environmental Growth Health & Safety Information Legal & Regulatory Managerial Partnerships Political Reputational Social Technological These risk categories help to inform the approach to identifying how risks should be identified but also mitigated. A key part of the Council s approach to mitigating the impact of these risks is to set aside specific reserves to meet the potential financial impact of one of more risks materialising. 2. Different Types of Reserves There are two main types of reserves that local authorities hold: Unearmarked also referred to as General Reserves. These reserves are not held for any specific purpose and can be used to cover exceptional expenditure or income shortfalls to help support the overall delivery of the budget (revenue and

2 capital). The main reserves falling under this category are the working balances for the General Fund (GF) and Housing Revenue Account (HRA). Both of these reserves are statutory reserves and a local authority is required to hold a working balance for both of these revenue accounts. Whilst it is primarily the responsibility of the local authority and its chief financial officer to maintain a sound financial position, external auditors will confirm that there are no material uncertainties about going concern. Even where, as part of their wider role, auditors have to report on an authority s financial position, it is not their responsibility to prescribe the optimum or minimum level of reserves for individual authorities or authorities in general. There is no specific set minimum threshold that a local authority must meet. CIPFA have in the past provided guidance based through Local Authority Accounting Panel (LAAP) Bulletins on setting minimum thresholds: The finance director may choose to express advice on the level of balances in cash and/or as percentage of budget (to aid understanding) so long as that advice is tailored to the circumstances of the authority for that particular year. The advice should be set in the context of the authority s medium term financial plan and should not focus exclusively on short-term considerations. Advice should be given on the adequacy of reserves over the lifetime of the medium term financial plan. Earmarked these reserves are set up to meet specific policy objectives and help deliver the overall budget strategy of the Council. A local authority can set up as many or as few of these reserves as it prudently needs to. Ring Fencing When setting up and managing reserves, the Council must also have regard to statutory provisions. The main issue that we must have due regard to is ring fencing which places specific restrictions on using resources which have been generated from a particular source. The main principle that must be followed is to ensure that resources generated from the following funds are not transferred outside of these funds: Housing Revenue Account income received from HRA assets can only be used to fund services that benefit tenants and must not be used to meet other services that the Council provides as part of its general fund. General Fund - income received from all services and non HRA assets must be used to meet general service expenditure, except for that which falls within the landlord function (HRA). Dedicated Schools Funds this grant funding received from central government cannot be used to meet expenditure which would be incurred within either the General Fund or HRA. 3. Why Reserves Are Held and Have Been Built Up Over Time Reserves are set up to hold funding (revenue or capital) which is not required to be spent in year, but is either needed to meet a specific spending commitment in a future year or to help manage and mitigate financial risks.

3 The Council currently holds a large number of earmarked reserves which have been created at different times for different reasons. The rationale for holding these reserves falls under the following main objectives: To manage known financial risks; To enable the Council to invest in services to generate future savings as part of its budget strategy (invest to save business cases); To manage one off expenditure which has allowed the Council to make ongoing revenue reductions. To build up funding to support the delivery of large projects such as capital programme schemes. To manage known timing differences between the receipts of funding and the profile of expenditure. To hold ring-fenced balances for example, specific grants, trusts, schools the Housing Revenue Account. The Council has a Reserves Policy which is published as part of the Financial Sustainability Plan each February. A copy of the current policy is attached at Annex B. 4. Setting the Level of Reserves Sections 32 and 43 of the Local Government Finance Act 1992 require local authorities to have regard to the level of reserves needed to meeting estimated future expenditure when calculating the budget requirement. The Chief Financial Officer (CFO) under Section 25 of the Local Government Act 2003 has a legal responsibility as part of the budget setting process to report formally on the adequacy of proposed reserves when setting a budget requirement and to ensure that there are key protocols for their establishment and use. The CFO recommends a minimum level of reserves for both the General Fund and Housing Revenue Account each year. These reserves are not ringfenced but are specifically held to manage unplanned expenditure or shortfalls against income in year. The minimum level at which these two reserves are set must take account of the nature of the risks to which the Authority is exposed. The Council s auditors will consider the level at which working balances are set in considering their opinion in relation to the Going Concern Concept and Value for Money Judgement. If in their view, the minimum balance or actual balances are considered to be too low, then this will be raised with those charged with governance which in Milton Keynes is the Audit Committee. There is no requirement for the auditors to specify any specific level. Earmarked Reserves With the exception of the above reserves, the Council is not legally required to maintain any other reserves. However, it may choose to do so as part of its financial planning and budget strategy. In reality all councils hold other earmarked reserves for a variety of different purposes. The Council holds a significant number of earmarked reserves which have been created at different times. A full breakdown of these is set out at Annex B. No specific minimum balance has been specified against any individual against

4 Forecast Balance 31/3/2021 Forecast Balance 31/3/2020 Forecast Balance 31/3/2019 Forecast Balance 31/3/2018 Balance 1/4/2017 earmarked reserve, although the balances are reviewed annually as part of the budget setting process. These are summarised in table 1.0 overleaf: Table 1.0 Overall Revenue Reserves Summary as at 23 August 2017 Type of Reserve General Fund GF Working Balance 7,000 7,000 7,000 7,000 7,000 Specific Risk Reserves* 11,759 8,327 8,121 8,121 8,021 Delivering the Budget Strategy 30,063 21,178 19,812 18,591 16,483 Third Party and Cashflow Reserves 4,526 3,534 3,534 3,534 3,534 (Restricted Use) Other Earmarked Reserves 4,224 3,951 4,358 4,938 4,938 Capital Programme 26,718 9,062 4,211 3,595 3,595 Debt Financing 11,034 11,808 11,776 11,192 10,749 Trading Total GF Reserves 96,031 65,217 59,119 57,228 54,577 Housing Revenue Account HRA Working Balance 6,236 5,903 5,903 5,903 5,903 Delivery the HRA Business Plan 8,075 8,124 8,998 9,872 10,746 Capital Programme 58,317 43,299 48,187 52,401 57,394 Total HRA Reserves 72,628 57,326 63,088 68,176 74,043 Schools 9,570 9,570 9,570 9,570 9,570 Total Revenue Reserves 178, , , , ,193 Specific Risk Reserves form part of the overall calculation of the GF working balance. 5. Approach at MKC to General Fund Working Balance In recent years, the Council has maintained separate risk reserves for specific demand issues from the General fund (GF) working balance. It should be noted that these specific risk reserves are in effect part of the General Fund Working Balance. This was intended to provide an increased focus around demand management issues. Over the past couple of years these reserves have been regularly used to help meet recurring demand pressures. This has been due to a combination forecasting and demand management Moving forward, the intention is to consolidate the demand management risk reserves into the GF working balance and place much greater focus on improving budget forecasting and demand management across the Council. As resources continue to reduce less reliance will need to be placed on reserves to meet demand pressures. The last published risk assessment for setting the GF working balance is attached at Annex D.

5 6. Transparency of Reserves The Council publishes as part of its budget setting process a Reserves Policy which is approved by Council each year. This includes details of the risk assessment that has been carried out by the Chief Finance Officer to explain how the minimum working balance and risk reserves have been arrived at. The Council s scheme of delegation provides the Chief Finance Officer with the authority to use reserves (within their defined purpose) as necessary to support the delivery of the Council s overall budget strategy. The actual reserves position is reported annually through the Statement of Accounts and more regularly through the budget monitoring reports to Cabinet on a quarterly basis. 7. What are the Trends Over the Past Few Years For information, a summary of the balances held at the end of each of the previous 3 financial years has been provided at Annex E. 8. Delivering the Budget Medium Term Financial Strategy The Council needs to address a projected budget gap of circa 40m between 2018/19 through to 2021/22. The Council has already implemented, or is in the process of implementing budget reductions and additional income worth 130m since In 2016/17 the Council overspent against its base budget and needed to use reserves to keep this at circa 3m. In 2017/18 there is anticipated to be an over spend of circa 2m - 3m at period 5, reflecting higher than budgeted demand pressures. This projected overspend is after using nearly 3m from risk reserves. Whilst the Council currently has sufficient reserves to meet its current obligations and assessed risks based on the 2017/18 budget, the Council continues to face significant financial risks over the medium term, including: Delivery of planned savings and income growth which has been approved as part of the existing budget plans. Identification and implementation of circa 40m of new budget reductions and income proposals against a backdrop of reducing capacity. The Council will also need to identify significant new funds to invest in service changes and assets to support the necessary changes. Uncertainty over government policy and the amount of funding beyond 2019/20, including New Homes Bonus from 2018/19. Business Rates reset which is due in 2020 and its potential impact on the amount of retained business rates income. Significant demand pressures in relation to homelessness, looked after children and adults social services as a result of demographic, economic and social pressures over which the Council has no real control. Delivery of the planned savings and additional income from the new Residual Waste Treatment Facility are still uncertain in terms of timing and quantum.

6 9. Observations on Reserves Reserves are currently forecasted to reduce from 178m to 138m between 2017/18 and 2021/22. General Fund reserves will reduce to circa 55m by 2021/22 based on existing plans and assuming that the Council is able to fully balance its projected baseline budget deficit of nearly 40m. This does not take account of the additional one-off costs (currently unknown) that might be incurred in supporting delivery of these budget reductions and income growth measures. The forecasted position on reserves is based on the assessment of risk at February 2017 and this will change over the medium term in light of changes to government policy, wider economic and social factors and local circumstances. 10. Recommendation That the Budget Scrutiny Committee notes the position on financial reserves for the Council. Steve Richardson Director of Financial Services 25 August 2017

7 Budget Scrutiny Planning Group Supplementary Information 1 September 2017 Council Reserves Additional Information Purpose This paper sets out the additional information requested at the previous meeting of this group on the 25 August MKBE Reserve MKBE Ltd was a wholly owned company of MKC, set up for trading. This company has ceased operating (we are going through the process of closing the company with Companies House); the balance on this reserve is the final reserve balance of the company when it ceased trading, which has transferred back to the Council. These are spare funds. 2. Redundancy and Reorganisation Reserve In setting the 2017/18 budget, the Council approved a one-off pressure for redundancy costs and pensions strain costs for a 3 year period between 2017/18 and 2019/20. These one-off contributions are taken to the reserve and held to meet restructuring costs. Budget Contribution to Reserve 2017/18 600, /19 750, /20 750,000 Currently only one-off pressures in 2017/18 have been funded within the overall budget. The projection on the reserves schedule reflects these contributions being credited to the reserve fund each year in line with the approved budget. There are no current commitments against this fund. However, there are still significant restructuring plans to be confirmed from the partnership with LGSS which will require future funding. The balance on this reserve and future contributions will therefore need to be reviewed as part of the annual budget process to ensure that the Council can meet future obligations. 3. Saxon Court Dilapidation This reserve was established in 2009/10 in recognition of the Council s commitment that on relinquishment of its lease it would return the Saxon Court premises to the standard of the building at the commencement of the lease, or pay an agreed equivalent cash sum to the landlord. Since that time the Freehold on the building has been purchased but the reserve has been retained to fund essential building projects within Saxon Court.

8 4. Severe Weather Reserve This fund is held to meet unbudgeted exceptional spend on highways maintenance. In recent years the budget has been exceeded and the fund has been used. Additional contributions have also been made to help maintain the reserve balance. The projected future balance assumes that the level of expenditure will continue but no further contributions will be made into the reserve. This issue is currently being assessed as a budget pressure for 2018/ One Off Expenditure Reserve This reserve holds approved one off pressure funding which has been approved as part of the budget process. The balance is made up of unspent balances which are carried forward as part of the year end approval of the outturn report. These are reviewed each year and any unspent balances which are still required have to be reapproved each year. Most of the one-offs should be spent in the year, there are exceptions that run over multiple financial years and where there are known commitments these are added into the forecasted balance. The reserve does include an uncommitted balance of 1.819m which is being held to meet one off items which are still anticipated to be required in a future year. These uncommitted balances will need to be reviewed individually as part of the budget setting process to ensure that they remain valid. 6. Budget Roll Overs This is similar to the one off expenditure reserve only the balances held relate to in year underspends where it has been agreed that these can be carried forward. These will be fully reviewed as part of the budget setting process and any spare resources transferred out from this reserve. 7. Local Government Reorganisation Reserve This fund was set up to finance the costs of amortisation of the inherited loans from local government reorganisation with BCC. The loans have actually been repaid an there is now an annual Minimum Revenue Provision charge made to the Income and Expenditure Account each year which is funded through this reserve. This reserve will be fully utilised over the next 3 years to service these costs and then closed. Steve Richardson Service Director Finance and Resources 1 September 2017