(A pdf version of this policy is available for download here)
Introduction
The Joint Panel on Accountability and Governance Practitioners Guide (JPAG) (March 2023 edition) advises
“As with any financial entity, it is essential that authorities have sufficient reserves (general and earmarked) to finance both their day to day operations and future plans.
Smaller authorities have no specific right to accumulate funds via the precept. All reserves should be reviewed and justified regularly (i.e. at least annually). It is good practice to transparently publish both the level and rationale of all reserves.”
St Stephen in Brannel Parish Council is required by statute to maintain adequate financial reserves to meet the needs of the business and ensure financial security. The purpose of this policy is to set out how the Council will determine and review 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 when calculating the budget and precept requirement. However, legislation does not specify the level of reserves that an authority should hold meaning it is the responsibility of the Responsible Financial Officer to follow current best practice and advise the Council whilst ensuring there are procedures to follow.
Types of Reserves
Reserves fall into two categories – earmarked and other or general.
Earmarked Reserves can be held for several reasons. The money is held for specific items of expenditure to meet known or predicted liabilities or projects. Earmarked reserves can be used to ‘smooth’ the effects of certain expenditure commitments over a period of time thereby reducing the impact of significant expenditure in any one year. Typically, they are held for four main reasons: –
- a) Renewals
- b) To carry forward an underspend
- c) To indicate commitment to a capital project
- d) To meet known or predicted liabilities
Other reserves may include capital receipts. Capital receipts (proceeds from the sale of assets) are subject to statutory restrictions requiring they only have to be used for capital expenditure.
General Reserves are funds which do not have any restrictions as to their use. These reserves can be used to smooth the impact of uneven cash flows, offset the budget requirement if necessary or can be held in case of unexpected events or emergencies.
Earmarked Reserves (EMRs)
JPAG (March 2023 edition) advises there is no upper or lower limits to EMRs, but they must be held for genuine and intended purposes, and their level should be subject to annual review and justification. They should be separately identified and enumerated to prevent query from internal and external auditors.
EMRs will be established on a “needs” basis, in line with anticipated requirements. Any decision to set up an EMR must be approved by Full Council.
If the EMRs are used to meet short term funding gaps, they must be replenished in the following financial year. However, EMRs that have been used to meet a specific liability would not need to be replenished, having served the purpose for which they were originally established.
Earmarked Reserves during 2023/4 include
- Major Asset Work – to fund repairs or improvements on Council’s major assets.
- Cemetery extension – to fund the future purchase of land to be used as an extension to St Stephen Churchtown cemetery.
- Community Benefit Fund – subject to contract restrictions requiring the funds only be used for certain kinds of expenditure.
- Staff Contingency Fund – to fund any additional staff costs.
- Elections – to fund by-elections
- Parish Community Assets – to fund repairs to or purchase of community assets
- AQM Monitoring – subject to contract restrictions requiring the funds only be used for certain kinds of expenditure.
- Youth Council – to fund any projects suggested by the younger generation of the parish.
- Neighbourhood Plan – to fund the production of a neighbourhood development plan.
- Equipment – carried forward from previous council committed expenditure.
- Allotments – to fund expenditure at the allotment site
- CIL – subject to statutory restrictions requiring the funds only be used for certain kinds of expenditure.
- Dev committee project – to fund projects previously agreed by the committee.
General Reserves
JPAG (March 2023 edition) advises that
“The generally accepted recommendation with regard to the appropriate minimum level of a smaller authority’s general reserve is that this should be maintained at between three and twelve months Net Revenue Expenditure. The reason for the wide range is to cater for the large variation in activity level between authorities. The smaller the authority, the closer the figure may be to 12 months expenditure, the larger the authority, the nearer to 3 months. In practice, any authority with income and expenditure in excess of £200,000 should plan towards 3 months equivalent general reserve.”
The primary means of building General Reserves will be through a reallocation of funds (underspend on project) and allocation from the annual budget. This will be in addition to any amounts needed to replenish reserves that have been consumed in the previous year.
If in extreme circumstances General Reserves were exhausted due to major unforeseen spending pressures within a particular financial year, the Council would be able to draw down from its EMRs to provide short term resources.
Review of Reserves
The level of financial reserves held by the Council will be agreed during the discussions held regarding the setting of the budget for the next financial year.
The current level of General Reserves to be held by the Council is set at equal to four (4) months of predicted expenditure.
This policy will be reviewed on an annual basis to ensure these level remains appropriate as changes in activity levels/range of services provided will inevitably lead to changes in the requisite minimum of General Reserves in order to provide working capital for those activities.
[1] Adopted by Full Council at the meeting held on Wednesday 2nd August 2023 under minute number FPC205/23. Due for review annually.