Are reserves such a bad thing?

By Gary Fielding | 09 July 2019

‘Instead of pleading poverty, town halls should be tapping into their reserves to protect frontline services and keep council tax down for local people.’ That was what former communities secretary Eric Pickles said back in December 2014. Ever since then there has been a degree of nervousness in talking about council reserves as if they were something to be ashamed of.

Reserves are, however, a vital tool in a council’s armoury as we continue to battle with uncertainty and austerity and we need to be able to talk about them without emotions running away.

Councils and their chief finance officers (CFOs) will have almost certainly been challenged about the levels of reserves on a number of occasions.

Often the inference is that they are too high but, of late, we have been under the spotlight after events in Northamptonshire and with the Chartered Institute of Public Finance and Accountancy’s (CIPFA) resilience index, where the emphasis is more about whether we are running out of reserves too quickly for good financial practice. What is the truth?

As a CFO, I find myself repeatedly reminding people that you can only spend reserves once – they are the ‘piggy banks’ of councils. So, it does not make sense to use them to fund pressures that are year-on-year.

Nor should they be used as a way of putting off until tomorrow what can be done today. It would be naïve to ignore that reserves can help to buy time but when ‘buying time’ is the only plan then you may well be in trouble.

You may spot that Eric Pickles seemed to fall foul of these principles. Thankfully, the climate has moved on and it’s just as well. We have never faced a period of such financial uncertainty.

It looks like we will have to wait until 2020 for any Spending Review of note and who knows what will happen to the various pieces of one-off additional Government funding from December 2018 or the last tranche of Better Care Fund that ends in seven months?

Many CFOs will be looking at this uncertain outlook and will be feeling relieved or worried, depending on their level of reserves.

Reserves are also helpful but remarkably dull. Most are set aside for a specific operational purpose – service risks, contract commitments, etc – so nobody should be alarmed when they are used in that way.

Other reserves belong to broader partnerships or schools, but sit on council balance sheets. You may think this is obvious, but several years ago the then Department of Communities and Local Government wrote directly to our MPs citing the value of reserves we held, presumably in order to counter assertions of underfunding.

Unfortunately, they included schools and earmarked reserves, demonstrating a complete lack of understanding, but it fitted the then narrative.

While we anticipate funding announcements only three months before the start of the financial year, councils will already be making plans, including consultation with staff and the public.

Many will be politically contentious. Some will be subject to legal challenge and none will be ‘guaranteed’ to deliver. I, for one, will be making provision for delays, additional costs of implementation and shortfalls in some areas. Un-ringfenced reserves will be the temporary solution to these issues.

We will also be setting aside money into earmarked reserves to invest in innovation so we can save money and/or improve services as part of the transformation work we are all doing. This is all part of sensible arrangements to help navigate a way through choppy waters.

Under Section 25 of the Local Government Act 2003 the s151 officer is required to review the adequacy of the reserves so they should be reviewed annually.

If any of these reserves end up being surplus to requirements it presents a welcome further one-off opportunity to invest in more innovation or valuable council services, like fixing potholes.

Reserves also need to be seen in context. Nationally, councils are sitting on about £3.7bn of un-ringfenced reserves. This is a significant sum but it represents just 17 days of council service provision if all funding was to stop.

The National Audit Office said that one in 10 councils with social care obligations will have exhausted their reserves within the next three years if the current rate of expenditure continues.

And finally, let’s remember that austerity was the result of a banking collapse when banks didn’t have sufficient reserves to offset their risks. Are reserves such a bad thing?

Gary Fielding is president of the Society of Council Treasurers and corporate director of strategic resources at North Yorkshire CC

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