The council reserves we should be worried about
Public sector finance professionals were treated to some ‘encouragement’ from the Secretary of State over at the Department of Communities and Local Government last week.
The object of ministerial ire this time was the amount of money councils and other local public sector organisations were keeping locked up in reserves. The full news release is here but it’s worth repeating the quote from the minister.
Good financial planning is about putting a little extra away when the sun is shining so you have some cover during the rainy days.
But building up reserves isn’t simply about turning town hall vaults into Fort Knox. These untapped funds exist to ensure councils can respond to unexpected situations like the pressing need to tackle the nation’s unprecedented level of debt.
Just like any household facing challenging times, all good councils should be considering the merits of temporarily dipping into the money they have set aside as part of their plans to address immediate financial challenges, with a view to building up their reserves again in the sunnier days to come.
Of course, the jaded among us will be wondering whether the spat between the department and the Local Government Association would have had anything to do the issue of balances being raised. Surely not.
My colleagues have been rolling their eyes though at yet another example of governmental selective localism. Council chief financial officers are under a legal duty to annually report on the adequacy of reserves when budgets are set. Criticism of reserve levels from Whitehall looks strongly like second guessing of local judgements made by finance professionals and the councillors for whom they work.
Some of the levels of balances identified in the data release from government do look pretty generous though. But there are no hard and fast rules on what minimum or maximum levels of balances should be and it is impossible to tell at a global level whether individual council holdings make sense. That can only happen locally. The annual wrangle with the auditor is something council CFOs and auditors generally look forward to. Higher? Lower? Just right?
General reserves are there to meet events like the costs of unexpectedly harsh winter weather. I am sure I am not the only one who is sceptical that a government policy decision over the speed of deficit reduction quite falls within that definition. Besides which if lower government spending is to be a permanent feature in the lives of finance professionals using reserves to prop up spending creates a ‘double-whammy’.
You spend the money now that you will need later to make the cuts you should have made anyway. The delays in the announcement of the local government settlement create practical problems too for making considered spending reductions that will have a full year effect in 2011/12.
Attention in the ruckus over the Fort Knox Reserves affair focused on councils with loadsamoney. Of more concern to me after looking through the spreadsheet were the councils that fall into the buggerallmoney category. (Please accept my apologies for using technical accountancy terms there.)
There’s Waveney District Council in Suffolk for example where the Council’s General Fund is in deficit (see page 22 of the Auditor’s Annual Governance Report) or Trafford MBC which has £5 million of reserves while spending £350 million each year. There are eighteen or so organisations with reserves of 3% or less of their annual spend. How resilient will they be in the face of the local government finance settlement that will be with us shortly?
Now that is a question worth armchair auditors thinking about instead of the minutiae of the monthly payments over £500.