Monday, February 13, 2012

What is happening to the reserves?

In the report to cabinet on the 2012/13 budget, the minimum level of reserves held by HDC has risen from £3 million to £4.5 million. An increase of £1.5 million.

I do have to scratch my head as to why there is an increase in reserves?

The fundamentals haven't changed. The economy is bad and the same goes for Europe. So not much has changed. The reports says:

7.1 Overview and Scrutiny felt that it would be prudent to increase revenue reserves even further than the uplift from £3M to £4M proposed in the draft budget. The Proposed Budget/MTP is therefore based on not allowing reserves to fall below £4.5M.

(What the OSP actually said: Given the identified risks and the unknown factors the Panel questioned whether the proposal to increase the Council’s minimum level of general reserves from £3M to £4M was adequate. Reference was made to the fact that the New Homes Bonus represented 25% of the Council’s predicted income in 2015/16 and this could pose a significant risk. Having noted that the Auditor had previously suggested the Council should reduce its reserves, Members were generally of the opinion that it would be desirable for the Council in the current economic climate to hold greater reserves. Whilst this would place a burden on the savings programme in the short term, the Panel agreed that the a minimum level of reserves should be set at £4M and that this should be reviewed in two years and, if it was reasonable, should be increased to £5M. It was also agreed that this should be tested and considered in the forecast report each year and built into the draft budget if necessary.)

So what was agreed in this section of the OSP minutes? Well, the Council should hold greater reserves and the panel agreed the minimum level of reserves should be set at £4m and should be reviewed in 2 years and then should go up to £5m if needed.

When the Cabinet is informed that: "Overview and Scrutiny felt that it would be prudent to increase revenue reserves even further than the uplift from £3M to £4M proposed in the draft budget. The Proposed Budget/MTP is therefore based on not allowing reserves to fall below £4.5M. "

The OSP were looking at leaving any upgrade of the minimum reserves for 2 years. This view have been changed by someone to mean reserves have increased again to £4.5 million now rather than in 2 years time.

7.2 It is very difficult to theoretically calculate the appropriate level of reserves but the following factors are all relevant: 

The new rules that require a positive referendum result before a Council can increase its tax level above the limit set by the Secretary of State has the potential to make it very difficult to replenish reserves once they are used. Reserves therefore need to be sufficient to allow a savings programme to be introduced to replenish reserves before they run out.

That argument is the same as under the capping regime. No real increase in reserves during capping. Only after capping has ended. Accepting the Councils argument means the District Council has not had the right level of reserves under the old capping regime. 

The level of New Homes Bonus is forecast as £6.1M by 2016/17 and although a risk provision of £0.9M has been made there is still potential for significant variations depending on how quickly the world, European and UK economies recover.

The Council has made a risk provision of £900,000. In effect padding out the estimations. What this argument is saying is the even with £0.9m of padding there still needs more money put aside in reserves. The Council's argument just doesn't stand up. If more money is needed then the risk provision should go up. This would cause problems for the Council. Increasing the risk provision reduces the forecast for the New Homes Bonus. This means more savings or higher Council Tax is needed to be found.

2013/14 sees the planned move to the localisation of Business Rates to replace the current Formula Grant regime. There is potential for volatility in the new starting point as well as the variations thereafter. Individual items that could have significant revenue impacts include Planning Inquiries, higher than planned pay awards, significant rises in homelessness, reduced Government spending allocations to Local Government and falling income levels due to recession.

Yes this is all very worrying. Yet none of this argument actually means more reserves. Indeed it is more of an argument for not spending any reserves and saving the whole lot. What increasing reserves does is allows the management not to worry about managing.

There in no valid reason to increase reserves from £3 million to £4.5 million. Even the reason to increase from £4 million to £4.5 million has been found to be false. Indeed minimum reserves should be less than £3 million. Much easier to increase reserves rather than properly manage the finances. 

Of course if this money didn't go to reserves this would allow money to be used to keep the Council Tax down for this year. There is no reason for a 3.5% increase for the next year. 

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