Medium Term Financial Strategy 2023-24

6. Reserves

1. 6.1. This section provides an overview of reserves held by the Council. The Policy Framework for Reserves is reviewed annually alongside the setting of the annual budget. The reserves held by the Council fall within one of the following categories:
   • General Reserve
   • Earmarked Reserves (General Fund and Housing Revenue Account)
   • Capital Receipts Reserve
   • Housing Revenue Account Reserve
2. 6.2. The General Reserve is held for two main purposes - to provide a working balance to help cushion the impact of uneven cash flows to avoid temporary borrowing, and as a contingency to help cushion the impact of unexpected events or emergencies.
3. 6.3. As part of setting the budget each year the adequacy of all reserves is assessed along with the optimum level of general reserve that an authority should hold. The optimum level of the general reserve takes into account a risk assessment of the budget and the context within which it has been prepared, including the following factors:
   • sensitivity to pay and price inflation and fluctuations in interest rates
   • the level of savings that have been factored into the budget and the risk they will not be delivered as anticipated, both level and timing
   • potential legal claims where earmarked funds have not been allocated
   • emergencies and other unknowns
   • impact of demand led pressures which impact on both income and expenditure
   • future funding fluctuations
   • a level of earmarked reserves held
   • a level of general reserve that is within 10% to 15% of net expenditure
4. 6.4. A financial assessment is made of all the factors to arrive at a recommended level for the general reserve, which for the current year was assessed to be £3.5 million. The general reserve balance as at 1 April 2023 was £4.6 million, after allowing for the latest financial monitoring position in the year (before any preventative action) this could be reduced to £3.2 million.
5. 6.5. Earmarked reserves provide a means of building up funds to meet known or predicted liabilities and can be used to set aside sums for major schemes, such as capital developments or asset purchases, or to fund restructurings as part of invest to save proposals. These reserves are earmarked until the amounts are budgeted to be taken from the reserves. Earmarked reserves can also be held for service projects and business units, which have been established from surpluses to cover potential losses in future years, or to finance capital expenditure. Earmarked reserves also provide a mechanism to carry forward underspends at the year-end for use in the following financial year.
6. 6.6. For each earmarked reserve several principles should be established:
   • the reasons for, or the purpose of the reserve
   • how and when the reserve can be used - short to long term
   • procedures for the reserve's management and control
7. 6.7. The planned use of earmarked reserves are reviewed during the year as part of the budget setting and year end process.
8. 6.8. The following provides a commentary on some of the more significant reserves that the Council currently holds and maintains:
   1. 6.9. Invest to save - This earmarked reserve provides resources to fund one-off/upfront costs for projects that will deliver future savings. Examples include:
      • officer restructures, where one-off redundancy or pension strain costs might be payable subject to a business case that delivers on-going revenue savings
      • for an investment in IT hardware, software or equipment which will deliver savings through more efficient ways of working
      • the balance at the beginning of the year was £1.525m and the forecast balance at 31 March 2024 is £1.475 million
   2. 6.10. Asset management reserve - This reserve was established to earmark funds that will support the provision of current and future assets, of the reserve £1.26m has been committed to smooth the impact to the revenue account of the new leisure facility.
   3. 6.11. Capital receipts reserve - The Council also holds a reserve which includes the balance of receipts generated from asset disposals - capital receipts. Capital receipts can only be used to fund capital expenditure (not for on-going revenue expenditure). The balance as at 31 March 2023 was £6.11million, although this includes an element for the HRA and some set aside for existing capital project spend, the forecast balance at 31 March 2024 is £10million allowing for anticipated receipts in the year and assumed financing in the year.
9. 6.12. An initial review of all reserves has been carried out with the view to re-allocating unused balances to the general reserve to strengthen the balance in the general reserve as there will be an increased requirement to use reserves to balance the budget in the medium term. From this review it is recommended that the following transfers from earmarked reserves be made in the current year:
   • £100k allocated from the Empty Business Property Incentive Fund
   • £625k from the Collection Fund Compensation earmarked reserve
   • £100k from the Benefits earmarked reserve.
10. 6.13. There are a number of other reserves which are holding balances from previous roll forward requests that have not been drawn down yet. It is anticipated that there are some balances in here that are no longer required for their original plans and these can be re-allocated to the general reserves. A target of £500k for re-allocation from these reserves has been set to be allocated to the general reserve.
11. 6.14. Using reserves to finance one-off spend for example in relation to projects, and where the funds can be used to lever in external funding enables flexibility and releases in-year revenue budget allocations. Due to the increased pressure on the general fund revenue account there is a need to have a financial strategy that is reliant on both delivery of savings and income in year, but also some reliance on use of reserves. This is in response to the significant shift in spending pressures increasing at a greater rate than the funding and income received. This does not provide a sustainable solution in the medium to long term and financial planning options need to take into account the need to cover the future financial gap without relying on the use of reserves each year.