Call for greater clarity on councils’ reserves
‘Striking a balance‘, an Audit Commission report, encourages English councils to focus more attention on the £12.9 billion set aside in their reserves – the equivalent of nearly a third of their net spending on services in 2011/12.
While the Commission found that councils routinely consider reserves as part of their annual budget setting, the report calls for officers to offer elected members clearer and more comprehensive advice, equipping them to make better-informed decisions. It also calls for greater clarity from councils about the reasons for holding reserves. The majority (£9.9 billion) was earmarked for specific purposes, but this did not always mean there was a plan for spending the funds.
From 2007 to 2012, 77 per cent of councils increased their reserves relative to their spending, with 26 per cent more than doubling them. Council reserves grew by £4.5 billion (36 per cent in real terms) over this period. The Commission found that many councils had been setting money aside as a response to funding reductions and financial uncertainty arising from, for example, the introduction in 2013 of local business rates retention and new arrangements for providing council tax support.
Some of the growth in reserves has been the result of unplanned increases, for example, when councils received unexpected income, or exceeded their savings plans. ‘Striking a balance’ says that regularly reviewing reserves is essential to ensure they reflect the risks that councils face and the scale of their future spending plans.
Councils also need to ensure that their reserves provide adequate protection against financial shocks. The Commission’s recent report, Tough times 2012, found that auditors considered low reserves to be an important risk factor for a small group of councils.
Audit Commission Chairman Jeremy Newman says:
‘Reserves are a vital element of good financial management for any council, especially at a time of financial uncertainty. They help councils plan for known and predictable spending commitments, but are also a defence against the unknown and unpredictable.’
‘However, councils must strike a balance between the needs of current and future taxpayers. Given the sums involved, and the risks, it is essential that councils’ decisions are made openly and reported with clarity, so local taxpayers and service users can hold their councils to account.’
‘Our report doesn’t offer any magic formula for deciding whether reserves are appropriate – councils must make their own decisions in the light of local circumstances. But we do identify how councils can improve their decision making, and suggest questions for councillors to ask to stimulate local debate about reserves.’
The Commission encourages councils to use its Value for Money Profiles tool, compiled using data councils supply to government, to compare their levels of reserves relative to spending, over time and with different groups of councils.
Notes to editors
- The report focuses on the reserves English councils hold that are available to support their revenue spending.
- The findings are based on a review of published financial information for 40 councils, interviews with ten council chief finance officers, and analysis of financial data published by the Department for Communities and Local Government (DCLG).
- Data in the report for the financial year 2011/12 is based on provisional revenue out-turn data published by DCLG on 31 August 2012. The figure of £12.9 billion at 31 March 2012 is based on 350 English councils. This was equivalent to 31 per cent of their total net revenue spending in 2011/12. Three councils with outlying data have been excluded from the analysis – they held total reserves of £0.2 billion.
- The analysis in the report shows that:
- Single-tier and county councils held most of the reserves: £10.9 billion in 2012, of which £8.6 billion was earmarked.
- District councils held reserves of £2.0 billion. District councils generally have much higher reserves relative to their spending and are less likely to earmark them.
- Final out-turn data for 2011/12 was published by DCLG on 27 November 2012. This shows total reserves for English councils of £13.1 billion. Excluding the same three councils gives a corresponding total for English councils of £12.9 billion (£10.9 billion for single-tier and county councils and £2.1 billion for district councils – figures do not add due to rounding).
- Councils’ financial resilience in the wake of funding reductions and the impact of the economic downturn was reported in Tough times 2012 – Councils’ financial health in challenging times in November.
- The Audit Commission’s role is to protect the public purse. We do this by appointing auditors to a range of local public bodies in England. We set the standards we expect auditors to meet and oversee their work. Our aim is to secure high-quality audits at the best price possible. We use information from auditors and published data to provide authoritative, evidence-based analysis. This helps local public services to learn from one another and manage the financial challenges they face. We also compare data across the public sector to identify where services could be open to abuse and help organisations fight fraud.
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