Agenda item

To submit a report by the Head of Function (Resources)/Section 151 Officer.

The report of the Head of Function (Resources)/Section 151 Officer on the use of reserves and balances was presented for the Executive’s consideration.

The Portfolio Member for Finance reported that the purpose of the report is to set out the Section 151 Officer’s assessment on the level of general balances and reserves for 2019/20 and to make recommendations as to the allocation of general balances for use during 2019/20. The Portfolio Member said that it is appropriate in this context to refer again to the Wales Audit Office’s Audit Letter for the Isle of Anglesey County Council for 2017/18. The Letter highlights the Council’s reserves position noting a recent trend of reduction in the Council’s general fund balance which the Auditor General deems unsustainable and which   the letter notes the Section 151 Officer and the Council have recognised as a risk. The Auditor General advises that “continued careful consideration of reserves balances and how they might be used to support financial plans is particularly important as it is not sustainable to rely on reserves to support ongoing cost of demand led Care/Children’s Services. Once reserves have been depleted, other sources of funds or efficiencies must be identified.” The Auditor General goes on to say that the Executive’s resolution to seek to balance the revenue budget in 2019/20 without resorting to the use of general reserves by making sufficient  savings and ensuring they are achievable, is welcomed.

The Head of Function (Resources)/Section 151 Officer said that at the end of 2015/16 the Council’s general fund balance, its earmarked reserves and schools’ balances stood at in the region of £27m or 22% of the Council’s net budget; by the end of 2018/19 they are forecast to reduce to £15m or 12% of the Council’s net budget. The Officer said that reserves are held as security against unexpected events or unplanned for expenditure; the general reserves were drawn upon in 2017/18 to help meet the cost of over expenditure on the revenue budget; it is likely they will again be utilised for this purpose this year as the 2018/19 revenue budget is projected to be overspent. Funds are also allocated to budgets to  meet the in-year costs of events  e.g. the reserves were used to support a Legacy Team in Children’s Services to deal with historical cases and were also used in 2017 to meet the additional cost of flood damage (outside of the Highways budget) following the severe flooding event in November that year.  The Council’s earmarked reserves are set aside for various specific and known purposes e.g. Insurance reserve to meet the estimate of future claims to enable the Council to meet the excesses not covered by insurance, Grants reserve which holds grant income not yet spent and a reserve for specific one-off projects which span more than one year which are not financed by the revenue budget.

The Head of Function(Resources)/Section 151 Officer said that whilst there is no hard and fast rule as to the level of general balances that a council should hold, as a general rule of thumb, 5% of a council’s net revenue budget is considered to be an acceptable level, which for Anglesey for 2019/20 is £6.76m. The estimated balance at 31 March, 2019 for the general balances is £4.7m which is £2m lower than the calculated minimum. The Officer said that he accepted that in the current financial climate it is not possible to budget for a budget surplus in order to bring the general reserves back to the minimum level and that the increase in general reserves must be done gradually over a period of 5 to 7 years. Having a level of general balances which is below the minimum level is a financial risk and the longer the general balances remain below this level, the greater the risk that the Council will not be able to financially weather an emergency or unexpected event.

With regard to the recommendation that the Edge of Care reserve be transferred from the earmarked reserves to the General Reserves, the Officer clarified that there had been a delay in the setting up of the Edge of Care Team and as a result, a balance of the £250k allocated will be unspent at the end of this financial year. From 2019/20 the Edge of Care Team will be funded from the revenue budget on a permanent basis, thereby enabling the release of the earmarked fund balance back into the General Reserves.

The Executive considered the report and made points as follows –

•           The Executive noted that the situation is very challenging and that the Council will likely struggle to bring the reserves back up to an acceptable level when it is still facing having to make cuts for the foreseeable future. The situation is unsustainable unless the Council receives an improved funding settlement from Welsh Government in 2020/21 and beyond.

The Head of Function(Resources)/Section 151 Officer whilst acknowledging that building up the reserves back up to the 5% level during a period of continued  austerity will not be easy, said that it should be the Council’s aim to do so as part of its financial plan over the medium term. It will not be achieved in one financial year and may take between 3 to 5 years or even longer to achieve depending on the detail of the budget settlements which the Council receives from 2020/21 onwards.

•           The Executive noted that pressure needs to be brought to bear on Welsh and Central Governments by concerted lobbying of Anglesey’s Assembly Member and Member of Parliament for fairer funding for public services. The Executive emphasised that it is the Council that has to make difficult choices because of  a shrinking budget and it is the Council that then has to account for those choices to the Island’s citizens. 

•           The Executive noted that increasing the level of Council Tax has an impact on the public. The Executive sought clarification of how sustainable is the approach that seeks to use reserves to reduce, or avoid Council Tax rises and whether a “fire sale” of assets  is an option were the Council to find itself under financial pressure with insufficient reserves to draw upon.  

The Head of Function (Resources)/Section 151 said that the Council’s level of general balances will at the end of 2018/19 be at a level that is below the minimum recommended level. Reducing the general balances even further would increase the financial risks to the Council in limiting its ability to deal with the unexpected or to address budget overspend as was necessary in 2017/18 and is likely to be the case for the 2018/19 financial year. A council that has run down its reserves is technically insolvent. In such a case a fire sale would not provide a solution as the capital receipts generated from such a sale could not be used for revenue purposes to support services. Therefore a council finding itself in such a position would have to reduce services to the statutory minimum in order to reduce expenditure and create the circumstances wherein it is able to pay its way going forwards. The Officer said that it was his professional opinion that this Council’s level of general reserves has reached a critical point and should not be allowed to fall any further. To do so could put the Council at risk financially were the unexpected to happen.

It was resolved –

•           To note the general policy on reserves and balances adopted on 1 March, 2016, as at Appendix A to the report.

•           To approve the amendments to the general policy on reserves and balances adopted on 1 March, 2016 at Appendix A.

•           To set the minimum level of general balances for 2019/20 as £6.76m in accordance with the Section 151 Officer’s assessment.

•           To plan for an increase in general balances over a 3 to 5 year period in order that the actual level of reserves reaches the minimum level. This increase will be achieved by budgeting for planned annual surpluses.

•           To confirm the continuation of the existing earmarked reserves.

•           To approve the transfer of the Edge of Care reserve from the earmarked reserve to the General Reserves.