DOCUMENT CONTROL
| Author Juliet Cross, Clerk and Responsible Financial Officer | |||
| Date | Version | Status | Description |
| 07/09/19 | 0.1 | Draft | Draft document circulated to councillors. |
| 12/09/19 | 1.0 | Final | Document approved at the council meeting with amendmentsheld on 12 September (Minute: 19.236). |
| Review Cycle Every four years at the Annual Meeting of the Council after the election of the parish councillors or in response to new or amended statutory requirements. Next review due May 2023. | |||
| Legislation and Regulation Governance & Accountability for Local Councils Practitioners Guide 2019Local Government Act 2003Local Government Finance Act 1992 Chawleigh Parish Council’s related documents:Financial RegulationsInvestment PolicyList of Reserves |
INDEX
| 1. | INTRODUCTION | 2 |
| 2. | TYPES OF RESERVES | 2 |
| 3. | GENERAL RESERVES | 3 |
| 4. | CONTINGENCY RESERVES | 3 |
| 5. | EARMARKED RESERVES | 4 |
| 6. | RINGFENCED RESERVES | 4 |
| 7. | ELECTION RESERVES | 4 |
| 8. | OPPORTUNITY COST OF HOLDING RESERVES | 5 |
1. INTRODUCTION
The purpose of this policy is to set out how Chawleigh Parish Council (the Council) will determine and review the level of its financial reserves. The Governance & Accountability for Local Councils Practitioners Guide 2019 states that:
“As with any financial entity, it is essential that authorities have sufficient reserves to finance both its day to day operations and future plans. It is important, however, given that its funds are generated from taxation/public levies, that such reserves are not excessive.”
Sections 32, 43 and 50 of the Local Government Finance Act 1992 require local authorities to maintain adequate financial reserves in order to meet the needs of the organisation and to have regard to the level of reserves needed for meeting estimated future expenditure when calculating the budget and precept requirement. However, there is no specified minimum level of reserves that a local authority should hold and it is the responsibility of the Responsible Financial Officer to advise the Council about the level of reserves and to ensure that there are procedures for their establishment and use.
There is also a requirement reinforced by section 114 of the Local Government Finance Act 1988 which requires the Responsible Finance Officer to report to the Council if there is or is likely to be unlawful expenditure or an unbalanced budget. This would include situations where reserves have become seriously depleted and it is forecast that the Council will not have the resources to meet its expenditure in a particular financial year.
Furthermore, sections 26 and 27 of the Local Government Act 2003 set out the requirements regarding the determination of minimum levels of controlled reserves, i.e. currently unallocated balances, and actions required should they fall below such minimum levels.
2. TYPES OF RESERVES
| 2.1 | Reserves can be categorised as: General – This is a working balance to help cushion the impact of uneven cash flows and avoid unnecessary temporary borrowing.Contingency – This is a reserve to cushion the impact of unexpected events or emergencies. Earmarked – This is a means of building up funds to meet known or predicted requirements. Earmarked reserves are accounted for separately but remain legally part of the General Fund.Ringfenced – These are monies or grants allocated for a specific project only and cannot be used for any other purpose.Election – These comprise the reasonable costs of holding local council elections which can be fully recharged by the District Council to the Council, if they so determine. |
| 2.2 | Any decision to set up or extinguish a reserve must be made by the Council. |
| 2.3 | Expenditure from reserves can only be authorised by the Council. |
| 2.4 | Reserves should not be held to fund on-going expenditure. This would be unsustainable as, at some point, the reserves would be exhausted. To the extent that reserves are used to meet short term funding gaps, they must be replenished in the following year. However, earmarked or ringfenced reserves that have been used to meet a specific liability would not need to be replenished, having served the purpose for which they were originally established. |
| 2.5 | All reserves are recorded on a central schedule held by the Responsible Financial Officer which lists the various reserves and the purpose for which they are held. |
| There is no specified minimum level of reserves that a Parish Council should hold and it is the responsibility of the Responsible Finance Officer to advise the Council about the level of reserves and to ensure that there are procedures in place for their establishment and use. | |
| 2.6 | The Council’s Financial Risk Assessment will be reviewed as part of the budgeting and year end accounting procedures in order to identify planned and unplanned expenditure items and thereby indicate an appropriate level of reserves. |
| 2.7 | The level of financial reserves held by the Council will be reviewed and agreed by the Council during the discussions held regarding the setting of the budget for the next financial year. |
| 2.8 | The Council’s annual budget report will include a financial reserves statement showing the estimated opening balances for the year ahead, the addition to/withdrawal from balances, and the estimated end of year balance. A statement will also be included commenting on the adequacy of general balances and provisions in respect of the forthcoming financial year. |
3. GENERAL RESERVES
| 3.1 | General Reserves are funds which do not have any restrictions as to their use. These reserves can be used to smooth the impact of uneven cash flows, to offset the budget requirement if necessary, or can be held in case of unexpected or unforeseen liabilities or emergency and uninsured situations. |
| 3.2 | The level of General Reserves to be held by the Council is at least half of the annual precepted figure, i.e. to fully cover six months’ expenditure, but no more than the whole of the annual precepted figure, i.e. 12 months’ expenditure. |
| 3.3 | The primary means of building General Reserves will be through an allocation from the annual budget. This will be in addition to any amounts needed to replenish reserves that have been consumed in the previous year. |
| 3.4 | Setting the level of General Reserves is one of several related decisions in the formulation of the medium-term financial strategy and the annual budget. The Council must build and maintain sufficient working balances to cover the key risks it faces, as expressed in its financial risk assessment. |
| 3.5 | If in extreme circumstances General Reserves were exhausted due to major unforeseen spending pressures within a particular financial year, the Council would be able to draw down from its earmarked reserves to provide short term resources. |
| 3.6 | Even at times when extreme pressure is put on the Council’s finances, the Council must keep a minimum balance sufficient to pay two month’s expenditure in the General Reserves at all times. |
4. CONTINGENCY RESERVES
| 4.1 | Contingency reserves are used to cushion the impact of unexpected liabilities or emergencies, including future claims to enable the Council to meet the excesses not covered by insurance. |
| 4.2 | Any contingency liabilities would be covered by funds held in the General Reserves. |
5. EARMARKED RESERVES
| 5.1 | Earmarked reserves will be established on a “needs” basis, in line with anticipated requirements. They represent amounts that are generally built up over a period of time which are earmarked for specific items of expenditure to meet known or anticipated liabilities or projects. The ‘setting aside’ of funds to meet known future expenditure reduces the impact of meeting the full expenditure in one year. |
| 5.2 | Earmarked reserves can be held for several reasons: As renewals to enable services to plan and finance an effective programme of vehicle, equipment and infrastructure replacement and planned property maintenance. These reserves are a mechanism to smooth expenditure so that a sensible replacement programme can be achieved without the need to vary budgets. As a means of carrying an underspend forward – some services commit expenditure to projects, but cannot spend the budget in year. Reserves are used as a mechanism to carry forward these resources. Other earmarked reserves may be set up from time to time to meet known or predicted liabilities as a means of building up funds or of re-allocating specific funds from one year to the next. |
| 5.3 | When establishing an earmarked reserve, the Council will set out: the reason/purpose of the reserve;how and when the reserve can be used;any procedures for the management and control of the reserve; anda process and timescale for review of the reserve to ensure continuing relevance and adequacy. |
| 5.4 | If earmarked reserves are used to meet short-term funding gaps, they must be replenished in the following year. However, earmarked reserves that have been used to meet a specific liability would not need to be replenished, |
| 5.5 | All earmarked reserves will be recorded on a schedule held by the Responsible Financial Officer which lists the various earmarked reserves and the purpose for which they are held. |
6. RINGFENCED RESERVES
| 6.1 | Ringfenced reserves are allocated for a specific project only and cannot be used for any other purpose. |
| 6.2 | Ringfenced reserves will not be replenished. |
7. ELECTION RESERVES
| 7.1 | Some Parish Councils hold an election reserve, as all reasonable costs of holding local council elections can be fully recharged by Mid Devon District Council to the Council, if they so determine. |
| 7.2 | The seats on the Council are rarely contested in practice, in which case there is no requirement to hold an election. The Council does not therefore hold election reserves. |
| 7.3 | Any unexpected election costs would be covered by funds held in the General Reserves. |
8. OPPORTUNITY COST OF HOLDING RESERVES
| 8.1 | In addition to allowing the Council to manage unforeseen financial pressures and plan for known or predicted liabilities, there is a benefit to holding reserves in terms of the interest earned on funds which are not utilised. This investment income is fed into the budget strategy. |
| 8.2 | However, there is an “opportunity cost” of holding funds in reserves, in that these funds cannot then be spent on anything else. As an example, if these funds were used to repay debt, the opportunity cost would equate to the saving on the payment of interest and the minimum revenue provision, offset by the loss of investment income on the funds. However, using reserves to pay off debt in this way would leave the Council with no reserves to cover unforeseeable short-term funding gaps which may occur; and they would have to be replenished in the following year. |
| 8.3 | Given the opportunity costs of holding reserves, it is critical that reserves continue to be reviewed each year as part of the budget process to confirm that they are still required and that the level is still appropriate. |