Reserves/robustness of the estimates

Report: 07
Date: 20 November 2008
By: the Treasurer

Summary

This report sets out a review of earmarked reserves prior to the final draft budget submission. It reviews the possible use of earmarked reserves to aid the budget or to be redirected to new priority areas and concludes it is anticipated that there are such opportunities. The report brings into focus for the first time the possibility of using 2008/9 revenue underspends to create new earmarked reserves.

The report also provides Members with information on the robustness of the estimates and the adequacy of the reserves, so that members have authoritative advice available when they make their decisions on the budget submission.

A. Recommendations

That members

1. Members consider the review of earmarked reserves and confirm their existing use;
2. note the transfer of £2.47M earmarked reserves no longer needed for their identified use to the General Reserve pending further decisions; and
3. consider and endorse the advice on the robustness of the estimates and adequacy of reserves when referring any comments or recommendations on to the full Authority.

B. Supporting information

Background

1. Revenue reserves are cash backed balances, held on the balance sheet until they are spent or released for other purposes. As such, they can only be spent once, and are not part of the ongoing base budget.

2. The Authority’s balance sheet reserves are held for three main purposes:

• A contingency to cushion the impact of unexpected events or emergencies – this forms part of general reserves;
• A working balance to help cushion the impact of uneven cash flows and avoid unnecessary temporary borrowing – this too forms part of general reserves; and
• A means of building up funds to meet known or predicted liabilities or to smooth significant expenditure requirements – known as earmarked reserves.

3. The position on the main revenue reserves maintained by the Authority as at 30 September (period 6) is set out below:

4. There is no statutory guidance on reserves, and there has never been an accepted case for introducing a statutory minimum level of reserves, even in exceptional circumstances. CIPFA guidance issued in June 2003 confirms that authorities, on the advice of their treasurers, should make their own judgements on such matters, taking into account all the relevant local circumstances.

5. The Authority’s external auditor has responsibility to review the arrangements in place to ensure that financial standing is soundly based. This includes reviewing and reporting on the level of reserves taking into account their local knowledge of the authority’s financial performance over a period of time. It is not their responsibility to prescribe the optimum or minimum level of reserves for an individual authority.

General Reserves

6. The General Reserve (£46.782M) and the Emergencies Contingency Fund (£23.093M) total £69.875M some 2.7% of the budget requirement, satisfying the Authority’s present policy of holding general reserves of at least 2% of net revenue expenditure provided that there are appropriate accounting provisions and earmarked reserves, reasonable insurance arrangements a well funded budget and effective budgetary control. This position is expected to be maintained or improved at 31 March 2009.

7. Where target levels for reserves are exceeded it is necessary to report to members the opportunity costs of maintaining these levels compared to the benefit it accrues. Strictly speaking, the 2% target level is open ended, with an implicit wish to improve on this level if conditions allow. However, whilst reducing the general reserves to 2% would allow £17.9M to be released for other uses, the confidence, robustness and financial standing that these hard won reserves now gives the Authority, particularly in the difficult financial conditions we are now in, is felt to provide adequate reason to maintain these present levels of reserves. No further action is proposed on these at present.

Earmarked reserves

8. In conjunction with the Chairman, a review of the usage and need of the present earmarked reserves has been undertaken with the MPS. This is now backed up by an MPS quarterly review process, which both monitors usage and forecasts any opportunities that might be available if the intended use is no longer required.

9. The review has now identified an opportunity to release £2.4M of earmarked reserves, although £2M from the Pump Priming Fund was specifically proposed by the MPA, which could presently be released to assist the budget making process or be redirected to key policy areas. These are as follows:

10. It is therefore proposed that these reserves will be transferred to the General Reserve balance before the end of the financial year, pending any further decisions as to their use to support new service spend (or a reduction in the precept).

11. The Pump Priming Fund has been identified as being available for release by the MPA. The Fund was instigated by MPA members specifically when there appeared to be opportunities to develop better ways of managing the forensic science budget. This was connected to new specialist capital provision, which is now unlikely to proceed. Release of the Pump Priming Fund to the General Reserve will allow members to consider alternative uses, including those which may be proposed by the MPS. The service has indicated a need to support the delivery of the Service Improvement Plan, a more integrated planning process which the MPS feel will inevitably put more pressure on earmarked reserves as it tries to smooth the cost of preparing for the third generation of outsourced contracts over the next planning period whilst at the same time delivering the required savings on the budget. There is also the possibility that further rationalisation of the forensics service may no longer be affordable and that SCD may be looking to seek to utilise available reserves when looking for revenue solutions. On this basis, at present, the budget submission has not proposed this transfer to General Reserves. Members will, however, wish to take a view about the opportunity of transferring these unutilised earmarked reserves to the General Reserve, pending decisions as to their future use.

12. Appendix 1 identifies the purpose and amounts of the earmarked reserves. There can be a number of reasons why it is anticipated that earmarked reserves will still be unspent at April 2009:

• The reserve was created with the intention of being released over a number of forthcoming years (e.g. property related costs),
• The reserve was prudently created to deliberately cover potential future years’ liabilities (e.g. insurance fund),
• The reserve was created to allow revenue account surpluses to be carried forward (e.g. Proceeds of Crime Act).

Latest outlook for earmarked reserves

13. A summary of the earmarked reserves as at 30 September 2008 (Period 6) is provided below:

This Committee will approve any further draw down of reserves during 2008/09 at the appropriate time.

Creation of reserves from the 2008/9 forecast underspend

14. The Committee is advised elsewhere on the current agenda of a forecast 2008/09 revenue underspend of £22M with a request that it be transferred in 2008/09 to a balance sheet capital reserve. It will, however, be useful for planning purposes to gauge members’ initial preferences for possible use of any further underspends, above the £22M level, when considering transfers to reserves as at 31 March 2009. It is proposed that, in addition to maintaining the General Reserve to at least 2% of net revenue expenditure, any further underspends, above the £22M, be transferred to the General Reserve. It will of course be necessary near accounts closure (May-June 2008) to ensure there are no further important priorities for the Authority and Service when considering reserving policy.

Adequacy of the reserves

15. It is necessary to provide members with information on the robustness of the estimates and adequacy of the reserves so that members have authoritative advice available when they make their budget decisions.

16. Police Authorities decide every year how much their overall budget requirements are. They base these decisions on a budget that sets out estimates of what they plan to spend on their policing services.

17. The decision on the budget is taken before the year begins and it cannot be changed during the year, so allowance for risks and uncertainties that might increase police service expenditure above that planned, must be made by:

1. Making prudent allowance in the estimates for all of the requirements of the MPS, including all its business groups; and in addition,
2. Ensuring that there are adequate reserves to draw on if the estimates turn out to be insufficient.

18. Section 25 of the Local Government Act 2003 requires that an authority’s chief financial officer reports to the authority when it is considering its budget. The report must deal with the robustness of the estimates and the adequacy of the reserves allowed for in the budget proposals, so that Members will have authoritative advice available to them when they make their decisions.

19. Section 25 also requires Members to have regard to the report in making their decisions.

Robustness of the Estimates

Reliability/Accuracy

20. The budget process has involved Members, the Commissioner and his staff and my own staff in a thorough examination of the budget now recommended to the Authority. The estimates have been put together by, or with the involvement of, qualified finance staff and directed and reviewed by the MPS Director of Resources and her Corporate Finance section.

21. In particular the estimates this year have reflected additional work which has produced more integration between business and budget planning, there is more supporting documentation for the budget submission and there continues to be a review of our capital needs over a seven year planning period.

Scrutiny

22. Budget proposals have been through a rigorous scrutiny within the MPS, including the Management Board and Investment Board. I have asked a series of questions about the construction of the budget and the nature of individual components and have received responses from the MPS. Informal budget scrutiny meetings have been held by the MPA which have included a small group of MPA members. Individual MPS business groups and Management Board members were asked to present their detailed revenue growth and savings proposals for scrutiny. The outcome of the review process for the proposed growth and savings items assessed possible impacts of any savings across business groups as well as on strategic priorities. The previous Joint Finance & Planning Performance and Review (PPR) Committee has reviewed update reports on the draft budget submission. The budget submission will be formally considered by a meeting of the full Authority on 27 November after consideration by the Finance and Resources Committee on 20 November. In addition there has been a regular dialogue with, and challenge from, GLA officers.

Achievability and Risks

23. There are a number of areas of risk in the budget as currently proposed. In particular the budget is being submitted before the formal government grant settlement, although as a 3-year CSR settlement has been provisionally agreed the risks of change are low. The Mayor has set a budget target based on the increase in the Authority’s Budget Requirement rather than including any assumptions about government grant, nevertheless the Mayor will undoubtedly have had to make estimates of the MPA’s grant entitlement. Again the added certainty is helpful. At this stage there is a small risk that the grant estimates are overstated and the Authority might well be asked to reflect any reduction in grant expectations with a lower expenditure level. It should be noted that the draft business plan only includes funding already provided by government for the Olympics and Paralympic Games or for borough partnerships. Further growth will only be added in when agreed. However, any of these growth items are assumed to be budget neutral, in effect additional costs such as additional employee expenses are assumed to be offset by income from government or from local partners. Remedial action in the budget would be necessary if income was lower than expected.

24. It is likely that capping criteria will apply again in 2009/10. In our case capping would actually apply to the overall GLA precept. However since the police component represents approximately 80% of the GLA precept, the increase in the MPA precept will be critical in relation to the criteria for excessiveness applied to the overall precept and a significant impact would inevitably fall on the MPA budget if the GLA precept had to be reduced as a result of capping. There is no firm information at the moment as to the criteria that will be applied in 2009/10.

25. The draft budget requires delivery of new savings and efficiencies totalling £92.3M to balance the budget; these have been identified in the draft budget submission and there are significant items that will require firm management. However, the MPS track record in delivery of large savings and efficiency packages has been good.

26. The Authority has regular budget monitoring undertaken by Finance and Resources Committee. Progress is also reported to the Mayor and London Assembly (Budget Monitoring Sub Committee) on a quarterly basis. Authority agreement is needed for the carry-forward of any year end underspending. The MPS Investment Board, chaired by the Deputy Commissioner is also charged with monitoring the budget. Monitoring of the 2008/09 budget indicates a year end underspending of £22M. There is a risk that this may not be maintained, but the record of management action over the last few years, coping with large unexpected operational expenditure, is good and I consider it would be reasonable to expect that appropriate corrective action will be undertaken if it does materialise during the year or indeed next financial year. If the 2008/09 underspend materialises the sum will be available to transfer to earmarked or unearmarked reserves and proposals are being made to transfer this to a capital reserve.

27. There are a number of features of the Authority’s financial policies, accounting policies and governance arrangements which mitigate financial risks. These include the following:

• An element of the risk of financial loss is transferred externally though insurance arrangements.
• The Authority has appropriate general and earmarked reserves
• The Authority takes a prudent approach to achievability of income and debts due, making appropriate provisions for bad debts.
• The Authority has adopted accruals accounting, in particular making full provision for realistic estimates of future settlements of known liabilities.
• The level of external borrowing is low and therefore the Authority’s exposure to interest rate changes is low.
• Risk management has been built into the corporate governance arrangements of both the MPA and MPS so that there is proactive assessment of risks and processes to monitor and manage risks.
• The budget has recognised that there are financial risks inherent in new funding partnerships, but no commitments will be entered into until satisfactory arrangements are agreed by all parties

Future Commitments

28. The financial projections for future years included in the budget show a significant level of ongoing commitment. However further work is required on the medium term figures in order to judge the implications in the context of the Authority’s overall financial position. These will be reported to Finance and Resources Committee who will oversee progress.

29. The Authority’s cash flow requirements are forecast and monitored on a monthly basis to ensure stable and predictable treasury management, avoiding unexpected financing requirements.

Capital

30. The MPA has approved a capital strategy. The capital strategy focuses on processes to take forward a strategically led, priority driven, capital programme.

31. The draft capital programme has been reassessed in the light of the significant drop in capital receipts available to the Authority and the Service. The MPA/MPS have reviewed the capital programme with the view of minimising the operational impact. Together with rephasing scheme expenditure, deletion of some schemes from the programme and a review of the financing options available to the Authority a sustainable capital programme have been developed.

32. The aim of the proposed capital spending plan is to allow officers to start designing/delivering the programme as stated. The budget submission reflects the need to review 2010/11 and beyond. This will require substantial work in 2009/10 to be carried out to ensure the best match with strategic objectives is achieved. There will need to be rigorous governance arrangements in place, including oversight by the Authority’s Finance and Resources Committee to ensure proper management. There will also need to be a review of the affordability of the programme against the medium term financial plan, again overseen by the Finance and Resources Committee.

33. The revenue consequences of the capital programme still needs to be fully assessed in light of the recent significant adverse impact of the decline in the property markets and the Authority’s ability to generate capital receipts on the size of the programme. The impact could give rise to additional costs of maintaining and keeping compliant old, inefficient property/systems, which may partly be offset by savings from delays in bringing some properties into service. This work will be completed before the detailed budget is approved in March. Any resultant costs will have to be contained within the overall financial limit set by the Mayor.

34. The Prudential Code has introduced a rigorous system of prudential indicators, which explicitly require regard to affordability, prudence, value for money, stewardship, service objectives and practicality. This is backed up by a specific requirement to monitor performance against forward-looking indicators and report and act on significant deviations.

35. The updated capital strategy has drawn together key processes and arrangements for prioritisation, appraisal, management, monitoring and review of the existing programme and new investment. Although the processes are not yet mature, improvements will be made over the short to medium term, which will inform choices on the allocation of additional capital investment and its affordability. This process is supported by the MPS Capital Programme Review Board (CPRB), which the Treasurer attends.

36. The capital programme will still be reliant on the generation of new capital receipts from asset disposal. From 2009/10, the MPA Resources Sub Committee will monitor capital receipts achieved to date and those forecast against targets for the future programme.

37. In my view the robustness of the estimates has been ensured by the budget process, which has enabled all practical steps to be taken to identify and make provision for the Authority’s commitments in 2009/10. Estimates have been prepared in a properly controlled and professionally supported process. The estimates have also been subject to due consideration within the MPS and MPA.

Adequacy of Reserves

38. The Authority maintains working balances to manage the effect of uneven cash flows and avoid unnecessary temporary borrowing. These balances are also used to cushion the impact of unexpected events or emergencies. In addition earmarked reserves are used to meet known or predicted future expenditure. Provisions are established when the Authority has a financial obligation as a result of a past event and that liability can be reliably estimated. The CIPFA Local Authority Accounting Panel has issued a guidance note on local Authority Reserves and Balances (LAAP Bulletin 55) to assist Local Authorities in this process.

General Reserve

39. This guidance however, states that no case has yet been made to set a statutory minimum level of reserves, either as an absolute amount or a percentage of budgets. Each authority should take advice from its chief financial officer and base its judgement on local circumstances. The Authority has taken a policy decision to increase its level of general reserves (to include the Emergencies Contingency Fund) over the last few years from 1% of net revenue expenditure to a minimum figure of 2% - the figure currently stands at a prudent 2.7% NRE (£69.9M).

40. In coming to a view on the adequacy of reserves, account needs to be taken of the risks facing the Authority. The annual governance statement, within the Authority’s Statement of Accounts, gives assurance in relation to the organisation’s arrangements for the management of risk and ensuring proper arrangements are in place for governing its affairs and looking after the resources at its disposal. In addition a general reserves/balances risk analysis has been undertaken and the factors taken into account in the analysis are as follows:

• The estimates included in the medium term financial plan for inflation and interest rates, and in particular police officer and police staff pay;
• The assumptions used for the level and timing of capital receipts;
• The Authority’s capacity to manage in year budget pressures from demand led services;
• The need for probable but uncosted future demands;
• The need for working capital pending the receipt of grant and other income;
• The need to respond to natural disasters and emergencies whilst at the same time maintaining routine services and provide flexibility during uncertainty and change;
• The need to meet as yet unknown liabilities;
• The financial risk inherent in new funding partnerships, outsourcing arrangements and major projects;
• The adequacy of the Authority’s insurance arrangements;
• Financial control arrangements including internal and external audit arrangements;
• Availability and timeliness of information on changes in the Authority’s financial position
• The size and scope of the capital programme and Prudential Indicators and local determination of borrowing levels;
• The tightening financial position which has already driven out budget efficiencies
• The predicted worsening national financial funding position
• The Icelandic Government froze Landsbanki assets on 7 October, at which time MPA investments totalling £30M were outstanding. The UK government continues to discuss with the Icelandic government arrangements for the return of local and police authority deposits. In the event however, that these sums are not recovered, they will have to be written down to the Authority’s revenue account. The manner and phasing of such a write down will be subject to guidance from the CIPFA. Presently the Authority’s reserves are felt to be robust enough to accommodate a write-down if it is needed.

41. The setting of the level of reserves is an important decision not only in the budget for 2009/10, but also in the formulation of the medium term financial strategy.

42. Special consideration was given to the Authority’s Medium Term Financial Plan objectives, the Prudential Indicators and the impact of major capital projects. Subject to the maintenance of four key issues: adequate accounting provisions and earmarked reserves, reasonable insurance arrangements, a well funded budget and effective budgetary control, when all these factors are taken into account I am content with the present level where the general reserves and Emergencies Contingency Fund is an acceptable and adequate 2.7% of NRE at £69M which is more than compliant with the policy of having at least 2% NRE.

Earmarked Reserves

43. Earmarked reserves have been established to provide resources for specific purposes. These are identified in the main budget submission at £141.3M at 30 September 2008.

Provisions

44. A review of provisions has been undertaken. The remaining provisions are also estimated to be sufficient to meet known liabilities, including in particular the provision for insurance liabilities.

45. The level of the General Reserve for the period of the medium term financial strategy is estimated, at present, to remain broadly constant.

46. In my view, if the authority were to accept the recommended increase in the 2009/10 Budget Requirement, funding for unavoidable service pressures, proposals for savings and for capital, then the level of risks identified in the budget process, alongside the authority’s financial management arrangements suggest that the level of reserves for 2009/10 are adequate. Members should be aware that there is a need for a strategy to be put in place to address future year savings in order to ensure there is no unnecessary pressure placed upon the need to use existing General Reserves in future years. This has already been highlighted and officers will be addressing this issue as part of the planning for the 2010/11 and future year’s budget – for which the planning process will again commence early in the New Year.

C. Race and equality impact

There are no specific implications arising from information set out in this report.

D. Financial implications

Financial implications are set out throughout this report.

E. Background papers

Final Accounts papers

F. Contact details

Report author(s): Ken Hunt, Treasurer, MPA

For more information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

Appendix 1

Purpose and amount of earmarked reserves

1.1. Within each category of earmarked reserve described, there are a number of individual reserves. A broad explanation of the purpose of each of the categories of reserves and an explanation of the main reserve items within those categories is provided below.

1.2. Accommodation Strategy/Property Related – this category of reserve has been earmarked to fund costs associated with delivering the MPA/MPS’s estate strategy. It will be kept under review in order to assess whether there is potential flexibility to use this funding to support the overall budget. The main individual reserve items within this category are:

• Dilapidations (£9m) – this reserve will fund the future costs of dilapidations on the estate and is significantly less than the potential dilapidation liabilities.
• Central London Accommodation Strategy (£12.5m) – this reserve has been set aside to fund costs associated with delivering the estates strategy. In particular, this reserve will assist the MPA/MPS in smoothing the impact of increased rental payments on operational buildings such as Empress State Building.
• The remaining £12.3m has been set aside to fund a number of items such as the development of firearms facilities (£1.1m), various property works that ensure the organisation’s buildings function effectively (£2.7m) and compliance with statutory energy performance standards (£0.8m). There is also £5.6m set aside to fund costs associated with delivering the Safer Neighbourhoods programme.

1.3. Operational Costs – The reserve provides for a number of planned operational activities. The expectation is that the majority of the reserve will be used in 2008/09. The main individual reserve items within this category are:

• Police Pay Award (£11.5m) – this reserve was created during 2007/08 from the saving that resulted from a delay in the pay award from September 2007 to December 2007. The MPS is currently developing a programme of initiatives primarily linked to improving health that will utilise this funding over a number of years.
• Counter Terrorism (£13.9m) – this reserve was set aside to fund the costs of capital projects that have been rephased from 2007/08 into 2008/09. Home Office approval for this treatment of the grant has been received.
• Communications Project (£8.6m) – this reserve was set aside to provide for an integrated communications system for the MPS. The reserve is expected to be utilised in full during 2008/09.
• Sums have been set aside to fund a number of operational priorities such as Criminal Justice Initiatives (£7.8m) i.e. integrated prosecution teams, virtual courts etc, Youth and Violent Crime initiatives (£4m), Proceeds of Crime Act funded schemes (£1.2m), Kickz (£2.5m) to fund crime reduction projects funded with the Football Association, development of car pound facilities (£3.2m) and MetTime (£3.6m) to fund costs of the development of the system. There is also a legal reserve (£1.5m) set aside to cover any unbudgeted legal costs that are incurred and a Motor Insurance Reserve (£1.7m) set aside to provide for the MPA approved insurance strategy, which allows for savings on motor insurance premiums, a Pump Priming Reserve (£2m) was established to encourage new, more efficient and/or effective ways of doing business where there is a need for either ‘repayable’ pump priming monies or start up support. In addition Property reserves have been established for NSY works (£1.3m) and SCD Forensics needs (£1.5m).
• There are a number of other smaller reserves that have been set aside within this category including :
  • Covert Surveillance (£1.2m)
  • MetForensics Project (£1.2m)
  • NSPIS Case & Custody Project (£1m)
  • ICT Contract issues (£0.7m)
  • Special Priority Payments (£0.7m)
  • Transfer of policing responsibility for Blackwall Tunnel (£0.7m)
  • Recruitment of trainers to develop the initial police training programme (£0.7m)
  • Development of the Technical Support Unit (£0.5m)
  • Development of the Citizen Focus Policing Programme (£0.4m)

1.4. Revenue support to Capital rephasing - This reserve has been set aside to cover the revenue impact of the rephasing of the Capital Programme. Following a review of the revenue impact of the capital programme, £6m has been removed from DoI’s ‘projects into service’ provision for 2009/10 on the basis that, if needed, funding is available in this reserve. In addition, the MPS currently has reviewed the Capital Programme in the light of the severe decline of the capital receipts and therefore an element of this reserve may well be needed to support the financing of the Capital Programme in future years.

1.5. Major Change Programmes – this category of reserve has been earmarked to fund costs associated with the major modernisation programmes that the organisation is currently embarking on, e.g. potential redundancy costs. The main individual reserve items within this category are:

• Met Modernisation (£10m) – this reserve was set aside from the underspend in 2007/08 and will fund costs associated with the organisation’s modernisation programme.
• Transforming HR (£3.2m) – this reserve was set aside to reflect the revised profile of expenditure on the programme and will be utilised in full over the life of the programme.

1.6. Budget Pressures – this reserve offers potential flexibility to support the overall budget, however consideration is being given to use some of this reserve to fund the future costs of the organisation’s outsourcing programme and support the delivery of the Service Improvement Plan. The main individual reserve items within this category are:

• Budget Pressures (£7.2m) – this reserve was set aside to fund general pressures such as the re-phasing of reduction proposals, unanticipated demand pressure and pay and price volatility. An element of this reserve may well be needed to support the financing of the Capital Programme. This reserve will be used to cover the one off costs of the Carbon Reduction Communities Charge liability once Government guidance has clarified the liability (current estimates £1.6m).
• Territorial Policing Training Centre (£1.4m) – this reserve was set aside to fund the costs of maintaining the training centre and is expected to be utilised in full in 2008/09 following the approval by the MPA Finance and Resources Committee to a 10 year lease on the centre.

1.7. A review of the earmarked reserves has identified the following provisions which are no longer required for the purpose they were established:

• Safer London Foundation (£100,000)
• Child Protection (£156,959)
• Laming Enquiry (£14,473)
• Corporate Performance Survey (£200,000)

A sum of £2M has been separately identified by the MPA for the Pump Priming Fund for consideration as a reserve which is no longer required. These earmarked reserves will therefore, subject to member decision, be transferred to the General Reserve balance before the end of this financial year for consideration for alternative uses.

1.8. MPA Initiatives - this category of reserve has been set aside to fund projects that the MPA expects to undertake.

General Reserve & Emergencies Contingency Fund

1.9. At 31st March 2008, the general reserve balance was £46.8m, which represented some 1.8% of the 2008/09 Net Revenue Expenditure. The Emergencies Contingency Fund is available to assist in exceptional circumstances to support operational requirements, which will normally not have been budgeted for. This reserve totalled £23.1m at 31st March 2008.

1.10. In line with MPA policy, when the Emergencies/Contingency Reserve is taken into account the general resources available total £69.9m which represents 2.7% of the 2008/09 Net Revenue Expenditure.

1.11. At month six a full year under spend is predicted of £22m against the 2008/09 budget. In normal circumstances this under spend would increase the general reserve balance. However given the significant drop in resources available to support the capital programme the Authority is being asked to transfer the £22m to a capital reserve to help manage the capital programme over 2009/10 and 2010/11.

1.12. The Authority will be aware that there is uncertainty regarding the recovery of £30m deposits, which are currently frozen in Landsbanki Bank. If un-recovered this sum would at some point, or over a period have to be written off to the revenue account. This position and treatment of this outstanding debt will be clearer before the closure of the 2008/09 accounts. However if the sum cannot be managed over a period then it would have an immediate adverse impact on the general reserve balance at 31 March 2009. Whilst it would reduce future flexibility it is considered that this issue could be managed by the use of earmarked reserves and some use of general fund balances within the Authority’s current reserves policy.

1.13. The Authority has a policy of maintaining a general reserve (including Emergency/Contingency Reserve) of at least 2% of Net Revenue Expenditure. Given the current uncertainties facing the MPA/MPS there are no proposals at this stage to make available any of the current balance to reduce the budget requirement. The Treasurer is required to determine if the level of general reserve is considered adequate given the level of earmarked reserves maintained and the risks faced by the MPA/MPS and this advice is contained elsewhere. Final decisions on the use of the general reserve will be made when the budget is finalised in February/March 2009.

1.14. Currently, there has been no use of reserves specifically assumed in the 2009-12 budget to support Service spend. The Authority/Service is currently facing a number of cost pressures such as the third generation outsourcing costs, the freezing of the Authority’s Icelandic investments and capital pressures. This position will be kept under review pending the final approval to the 2009-12 budget.

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