Earmarked Reserves

Report: 5
Date: 18 October 2007
By: Treasurer and the Director of Strategic Finance on behalf of the Commissioner

Summary

This report sets out a review of earmarked reserves prior to final work on the budget submission. It reviews the possible use of earmarked reserves to aid the budget and concludes it is not anticipated that there will be any such opportunity. The report also brings into focus for the first time the possibility of using 2007/8 underspends to create new earmarked reserves.

A. Recommendations

That members

1. Consider the review of earmarked reserves and confirm their existing use;
2. Agree to establish a new Modernisation Fund and that it be given priority when decisions about the allocation of any underspend in 2007/08 are taken;and
3. Note that the Treasurer will report to the November full Authority on the adequacy of the reserves and the robustness of the estimates

B. Supporting information

Introduction

1. The Co-ordination and Policing Committee reviewed the Authority’s reserves position prior to closing the 2006/07 accounts. CoP noted that some earmarked reserves had been static over the last few years and that there might be opportunities as part of the 2008/9 budget process to rationalise these. CoP resolved that a paper be brought to the October meeting of this committee reviewing the use of reserves.

Background

2. 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.

3. 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

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 (£38.901M) and the Emergencies/Contingency Reserve (£23.093M) total £61.994M, satisfying the Authority’s present policy of holding general reserves at some 2% of net revenue expenditure. No further action is proposed on these at present.

Earmarked reserves

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

8. The review has now validated the need for the existing earmarked reserves and has been unable to identify any which could presently be released to assist the budget making process. The table in Appendix 1 identifies the purpose of the earmarked reserves, the basis of calculation/adequacy of the reserves and the expected balances at April 2008. There can be a number of reasons why it is anticipated that earmarked reserves will still be unspent at April 2008:

• 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)
• The reserve was intentionally arranged to allow drawdown, followed by reimbursement back to the reserve over a number of years (pump priming fund).

Latest outlook for earmarked reserves

9. The anticipated application of reserves, as detailed in Appendix 1 is summarised below:

The table reflects planned net usage of £29.485M of earmarked reserves during this financial year.

Creation of reserves from the 2007/8 forecast underspend

10. The Committee is advised elsewhere on the current agenda, of a forecast 2007/08 revenue underspend of £9.6M. It will be useful for planning purposes to gauge members initial preferences for possible use of an underspend when considering transfers to reserves as at 31 March 2008. It is proposed that, in addition to maintaining the General Reserve to at least 2% of net revenue expenditure, priority is given to creating a new Modernisation Fund, to ensure that the benefits promised by the Met Modernisation Programme have adequate resources to finance any initial upfront costs. 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

11. It will be 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; a report will be made by the Treasurer in November to accompany the budget report to the full Authority.

 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 2006/07

F. Contact details

Report author: Ken Hunt, Treasurer

For more information contact:

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

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