Reserves Policy 2023-24
SCOTTON PARISH COUNCIL
Reserves Policy 2023-24
Introduction
Scotton Parish Council is required to maintain adequate financial reserves to meet the needs of the organisation. The purpose of this policy is to set out how the Council will determine and review the level of reserves.
Sections 32 and 43 of the Local Government Finance Act 1992 require local authorities to have regard to the level of reserves needed for meeting estimated future expenditure when calculating the budget requirement. However, there is no specified minimum level of reserves that an 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.
Types of Reserves
Reserves can be categorised as general or earmarked.
Earmarked reserves can be held for several reasons:
• 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.
• Carry forward of underspend - some services commit expenditure to projects but cannot spend the budget in year. Reserves are used as a mechanism to carry forward these resources.
• Insurance reserve – to enable the Council to meet the excesses of claims not covered by insurance.
• Other earmarked reserves may be set up from time to time to meet known or predicted liabilities.
• 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, offset the budget requirement if necessary or can be held in case of unexpected events or emergencies.
Earmarked Reserves
Earmarked reserves will be established on a “needs” basis, in line with anticipated requirements.
Any decision to set up a reserve must be made by the Council.
Expenditure from reserves can only be authorised by the Council.
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 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.
All Earmarked Reserves are recorded and held by the Responsible Financial Officer which lists the various Earmarked Reserves and the purpose for which they are held.
Reviewing the Council’s Financial Risk Assessment is part of the budgeting and year end accounting procedures and identifies planned and unplanned expenditure items and thereby indicates an appropriate level of Reserves.
General Reserves
The level of General Reserves is a matter of judgement and so this policy does not attempt to prescribe a blanket level. 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.
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 enough working balances to cover the key risks it faces, as expressed in its financial risk assessment.
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.
Even at times when extreme pressure is put on the Council’s finances the Council must always keep a minimum balance enough to pay one month’s salaries to staff in General Reserves.
Opportunity cost of holding reserves
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.
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 funds to manage unexpected risks nor provide a mechanism to fund the planned expenditure for which the reserves were earmarked.
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.
Current level of financial reserves and medium to long-term financial considerations
The Parish Council will seek to increase its reserves for medium to long-term capital projects that may arise by setting aside funds from general reserves, where possible.
The Parish Council has allocated three twelfths of the annual precepted figure to ear marked reserves to be used in an emergency. This is the Emergency Working Fund. Should the Council fall into unforeseen financial difficulties, and through no fault of its own, either through unavoidable debt or arrears, experienced by disruption of governance outside of its control i.e. the Council is inquorate or inoperable. Any unspent precept from the passed financial year will be set aside for this purpose, if required. The recommended general reserves calculated using the 3/12th recommendation* would be £3,000 for the current precept of £12,000 for the year 2024-25.
The parish council will set aside an ‘Election Fund’ to cover the cost of elections and election materials to cover charges set by the District Authority.
Any surplus precept from a given financial year, after transfer to ear marked general reserves (if required), may be transferred to general reserves, or used to fund Capital expenditure, or used to limit any increase in the precept.
Capital reserves built up by sale of Parish land and bequests from residents of the parish will be used solely for the benefit of the village as a whole and placed in the Council’s reserve account.
VAT refunds will be paid into the Council’s current account unless otherwise designated to the reserves.
*[The figure of three twelfths of the precept is to be held rather than three months’ expenditure costs. This is the recommended practice as detailed in the JPAG ‘Governance and Accountability for Smaller Authorities in England’, Practitioner’s Guide March 2022 and will adopted by this Council to guide proper practices.]
Schedule of allocated funds
Ear-marked reserves
Ear-marked reserves will be held in the Parish Council savings deposit account. These are ring-fenced to offset estimated or projected costs for specific projects or expenditure. As part of the Council’s risk assessment and protection of the precept these funds are set aside, so that in the event of unavoidable expenditure working capital is not at risk. This is to ensure the Council avoids incurring debt in each financial year.
Allotment Rent - £864.50
At a meeting of the Council on 5th October 2023, Minute ref. 121/10/23 it was resolved to ring fence all unspent rent solely for the use of allotment maintenance and any arising allotment issues going forward.
These funds will be transferred to the Council savings account in the new financial year.
2023-24 £864.50
Estimated funds 2024-25: £904.50
Funds will be transferred to the Savings account on receipt Oct/Nov 2024.
Election costs - £3,500.00
Estimated from available figures 2024-25.
Uncontested elections – 7 members or less £450.00
A contested election – (based on 1000 electors or below, the provision of a single polling facility and excluding poll cards) £3,000.00
The provision of poll cards £1.00 per elector
Emergency Reserves: £3,000.00
Total funds in Parish Council Savings (figures to be updated at year end):
As at December 2023: £12,377.97
Total of funds ring-fenced in ear-marked reserves:
£,7,364.50
(Allotment Rent: £864.50)
(Election costs: £3,500.00)
(Emergency Reserves: £3,000.00)
Approximate funds in savings but not ear-marked for specific budgets or projects after deduction of ring-fenced funds: £5,013.47
Contingency Fund
Funds in this budget will be held in the Council’s current account and spent as and when needed during the financial year 2024-25.
Unspent precept 2023-24
Any unspent precept from the previous financial year will be put into a general contingency fund. It may be used to adjust the working budget to cover unforeseen expenditure, following Council resolution.
VAT Reclaim
Any funds reclaimed from VAT will be placed into the contingency fund, under a separate heading to ensure source of funds are transparent. These may be used to offset unforeseen expenditure, following Council resolution.