INTRODUCTION AND BACKGROUND

Section 43 of the Local Government Finance Act 1992 requires that, when setting the budget for the forthcoming year, precepting authorities should have regard to the level of reserves needed to provide sufficient resources to finance estimated future expenditure, plus any appropriate allowances that should be made for contingencies.

Best practice on the use and management of reserves and balances is provided by CIPFA and the Local Authority Accounting Panel (LAAP) guidance, specifically LAAP Bulletin 99 - ‘Local Authority Reserves and Balances’. This was issued in July 2014, but since then many references have been made to the scale of public sector reserves by various parties.

In May 2018 the Government published the new Fire and Rescue National Framework for England. This introduces a requirement for fire and rescue authorities to publish a Reserve Strategy on their website and outlines the detail which should be included. The Reserves Strategy can form part of the Medium Term Financial Plan or be a stand-alone document.

The Reserves Strategy for this Authority has been prepared as a stand-alone document for 2024-25.

STRATEGIC CONTEXT

There are a number of reasons why a Local Government Authority might hold reserves, these include to:

mitigate potential future risks such as increased demand and costs;

help absorb the costs of future liabilities;

temporarily plug a funding gap should resources be reduced suddenly;

enable the Authority to resource one-off policy developments and initiatives without causing an unduly disruptive impact on Council Tax;

spread the cost of large scale projects which span a number of years.

Reserves only provide one-off funding so the Authority aims to avoid using reserves to meet regular and ongoing financial commitments, other than as part of a sustainable medium-term budget plan.

LONG-TERM SUSTAINABILITY

Reserves are an essential tool to ensure long term budget stability particularly at a time when the Authority is facing significant year on year reductions in grant funding over the medium term. Due to the fact that funding for future capital projects is held as an Earmarked Reserve, the overall level of reserves held by the Authority is reducing quickly and will continue to reduce as the capital programme progresses.

Reserve balances have been identified as a key indicator of financial health and the Authority continues to have an appropriate level of reserves to deal with identified risks. As a minimum, there are sufficient balances to support the budget requirements and provide an adequate contingency for budget risks.

There are two different types of reserve, and these are:

Earmarked Reserves – these reserves are held to fund a specific purpose and can only be used to fund spending associated with that specific purpose. Should it transpire that not all of the agreed funds are required then the agreement of the Authority would be sought to decide how any remaining balance is to be utilised; and

General reserve – usage from this reserve is non-specific and is held to fund any unforeseen spending that had not been included in the base budget e.g. excessive operational activity resulting in significant retained pay costs. The aim is to ensure this balance remains at 5% of the current revenue budget.

In addition to reserves the Authority may also hold provisions which will provide funding for a liability or loss that is known, with some certainty, will occur in the future, but the timing and amount is less certain.

RISK ASSESSMENT TO DETERMINE THE ADEQUACY OF THE GENERAL RESERVE

A well-managed multi-purpose authority will strive to maintain as low a level of general reserve as possible, whilst still covering its financial risks. As a single-purpose authority, this Authority has no opportunity to use cross-service subsidies to meet unanticipated expenditure and so, proportionally, its general reserve may be slightly higher than for a multi-purpose authority.

This Authority has a robust approach to managing risk and there are effective arrangements for financial control in place. That said, given the high level of influence that third parties (such as the Local Government Employers and Government departments) have on its income and expenditure, there is always a risk that the Authority will unexpectedly become liable for expenditure that it has not budgeted for, e.g. the 2024-25 funding gap on the Firefighters pension scheme, inflationary pressures including pay awards, energy and any shortfall in council tax receipts.

The Authority has set its prudential Indictor for the general reserve at around 5% of annual budget which is a commonly used benchmark across the Fire Sector. At the start of 2024-25, the general reserve was slightly below this amount at 4.62% of the Authority’s net revenue budget. Due to varying revenue budgets, maintaining a consistent level of general reserve will result in the percentage varying over time. Transfers in or out of the general reserve to conform to the 5% indicator would only be considered if there was significant variance in budgets, an emerging risk, or if resources were earmarked to another project. The general reserve will be increased to 5% if revenue budget as part of the 2023-24 accounts closedown.

The prudential indicator is a useful control measure but is a rudimentary way of assessing the adequacy of the general reserve and a more meaningful approach is to develop a risk assessment. The Authority will consider both measures as part of its annual reserve strategy.

A risk assessment of the adequacy of the Authority’s General reserve will be carried out annually to determine the extent to which the Authority is exposed to uninsured and unbudgeted losses. The risk assessment for the current financial year, 2024-25, has been expanded on that prepared as part of the budget setting process and is shown in Appendix A. The impact and scale of potential losses has been estimated to calculate a potential net financial impact of £3.6m. At the start of 2024-25 the general reserve stood at £4.3m and therefore it will not be necessary to amend the amount based on the current risk assessment.

ANNUAL REVIEW OF EARMARKED RESERVES

The Authority has a number of earmarked reserves which have been established for specific purposes where there have been timing differences at budget setting or year end, or emerging risks or cost pressures. The relevance of, and balance in each of these is reviewed annually and the Authority is informed of the latest plans for the balances held in such reserves over the medium term via the Reserves Strategy. When the Authority approves the Reserves Strategy for publication it will be made available on its website.

Grants received in advance

£0.805m: These reserves relate to grants which have been given to the Authority which have either not been fully spent or have been received in advance of the intended expenditure period. Where a grant has been received in advance the Authority’s policy and accounting rules dictate that the funding be transferred to an Earmarked Reserve to be spent in future years.

Any smaller amounts will be reviewed annually as part of the budget monitoring process to assess whether they are still needed. It is not anticipated that any of the current balances will be carried forward beyond the medium term financial plan period of 2024-28.

Change & Improvement

£2.185m: A significant amount of funding has been set aside in Reserves to support the change activity within the Service. Invest to Improve reserves will be used to invest in projects such as the People Services Project, the replacement of the Finance system and for digital transformation which will support the modernisation of the Service. If restructure is required, reserve funding could be required to pay for any associated costs.

Budget Smoothing Reserve

£0.666m: The budget smoothing reserve is intended to support any shortfalls in future revenue budgets which are identified during the development of the Medium Term Financial Plan. The reserve has arisen from a surplus of funding in previous financial years, particularly where non-domestic rates or grant income have exceeded the budget requirement

Capital Funding

£16.488m: Capital Funding is the largest of the Authority’s earmarked reserves. There is a long-term strategy in place to reduce borrowing to fund capital expenditure and this reserve has been built up over several years from under spends in the Revenue Budget along with savings made in other areas. Reserves represents an opportunity to reduce borrowing in the future as well as the associated costs.

Borrowing currently stands at £23.8m and the loan portfolio is regularly reviewed for opportunities to pay off loans where there would be a long-term benefit but this is dependent on economic conditions. If the Authority does opt to pay off loans early, use of the Capital Funding reserve will accelerate. Currently it is forecast that the programme will require £4.7m of reserve funding in 2024-25 and for the reserve to be exhausted over the medium-term. This level of expenditure is due to the order of a significant upgrade to our fire engine fleet and several major Estates projects which have been formally commissioned.

Planning for the Capital Programme is undertaken as part of the annual budget setting programme and so each year the Authority will have the opportunity to review the funding options of the programme. The forecast use of the Capital Funding reserve will be determined by that programme. Given that it is prudent to maintain the long-term strategy to reduce, ideally remove, reliance on external borrowing to fund Capital expenditure, a healthy reserve will be maintained wherever possible.

Specific projects, budget carry forwards or risks identified

The Authority holds several Earmarked Reserves for items which have been identified through a business case, to address a specific risk or where timing differences have arisen in the revenue budget. Expenditure on these items will normally be spread over several financial years.

These one-off reserves will be reviewed annually and either maintained or enhanced. Any unspent funds remaining at the end of the project will, subject to the relevant approval, be transferred to an alternative reserve such as the Invest to Improve or Capital Funding reserve.

Explanation of specific reserves:

£0.050m: PFI Equalisation – The Authority is part of a tri-service Private Finance Initiative which covers the Severn Park training facility. Due to the nature of the contract and its longevity (will mature in 2028) the amount due at the end of the contract is dependent on various factors such as interest rates and investment performance. The reserve is held to mitigate the risk at the end of the contract period.

£1.050m: Emergency Services Mobile Communications Programme (ESMCP) – The Authority has committed to be part of the ESMCP national project which provides the technology and network to allow Emergency Services a dedicated method of communication whilst being more financially efficient than its predecessor. Whilst funding has been allocated on a regional basis there is a need to support the project beyond the funding (which has been allocated for discrete time periods) because of the South West region being the last to transition which is why the reserve was established. The reserve also holds grant funding from central government to support the establishment of Emergency Services Network capability. The national project is currently under scrutiny of the Public Accounts Committee and may be subject to change or cancellation. If cancelled, there is a risk that the current Airwave facility will cost the Authority more although at this stage that cannot be quantified.

£0.144m: Mobile Data Terminals (MDT) Replacement – MDTs are computers in appliances which provide site specific risk and technical information to firefighters when they respond to incidents. Due to the age of the current suite of MDTs, which are purchased and maintained under the Airwave Communications system, replacements are required in advance of the roll out of the new Emergency Services Mobile Communications Project. Refreshing the safety critical information available to firefighters at incidents supports the Authority’s underlying principles of Public Safety and Firefighter safety.

£1.222m: Pension Liability reserve – There are ongoing legal cases which may impact on future employers’ costs and therefore a pension reserve has been established to contribute towards the revenue budget if a liability arises.

£0.148m: Environmental Strategy – This new reserve has been established to support the Authority’s environmental strategy, assessing the impact of services and seeking to adapt and mitigate to reduce emissions.

£0.255m: Budget Carry Forwards – Arise as a result of timing differences, where a revenue project has been unable to complete in year and therefore the under spend on a particular budget line has been transferred to Earmarked Reserves. As reserve funds can span several financial years these are expected to be used in the short term, but the reserve may be enhanced at a later date if there are timing differences in the 2024-25 budget and beyond.

1.125m: Reserve created to fund future development in the replacement of the Control Room system in conjunction with the four partners of the Networked Fire Services Partnership.

£0.040m: Set up to fund the Fire Cover review which should be concluded during 2024-25.

ANDREW FURBEAR

Head of Finance (Treasurer)

APPENDIX A TO REPORT

Risk assessment of the adequacy of general reserves

Budget Head	Budget Provision 2024-25	RISK	Likelihood	Impact	Net Impact
	£m			£m	£m
Service Delivery Staff	67.3	Whole-time pay represents nearly a third of service costs. There is a low level of uncertainty around future pay increases, with inflation reducing.	Low	0.337	0.337
Firefighter’s Pensions	2.6	The Authority is required to fund the costs associated with ill-health retirements, and the potential costs of on-call firefighters who have joined the scheme. Due to the immediate detriment issue, there were more fewer retirees than anticipated during 2023-24 which has increased the likelihood of those individuals retiring in 2024-25.	High	0.400	0.300
Insurance Costs	1.0	The Fire Authority’s insurance arrangements require the authority to fund claims up to agreed insurance excesses. In addition some uninsured costs such as any compensation claims from Employment Tribunals carry a financial risk to the Authority. The Insurance Mutual holds a reserve which will enable the pool to absorb a reasonable level of claims.	Low	0.500	0.125
Fuel Costs	0.7	Fuel price fluctuations has seen some impact on fleet running costs. This risk has remained as medium due to the potential of conflict in the Middle-East.	Medium	0.175	0.088
Treasury Management Income	(1.2)	Interest Income. The target income for 24-25 has been set at a level slightly lower than achieved during 2023-24 due to anticipated interest rate reductions.	Low	0.075	0.019

Income	(0.8)	Whilst the authority has only limited ability to generate income, the budget has been set on the basis of delivering £0.8m of external income whilst reducing the reliance on the Service budget for Red One Income at £0.050m. Therefore, this risk has been reduced from medium to low.	Low	0.418	0.104
Capital Programme	7.2	Capital projects are subject to changes due to number of factors; these include unforeseen ground conditions, planning requirements, necessary but unforeseen changes in design, and market forces. The risk of contract deviation up to 10% of value. This risk will be monitored as wage growth pressures are likely to be offset by low supply chain growth.	Low	0.720	0.180
External Contracts		The Authority has a wide range of contractual arrangements which could see a financial loss in the event of the bankruptcy of a supplier or a customer. The Authority maintains a bad debt provision based on aged debtor analysis but it would be insufficient to fully fund a loss from a major contract. Additionally, Public Sector procurement processes and contracts are coming under increasing scrutiny and could be open to legal challenge.	Low	2.000	0.500
Legal Issues		Given the nature of the work of the Authority there is a possibility that it could suffer a major health and safety or environmental failure.	Low	3.000	0.750
System/ Infrastructure Issues		In the event that a key system, such as the control mobilising system or system networks, were to fail, it is possible that urgent consultancy or replacement equipment would be required within short time constraints.	Low	1.500	0.375

Funding Issues		The changes to the funding mechanism for local government, introduced following the Local Government Resource Review, transferred potentially significant levels of financial risk to the Authority.	Medium	1.000	0.500
Inflation		Whilst allowances for inflation have been made within specific budget lines, generally at 2% per annum, the risk surrounding the current cost of living crisis in the UK has been reduced with inflation reducing steadily over the last 12 months experienced. This risk is reduced to Low due to current inflation forecasts for 2024-25.	Low	0.200	0.050
Employment Issues		Issues that might arise in respect of pay settlements or other factors which might lead to industrial action would, in the first instance, be managed within the revenue budget. Prolonged Action or issues would require funding from Reserves.	Low	1.000	0.250
Estimated Reserve Requirement					3.6

APPENDIX B TO REPORT

Projected Reserve Balances over Medium Term Financial Plan Period (2024-29)

RESERVES AND PROVISIONS					
	Balance as at 1 April 2023	Spending Month 12	Proposed Balance as at 31 March 2024	Projected Spend 2024-2029	Projected Balance as at 31 March 2029 Spend 2024-2029
RESERVES	£'000	£'000	£'000		
Earmarked reserves					
Grants unapplied from previous years	(1,137)	331	(805)	805	(0)
Change & Improvement	(1,878)	(307)	(2,185)	2,000	(185)
Budget Smoothing Reserve	(666)	-	(666)	666	(0)
Direct Funding to Capital	(15,424)	(1,064)	(16,488)	16,488	-
Projects, risks, & budget carry forwards	-	-	-		-
PFI Equalisation	(50)	-	(50)	50	-
Emergency Services Mobile Communications Programme	(1,050)	-	(1,050)	500	(550)
Mobile Data Terminals Replacement	(145)	1	(144)	144	0
Pension Liability reserve	(1,218)	(4)	(1,222)	1,222	(0)
Budget Carry Forwards	(890)	635	(255)	255	0
Environmental Strategy	(243)	96	(148)	148	0
Control Room System change	-	(1,125)	(1,125)	1,125	-
Fire Cover Review	-	-	(40)	40	-
MTA Action Plan	(76)	76	-		
Total earmarked reserves	(22,777)	(1,361)	(24,178)	23,443	(735)
General reserve					
General Fund (non Earmarked) Balance	(4,280)	-	(4,631)	-	(4,631)
TOTAL RESERVE BALANCES	(27,057)	(1,361)	(28,809)	23,443	(5,366)
PROVISIONS					
Doubtful Debt	(55)	28	(27)	-	(27)

Reserves Strategy

Steve Yates

2024-06-19T08:56:00Z

Simon Clews