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 2025-26.

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 2025-26 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 2025-26, the general reserve will be slightly above this amount at 5.29% of the Authority’s net revenue budget, subject to the recommendation to utilise some of the 2024/25 underspend to increase the reserve. 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 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, 2025-26, 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 £3.5m. If the underspend recommendation is authorised, the general reserve will stand at £5.2m.

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

£0.797m: 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 2025-30.

Change & Improvement

£3.775m: 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. This will be used to balance the 2025/26 revenue budget so, the balance at year-end is expected to be nil.

Capital Funding

£16.645m: 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 £23.3m 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 £4.6m of reserve funding in 2025-26 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.

It is hoped that part of the 2026/27 funding settlement could include the re-introduction of an annual capital grant to help support with the programme.

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.

£0.051m: 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.

£0.083m: 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.

£0.104m: 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 2025-26 budget and beyond.

£1.125m: Control Room Futures reserve was 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.

£0.282m: finance system replacement reserve created to fund the replacement of the Service’s finance system which is now over 20 years old. This should go-live during 2025/26.

£0.027m: Fire Cover reserve – created to fund the Fire Cover review which should be concluded during 2025-26.

£0.055m: MTA Reserve – created to cover costs for Marauding Terrorist Attack (MTA) officer kit replacement or to kit out new officers.

ANDREW FURBEAR

Head of Finance (Treasurer)

APPENDIX A TO REPORT

Risk Assessment of the Adequacy of General reserves

Appendix A - risk assessment of the adequacy of general reserves. A table showing budget provision, risk, likelihood and budget head.

APPENDIX B TO REPORT

Projected Reserve Balances over Medium Term Financial Plan Period (2025-30)

Projected reserve balances over medium term period 20205 - 2030. Table showing earmarked reserves, general reserves.

REPORT REFERENCE NO

Steve Yates

2025-06-17T13:15:00Z

Simon Clews