Audit Commission calls for clarity over council reserves
Published by 24publishing for 24dash.com in Local Government and also in Housing
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Councils should provide greater clarity about the reasons for holding reserves, according to the Audit Commission.
Its report, Striking a Balance, encourages English councils to focus more attention on the £12.9 billion set aside in their reserves – the equivalent of nearly a third of their net spending on services in 2011/12.
While the Commission found that councils routinely consider reserves as part of their annual budget setting, the report calls for officers to offer elected members clearer and more comprehensive advice, equipping them to make better-informed decisions. It also calls for greater clarity from councils about the reasons for holding reserves. The majority (£9.9 billion) was earmarked for specific purposes, but this did not always mean there was a plan for spending the funds, it said.
From 2007 to 2012, 77 per cent of councils increased their reserves relative to their spending, with 26 per cent more than doubling them. Council reserves grew by £4.5 billion (36 per cent in real terms) over this period. The Commission found that many councils had been setting money aside as a response to funding reductions and financial uncertainty arising from, for example, the introduction in 2013 of local business rates retention and new arrangements for providing council tax support.
Some of the growth in reserves has been the result of unplanned increases, for example, when councils received unexpected income, or exceeded their savings plans. Striking a Balance says that regularly reviewing reserves is essential to ensure they reflect the risks that councils face and the scale of their future spending plans.
Councils also need to ensure that their reserves provide adequate protection against financial shocks, the commission warned. Its recent report, Tough Times 2012, found that auditors considered low reserves to be an important risk factor for a small group of councils.
Audit Commission Chairman Jeremy Newman says: “Reserves are a vital element of good financial management for any council, especially at a time of financial uncertainty. They help councils plan for known and predictable spending commitments, but are also a defence against the unknown and unpredictable.
“However, councils must strike a balance between the needs of current and future taxpayers. Given the sums involved, and the risks, it is essential that councils’ decisions are made openly and reported with clarity, so local taxpayers and service users can hold their councils to account.’
“Our report doesn’t offer any magic formula for deciding whether reserves are appropriate – councils must make their own decisions in the light of local circumstances. But we do identify how councils can improve their decision making, and suggest questions for councillors to ask to stimulate local debate about reserves.”
The Commission encourages councils to use its Value for Money Profiles tool, compiled using data councils supply to government, to compare their levels of reserves relative to spending, over time and with different groups of councils.