By Lucy Phillips
28 January 2011
Local government minister Andrew Stunell has written to council leaders reminding them to dip into their reserves during the current period of funding cuts and organisational change.
The letter, dated January 27, seeks to clarify the current situation on council reserves ahead of full guidance on capitalisation for 2011/12. This is due to be published next month – earlier than in previous years.
It reiterates a statement made by Local Government Secretary Eric Pickles late last year. The letter says: ‘Ministers believe that it is sensible – as part of wider financial planning – for authorities to consider drawing on their reserves to address short term costs and pressures, and to help them manage transformational change, where it is appropriate to do so. That will include managing the costs of internal restructuring.’
Stunell reminds local authority leaders that Whitehall rules around council reserves are fairly lax. He writes: ‘There is no prescriptive national guidance on the minimum or maximum level of reserves, either as an absolute amount or as a percentage of the budget.’
The minister also attempts to correct any misconceptions that the Treasury requires councils that are tied into Private Finance Initiative schemes to maintain a particular level of reserves. ‘This is not the case. The Treasury does not require reserves to be earmarked for PFI purposes, nor that any such arrangement be retained over the life of the contract,’ he says.
But accountants KPMG have warned some local authorities against raiding their reserves.
Claiming that there was a growing trend among councils to do this to try to mitigate grant cuts in the first and second years of the Comprehensive Spending Review, Iain Hasdell, KPMG’s UK head of local and regional government, said: ‘This might be a sensible short-term move for local authorities with significant cash reserves to meet one off requirements or for those who just need to buy a bit of time to implement financial coping strategies for the future.
‘However for some councils this approach risks having the long term effectiveness of a wafer-thin sticking plaster being applied to a deep wound – it will not prove to be a sustainable strategy.’
