Written Statement - Reserves Held by Local Authorities in Wales

In November, I wrote to all the Council Leaders in Wales asking for details of their holdings of reserves.  I also asked for information on their strategies for holding and utilising reserves as well as details of engagement of, and scrutiny by, Elected Members.  I expect Authorities to have the appropriate arrangements in place for internal and external challenge.  Such arrangements will ensure reserves are used in the best way to drive forward the transformation of services which is needed to place public services on a sustainable basis for the longer term.

The evidence shows that in recent years, the levels of reserves held by Local Authorities have significantly increased.  Whilst it is prudent for Authorities to prepare for more challenging financial times, it is also reasonable to want to see evidence that Authorities are making financial decisions in the best interests of their communities.
 
The exercise has indicated there are some good examples where Authorities demonstrate a high level of transparency by clearly setting out details of the purpose and use of reserves as part of their statutory accounts.  This provides readers of the accounts with information which helps to explain decisions to establish and hold specific reserves.

However this approach is not common to all Authorities.  Several Authorities present limited information, with little clarity about the purpose and use of the reserves they hold.  Given this is taxpayers’ money, it is reasonable to expect Authorities to provide sufficient information to assist readers of the accounts in interpreting them.  I believe there is scope for the audit process to challenge some of the presentation.  To support greater scrutiny and openness, information on the levels of reserves held by each Local Authority is now routinely published on the Welsh Government’s website.

The latest data indicates that, at the end of March 2014, earmarked reserves for all Local Authorities in Wales amounted to £823 million.  These are reserves set aside for specific projects or purposes.  Authorities also hold non-earmarked reserves to deal with unforeseen situations.  The balance of these reserves stood at £210 million at the end of March 2014.

This means earmarked reserves amounted to an average of 11% of Authorities’ gross revenue expenditure, whilst non-earmarked reserves amount to an average of 3%.  Within the earmarked reserves, there is considerable variation between Local Authorities in Wales, ranging from 3% to 22% of gross expenditure, whilst non-earmarked reserves were between 1% and 5%.  Although I accept some variation is to be expected, it is reasonable to expect some explanation of variation on this scale.  Similarly it would be helpful to understand why the overall average for all reserves accounts for 17% of Authorities expenditure compared with a figure of 11% for Councils in England.

Publishing this data should stimulate interest in the strategies adopted by Authorities for holding and utilising reserves.  The guidance is clear that all Authorities should prepare and maintain such a strategy.  Only one Authority provided evidence of having a protocol in place with a framework for a defined process for the establishment, review and discharge of reserves.  In the interests of greater transparency and accountability, I will be seeking to strengthen this requirement.

Finally, and of particular concern, is an apparent lack of opportunity provided for Elected Members to engage in and scrutinise the use of reserves held by their Authority.  In the majority of Authorities, scrutiny appears to take place only as part of the budget-setting process with no specific focus on the decisions about the levels of reserves held.

A situation where the Chief Finance Officer provides a statement to Members that ‘reserves are adequate and represent prudent financial management’, does not demonstrate to me sufficient opportunity for Members to consider and challenge the levels of reserves held.

Whilst I accept the decisions in these matters are the responsibility of the Authority, the scrutiny of these decisions rests with the Local Elected Members and they need to satisfy themselves that decisions represent value for money. In my view, the existing guidance for Members to undertake effective budget scrutiny does not go far enough in supporting scrutiny on reserves.  I intend to issue further guidance to Members to support them in this.

I believe the steps outlined above and our publication of the reserves data will facilitate increased transparency and the development of a more robust approach to making decisions about the management of reserves.  This should also promote a more consistent and transparent approach to reporting reserves which clearly explains their purpose to taxpayers and service users.

Ultimately, this is about ensuring that decisions about the holding and utilising of Local Authority reserves deliver the best value for the council tax payer and that we can be confident such decisions are subject to the appropriate scrutiny and challenge.