037/2013 – Review of Reserves and Provisions Policy – 30 April 2013
Executive Summary and recommendation:
The requirement for financial reserves is acknowledged in statute, as is the Chief Finance Officer’s duty to report on the robustness of estimates and adequacy of reserves as part of the budget setting process.
The policy on financial provisions and reserves is also reviewed at the time the annual statement of accounts is prepared, to ensure that reserves and provisions remain appropriate and adequate.
The Police and Crime Commissioner is asked to approve the policy set out in the paper.
Police and Crime Commissioner decision: Approved
Signature:
Date: 30 April 2013
Title: Police and Crime Commissioner
Part 1 – Unrestricted facts and advice to the PCC
Introduction and background
Guidance on local authority reserves and balances, including the legislative framework, the role of the chief finance officer (CFO), types of reserve and principles to assess the adequacy of reserves, is set out in the Chartered Institute of Public Finance and Accountancy’s (CIPFA) Local Authority Accounting Panel (LAAP) Bulletin 77 published in November 2008.
The Bulletin contains guidance which represents good financial management for Police and Crime Commissioners and should be followed as a matter of course.
Role of the CFO
It is the responsibility of the CFO to advise about the level of reserves held and to ensure that there are clear protocols for their establishment and use. Reserves should not be held without a clear purpose.
The Bulletin does not accept the case for introducing a generally applicable minimum level of reserves, and advises that commissioners, on the advice of their CFO’s, should make their own judgements taking into account all relevant local circumstances. There is a broad range within which commissioners might reasonably operate depending upon their particular circumstances.
Types of Reserve
Reserves can be held for three main purposes
- A working balance to help cushion the impact of uneven cash flows and avoid unnecessary temporary borrowing – this forms part of general reserves
- A contingency to help cushion the impact of unexpected events or emergencies – this also forms part of general reserves
- A means of building up funds, often referred to as earmarked reserves, to meet known or predicted requirements.
Common examples of earmarked reserves include
- Sums set aside for major schemes such as capital developments or asset purchases, or to fund major reorganisations
- Reserves of trading accounts and business units
- Reserves retained for service departmental use
1.7 For each earmarked reserve there should be a clear protocol setting out
- The reason for/purpose of the reserve
- How and when the reserve can be used
- Procedures for the reserve’s management and control
- A process and timescale for review of the reserve to ensure continuing relevance and adequacy
Principles to assess the adequacy of reserves
In order to assess the adequacy of unallocated general reserves, account should be taken of the strategic operational and financial risks facing the Commissioner. In addition to cash flow requirements the following factors should be considered
- The treatment of inflation and interest rates
- Estimates of the level and timing of capital receipts
- The treatment of demand led pressures
- The treatment of planned savings
- The financial risks inherent in any significant new funding partnerships, major outsourcing or major capital developments
- The availability of reserves, government grants and other funds to deal with major contingencies and the adequacy of provisions
- The general financial climate to which the Commissioner is subject.
Advice on the adequacy of reserves should be set in the context of the risk register and medium term plans and should not focus exclusively on short term considerations. Balancing the annual budget by drawing on general reserves may be viewed as a legitimate short-term option. However, it is not normally prudent for reserves to be deployed to finance recurrent expenditure. Where such action is to be taken, this should be made explicit, and an explanation given as to how such expenditure will be funded in the medium to long term. Advice should be given on the adequacy of reserves over the lifetime of the medium term financial plan, and should also take account of the expected need for reserves in the longer term.
Provisions
Amounts must be set aside in a provision where an event has taken place that gives the Commissioner an obligation that probably requires settlement by a transfer of economic benefits, but where the amount and timing of the transfer is uncertain.
Home Office Financial Management Code of Practice
The Code includes the following in respect of reserves and provisions.
The PCC should establish a policy on reserves (including how they might be used by the Chief Constable) and provisions in consultation with the Chief Constable. This should have due regard to the need to ensure the ongoing funding of policing activities and the requirement to meet exceptional or extraordinary policing operations.
General reserves should be held by the PCC and managed to balance funding and spending priorities and to manage risks. This should be established as part of the medium term financial planning process.
Locally agreed financial regulations and schemes of consent should
– contain full details of how the reserves and provisions policy will operate locally
– ensure that the annual budget includes a realistic amount of operational contingency that is available to the Chief Constable for operational priorities without the need for additional approval
– make provision for budgets to be carried forward from one financial year to the next.
Matters for consideration
The Commissioner holds two types of reserves, and an insurance provision. The reserves are:
– general unearmarked reserves (the general Police Fund Balance)
– earmarked reserves held for specific purposes, capital and revenue
The amount held in reserves and provisions and the anticipated movement over the medium term at the time of setting the budget is set out at Appendix 1.
The overall policy for general and earmarked reserves is set out in the Commissioner’s Financial Regulations, which were reviewed and approved in November 2012 and are subject to ongoing regular review. The regulations (included at Appendix 2) include the requirement for management, monitoring and review to ensure continued relevance and adequacy. A more detailed description of the purpose and utilisation of the earmarked reserves currently held by the Commissioner is attached at Appendix 3.
It is the current policy, as included within Financial Regulations, for general balances to be held at a level of at least 6% of the net revenue budget. This is reviewed at least annually, during the budget setting process. Factors taken into account in the review include
– the level of balances as a percentage of net revenue budget
– budget management and monitoring processes
– risk levels
– financial projections included in the medium term financial plan.
The level of each earmarked reserve is assessed separately, with reference to the purpose that the reserve has been created for, to ensure continued adequacy and appropriateness in the context of the budget and medium term financial plan taken as a whole.
The Commissioner is asked to approve the policy on reserves and provision as set out in the Financial Regulations, as part of the closedown process for 2012/13.
Other options considered, if any
Not applicable
Contribution to Police and Crime Plan outcomes
Provisions and reserves are held to ensure that financial health remains sound. The overriding aim is to ensure that, within the budget, the maximum amount of funding is available to deliver operational policing and the outcomes identified within the Police and Crime Plan, and that a sustainable approach to funding and service delivery is adopted.
Consultations carried out
Not applicable
Financial Implications/Value for money
As set out above
Legal Implications
As set out above
Equality Implications
Not applicable
Originating Officer Declaration
| Tick to confirm statement (√) | |
| Director/Chief OfficerThe Commissioners Chief Finance Officer has reviewed the request and is satisfied that it is correct and consistent with the NYPCC’s plans and priorities. | Judith Heeley24/04/2013 |
| Legal AdviceLegal advice has been sought on this proposal and is considered not to expose the PCC to risk of legal challenge or such risk is outlined in Part 1 or Part 2 of this Notice. | |
| Financial AdviceThe CC CFO/PCC CFO (delete as appropriate) has been consulted on this proposal, for which budgetary provision already exists or is to be made in accordance with Part 1 or Part 2 of this Notice. | Judith Heeley24/04/13 |
| Equalities AdviceAn assessment has been made of the equality impact of this proposal. Either there is considered to be minimal impact or the impact is outlined in Part1 or Part2 of this Notice. | |
| I confirm that all the above advice has been sought and received and I am satisfied that this is an appropriate request to be submitted for a decisionSignature Judith Heeley Date: 24 April 2013 | |
APPENDIX ONE:
APPENDIX TWO:
POLICY ON FINANCIAL PROVISIONS AND RESERVES
Preamble
The Police and Crime Commissioner maintains provisions and reserves to ensure a sound financial position for North Yorkshire Police. The overriding aim is to ensure that, within the budget, the maximum amount of funding is available to deliver policing. To this end, the levels of provisions and reserves are regularly reviewed to ensure that funding is directed to service use rather than being tied up unnecessarily in balances. Retaining reserves is a useful and considered tool which enables a sound financial position to be maintained and which can be used to reduce or negate the need for higher cost funding alternatives, ie borrowing.
The way in which provisions and reserves are managed and the distinction between them is determined by Accounting Standards.
Provisions
Provisions comprise estimates of known liabilities which have been incurred by the Police and Crime Commissioner, the settlement date for which could fall at any time. The exact value will not be known until settlement is agreed.
Reserves
Reserves are maintained to:-
(a) Create a contingency to help cushion the impact of unexpected events or emergencies – the General Reserve.
(b) Build up funds (often referred to as earmarked reserves) to meet specific future requirements, including the smoothing out of peaks in costs and the effect of loss of external funding.
The level of reserves is taken into account when calculating the council tax requirement. This ensures a balanced budget position is maintained and enables regard to be given to affordability when considering future revenue requirements and capital programmes.
The reserves must be reported to the Police and Crime Commissioner on a regular basis as part of budget and financial monitoring. Part of this exercise is to ensure continuing relevance and adequacy and to enable the Medium Term Financial Plan to be up-dated.
Policy
The actual level of reserves, earmarking and utilisation are considered when up-dating the MTFP and as part of its on-going review.
General Reserve
In setting the level of the General Reserve, consideration is given to the adequacy of financial control, the overall financial position, medium-term plans and strategic, operational and financial risks facing the Police and Crime Commissioner. The level of the General Reserve is reviewed by the Police and Crime Commissioner on the advice of the PCC’s Chief Finance Officer having regard to these matters.
Key Principles are:-
(a) The General Reserve will not be used to meet on-going revenue items.
(b) The General Reserve may be used, on an exceptional basis, as a short-term option
to balance the budget, particularly where major operations are experienced.
(c) The Police and Crime Commissioner will aim to maintain the level of General Reserves at not less than 6% of the net revenue budget. Most of the reserve is effectively ring-fenced to cover major incidents should they happen in the year.
(d) Under the requirements of the Local Government Act 2003, the level of the General Reserve is re-assessed annually as part of the annual budget-setting process.
Earmarked Reserves
The Insurance Reserve:
The Police and Crime Commissioner operates on a self-insurance basis determined by the level of excess on the cover provided by external policies. The reserve is ring-fenced for insurance requirements only and cannot be used for other purposes. It is calculated based on an historic assessment of claims history and is subjected to an actuarial audit to validate the fund level on a three-yearly basis. This reserve is available should the Police and Crime Commissioner face exceptional costs or suffer a major catastrophic incident or face premium increases which cannot be met by budget in year.
Working Earmarked Reserves:
Earmarked reserves may be created to build up reserves in advance where major schemes, such as asset purchases and capital schemes, are to be undertaken in future financial years. Such reserves are time-limited and for specified purposes only. These are predominantly to fund projects spanning more than one financial year. Spending against the reserve is monitored on an on-going basis. The level of earmarked reserves is re-assessed annually. Each reserve is reviewed to assess the validity of its retention and reserves overall are assessed to ensure both their adequacy and that excessive funds are not accruing for unspecified purposes.
Provisions
The Insurance Provision:
This comprises known anticipated outstanding amounts in respect of claim payments. The level of the provision fluctuates as anticipated claims are reassessed on an on-going basis. The provision is held separately from, and in addition to, the insurance reserve.
APPENDIX THREE:
Earmarked Reserves Held for Capital Purposes
Purpose:
These reserves are earmarked to support capital investment projects by setting aside resources to contribute towards the capital element of the Capital and Revenue Development Programme (CRDP) over the period of the Medium Term Financial Plan (MTFP).
Management and Control:
The adequacy and utilisation of the reserves is reviewed during the annual budget preparation process and as part of the annual closedown of the accounts. The proposed utilisation of these reserves is reported quarterly, and approved as part of the MTFP.
Usage:
Amounts are applied from the reserves at the end of each financial year to fund capital expenditure in year.
Detail of individual reserves:
Capital Reserve (RCCO)
The reserve is added to each year by way of a contribution from the Revenue Budget.
Major Capital Developments
This reserve was originally created from the balance in the pension reserve following changes to the funding arrangements for police pensions from 2006/07, and has been added to in subsequent years from underspends on the Revenue Budget, and by transfer from other earmarked reserves no longer required.
Reserve to Fund Estates Strategy
This reserve was created during 2011/12 to earmark the projected underspend on the revenue budget to fund the Estates Strategy.
Earmarked Reserves Held for Revenue CRDP Purposes:
Purpose:
These reserves are earmarked to support the revenue element of the Capital and Revenue Development Programme (CRDP) over the period of the Medium Term Financial Plan (MTFP).
Management and Control:
The adequacy and utilisation of the reserves is reviewed during the annual budget preparation process and as part of the annual closedown of the accounts. The proposed utilisation of these reserves is reported quarterly, and approved as part of the MTFP.
Usage:
Amounts are transferred from the reserves to revenue at the end of each financial year to fund revenue CRDP expenditure in year.
Detail of individual reserves:
Revenue CRDP Reserve
The majority of this reserve is now expended. The reserve consists of balances previously provided from the Revenue Budget, plus amounts approved to be transferred from the Major Capital Reserve where some or all of a capital project has been reclassified as revenue.
Leadership Reserve
This reserve was created by setting aside funding from revenue in previous years and has been utilised to contribute to the revenue costs of the Leadership Programme. The reserve will be fully utilised by the end of 2012/13.
Earmarked Long Term Reserves:
The Insurance Reserve
Purpose:
The Commissioner operates on a self insurance basis determined by the level of excess provided by external policies. The reserve is available should the Commissioner face exceptional costs or suffer a major catastrophic incident or face premium increases which cannot be met by budget in year.
Management and Control:
The reserve is calculated based on an historic assessment of claims history and is subjected to an actuarial audit to validate the find on a three yearly basis.
Usage:
Amounts are transferred from the reserves to revenue if required to fund relevant revenue expenditure in year.
Earmarked Short Term Reserves:
Purpose:
These Reserves are created from time to time to earmark funds for a particular purpose, predominately to fund projects which span more than one financial year. These reserves have been funded (as appropriate) from the Major Capital Reserve and the Capital Reserve (RCCO) or by specific transfers from revenue.
Management and Control:
The adequacy and utilisation of the reserves is reviewed during the annual budget preparation process and as part of the annual closedown of the accounts. The proposed utilisation of these reserves is reported quarterly, and approved as part of the MTFP.
Usage:
Amounts are transferred from the reserves to revenue during each financial year to fund relevant revenue expenditure in year.
Detail of individual reserves:
Major Incident Reserve:
This reserve was established by transfer from revenue, and is held to contribute to the funding of any one off major incident revenue costs over and above the annual budget set aside for major incidents.
Misuse of Drugs Act 1971 Reserve and Incentivisation Monies Reserve
These reserves hold monies raised from confiscated assets generated through the proceeds of crime, either directly or via grant from Central Government. The reserve is utilised to support crime fighting work, subject to statutory restrictions on usage.
Governance Reserve and PCC Technical Reserve:
These reserves have been funded by transfer from revenue in previous years and are held to support the PCC’s own revenue budget and to fund governance development costs.
PCC Community Fund:
This reserve will be funded for the first time in 2013/14 by a transfer directly fro revenue. The reserve will be under the direct control of the PCC, and will be utilised to support Community Projects.
Accounting Treatment Reserve and Priority Spending Reserve:
These reserves are funded by transfer from revenue to manage known commitments that extend over a number of financial years and/or to carry forward funding for commitments known at the financial year end but not materialising until the following year.
PROVISIONS
Insurance
This fund makes provision for the extent of our theoretical exposure in respect of our insurance claims in so far as they are not covered by the Commissioner’s insurers.
The Commissioner has made arrangements with its insurers to provide cover for:
- individual liability claims in excess of £75,000 for any one occurrence;
- liability and motor cross class aggregating over £1.2 million;
- third party motor claims subject to an excess of £75,000 for any one occurrence;
- material damage to property, together with consequential business interruption, subject to a policy excess of £1,000 for any one occurrence in respect of all risks cover, £250 for any one occurrence in respect of cover for money and £75,000 for any one occurrence for all other incidents;
- computer, motor uninsured loss recovery, engineering, airside liability, fidelity guarantee, personal accident, travel and contract works subject to policy terms and conditions.
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