Recent media coverage over the local government pay dispute has highlighted the level of local authority reserves and the purpose for which they are held.
CIPFA’s chief executive, Steve Freer’s interview on BBC Radio 4’s World At One has been widely quoted saying that local authority reserves are held for prudent financial management purposes to meet unforeseen expenditure.
While it is clear that it would be foolish to use reserves, which are one-off in nature, to meet ongoing expenditure increases such as a pay awards, it is less clear what constitutes a sensible level of reserves.
I am sure there are several authorities which would love CIPFA to set out a figure, perhaps as a percentage of budgeted expenditure, which would be a target figure for different classes of local authorities to aim for.
Such a standardised approach should, however, be resisted. Since all authorities are different, we should instead rely on the judgment of the professionals within each to reach their own soundly-based conclusions.
That is not to say we at CIPFA cannot help them with such advice. Let us be clear, holding reserves does not come without a cost. With this in mind, we are starting to work with Communities and Local Government and others to learn the lessons from recent years about the costs of civil emergencies and other internal and external risks, and what implications all this has for how local authorities determine what is a prudent level of reserves for their own unique circumstances.
Local government faces challenging times and must guard against the temptation to either use reserves to put off difficult decisions and prop up expenditure in the short term, or build up reserves against a level of catastrophe unlikely ever to be faced. As in all things in life, it is a matter of understanding and balancing risks. n
Alison Scott is technical manager at CIPFA
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