Reserves Strategy 2023/24

1. Introduction

The requirement for financial reserves is acknowledged in statute. Sections 32 and 43 of the Local Government Act require precepting authorities (and billing authorities) in England and Wales to have regard to the level of reserves needed for meeting estimated future expenditure when calculating the budget requirement.

This document provides information on the estimated levels of reserves including unapplied receipts currently held and explains how some of these will be used over the next five years to help support the revenue budget and capital programme, ensure the Police and Crime Commissioner (PCC) and Chief Constable meet their statutory responsibilities, manage critical risks and contribute towards key strategic initiatives.  This reserves strategy is a fundamental part of the overall financial strategy for the PCC.

This strategy refers to different types of reserves held by the Commissioner, although it should be noted that in England and Wales, earmarked reserves remain legally part of the General Reserve, although they are accounted for separately.

There are a number of safeguards in place to support the financial planning and control process.  These include:

• The balanced budget requirement (Local Government Act 1992 s32 and s43).
• Chief Finance Officers duty to report on the robustness of estimates and adequacy of reserves (Local Government Act 2003 s25) when the PCC is considering the budget requirement.
• Legislative requirements for each PCC to make arrangements for the proper administration of their financial affairs and that the Chief Finance Officer has responsibility for the administration of those affairs (section 151 of the Local Government Act 1972).
• The requirements of the Prudential Code.
• Auditors will consider whether audited bodies have established adequate arrangements to ensure that their financial position is soundly based.

These requirements are reinforced by section 114 of the Local Government Finance Act 1988, which requires the Chief Finance Officer to report to the PCC if there is likely to be unlawful expenditure or an unbalanced budget.  This would include situations where reserves have become seriously depleted and it is forecast that the PCC is unable to meet its expenditure in a particular financial year. The issue of a section 114 notice cannot be taken lightly and has serious operational implications, and in the unprecedented event of such a notice being served, the PCC must consider it within 21 days and during that period the force would be prohibited from entering into new agreements involving the incurring of expenditure.

Whilst it is the primary responsibility of the PCC and his Chief Finance Officer to maintain a sound financial position, external auditors will, as part of their wider responsibilities, consider whether audited bodies have established adequate arrangements to ensure that their financial position is sound. However, it is not the responsibility of auditors to prescribe the optimum or minimum level of reserves for individual PCC’s.

CIPFA’s Prudential Code requires the Chief Finance Officers to have full regard to affordability when making recommendations about the Commissioners future capital programme. Such consideration includes the level of long-term revenue commitments. In considering the affordability of his capital plans, the Commissioner is required to consider all of the resources available to him and estimated with any certainty over the medium term, together with the totality of his capital plans and revenue forecasts for the forthcoming year and the following two years. There is a requirement for three-year revenue forecasts across the public sector and the PCC maintains a longer term five year Medium Term Financial Plan (MTFP) to the end of 2027/28 to achieve this.  This is good practise and is an approach endorsed by CIPFA to promote and demonstrate resilience and financial sustainability.  The MTFP will continue to be reviewed regularly and updated formally each year, in line with updated information and proposed central funding levels.

CIPFA and the Local Authority Accounting Panel do not accept that there is a case for introducing a generally acceptable minimum level of reserves. Commissioners on the advice of their Chief Finance Officers should make their own judgements on such matters taking into account all relevant local circumstances. Such circumstances will vary over time.  CIPFA has however provided some helpful guidance to public bodies on the establishment and maintenance of local authority reserves and balances, setting out key factors that should be taken into account locally in making assessments of the appropriate levels to be held.  This guidance is followed by the Treasurer in assessing the adequacy of reserves, and is documented within the annual budget report.  The guidance should enable well-managed organisations, with a prudent approach to budgeting being able to operate with a level of general reserves appropriate for the risks (both internal and external) to which it is exposed. In assessing the appropriate level of reserves, it is imperative that an assessment be made not only on whether reserves are adequate, but that they are also necessary.  Previously the Home Office has indicated that it does not expect the level of reserves held by PCC’s to be more than 5% of net revenue expenditure.  Section 26 of the Local Government Act 2003 does give Ministers in England and Wales a general power to set a minimum level of reserves for authorities. However, the government has undertaken to apply this only to individual authorities in the exceptional circumstances where the body does not act prudently, disregards the advice of its Chief Finance Officer and is heading for serious financial difficulty.

2. The PCC’s approach to reserves

The use of a significant proportion of the Commissioner’s reserves, over the life of the Medium Term Financial Plan is an important element of the financial strategy. The Commissioner holds reserves for a variety of reasons.  Further details on this can be found in the annual budget report and  as approved by the Commissioner in February 2023, and this should be read in conjunction with this strategy.

In summary, the Commissioner holds reserves to:

• To meet the costs of significant, unplanned events where the precise event, date and amount required for such events cannot be accurately predicted. For example major events that would require the use of the General Reserves.  These are detailed within the general reserve risk assessment included at appendix A.
• To meet forthcoming revenue and capital budget and transformational events where the precise date and amount is not always known with absolute certainty, but which will also support the force to navigate and make progress to transform and operate effectively.
• To support one-off PCC work and initiatives.
• A reasonable amount to meet peaks, troughs and risks in revenue expenditure on certain risk assessed areas of the business including legal and insurance matters, pensions and income levels.
• To meet specific costs associated with road safety activity.
• To manage specific risks arising from any commercial activities undertaken

3. Implications of the policy

The current financial climate has grown increasingly uncertain, with inflation at some of the highest rates for the last forty years, energy costs have escalated, numerous strikes following higher pay demands have occurred, supply chain issues for various goods are common place and consistent increases in interest rates by the Bank of England have been implemented to temper inflation.

At a local level, pay and non-pay inflationary costs represent some of the most significant financial challenges for the force in the immediate future. The force have been successful in recruiting their share of the 20,000 officers by the 31^st March 2023 date, and this sees officer numbers in Warwickshire rising to the highest levels ever.  However, the ongoing costs of sustaining these officers will be a financial challenge in the medium term.

The Medium Term Financial Plan has indicated that around £3m of savings are required and the plan for achieving efficiency savings is through investments in technology to increase productivity and improve efficiency.  It is essential that these savings are identified to ensure future sustainability.  Reserves will underwrite this risk, but work to identify savings, should they be required must be prioritised.

4. Types of Reserve:

This document aims to provide an over-arching strategy that defines the boundaries within which the approved budget and Medium Term Financial Plan (MTFP) operate. The types of reserve held are considered in turn below:

The General Reserve

It has been established that General Reserves will be maintained at a level of £6million for 2023/24.  This represents approximately 4.6% of net revenue expenditure.  The general reserve was increased to £6.000m in 2022/23 to reflect the increasing net revenue expenditure and also based on the risk assessment.  , The adequacy of reserves statement, within the budget report, follows a risk based review of the level of reserves and provides some further context to the potential use or circumstances surrounding the use of the general reserve however, this is not exhaustive as new risks will emerge during the course of a year.

The purpose of this reserve is essentially two fold:

• to provide for any unexpected, significant operations (demand) arising from a serious incident, investigation or prolonged disruption in lieu of special grant
• to provide for commercial risks surrounding the national contractor vetting service.

Authorisation to finance such expenditure must be obtained in advance from the Commissioners Chief Finance Officer, in accordance with the scheme of delegation and the protocol between the force and the PCC’s office. Where time permits the request should be supported by a business case.

As the net budget position continues to change the level of general reserves must be monitored to ensure that it is maintained at an appropriate level.

Appendix A is an extract from the budget report for 2023/24 and outlines the adequacy of reserves statement and risk analysis undertaken by the Treasurer.

Earmarked Reserves

Unlike general reserves earmarked reserves have been identified for specific events and managing assessed risks.  Usually, there is uncertainty regarding anticipated costs, and/or timelines. It is therefore prudent for the Commissioner to identify such areas of expenditure and set aside amounts that would limit future disruption that could be caused by unforeseen events.  Such expenditure usually arises out of changes in legislation, policy, or where the organisation is working on a specific project.  Expenditure relating to earmarked reserves has to specifically relate to the purpose of the reserve.

Appendix B details for each of the earmarked reserves that exist at the start of the 2022/23 financial year, the transfers during that year, year end balances, as approved by the Commissioner and the future anticipated use of reserves over the MTFP.

Further details on the purpose of specific earmarked reserves are given below:

Budget and Transformation Reserve

The medium term financial plans (MTFP) of the Commissioner are under constant review, however, the MTFP is only formally updated and approved once each year, in line with the annual budget process.  The Commissioners financial strategy is to deliver a good and balanced budget that is sustainable in the medium to longer term.  This effectively means  that expenditure must be met from within core funding, without a routine reliance on reserves to balance the budget.

However, it is acknowledged that a longer term strategic approach to funding also needs to be adopted, which recognises, that short -term shortfalls may occur, that it is acceptable and prudent to be bridged by reserves to avoid detrimental decisions being taken on an annual basis, only to be reversed in future years.  Therefore the budget and transformation reserve will:

• Provide a glide path over the MTFP to deliver £3.0m of savings
• Provide support to finance capital expenditure for investment in ICT/digital services, where required
• Provide support for any potential loss of Government funding e.g. Police Uplift Programme ringfenced grant
• Provide support/coverage for any negative impact of the funding formula review

Infrastructure Reserve

This reserve is aimed at providing finance to fund capital expenditure for investment, primarily in short term assets thereby reducing the need to borrow.  This reserve constitutes part of the PCC’s approach to creating a more sustainable capital financing strategy.

Safer Roads Reserve

A transfer from this reserve of £0.100m has been approved in the 2023/24 budget to meet the costs of the PCC’s road safety grants and commissioned services.  The reserve is ring-fenced and can only be utilised on addressing and improving road safety across Warwickshire.

Pay reserve

This earmarked reserve was created in 2022/23 in acknowledgement of the risk surrounding the pay award for officers and staff.  Underspending in 2022/23 means that this will not be utilised, despite the final pay award being above the budgeted level.  Provision for a 3% increase in pay has been made within the 2023/24 budget, but given continuing high levels of inflation, and cost of living pressures, there is little intelligence to understand whether this will be adequate or not.  The reserve is intended to manage any pay inflation costs above 3% in year, to avoid the need to find other alternative savings in year.

PCC Grants and Initiatives Reserve

This reserve has been funded from previous year underspends in the PCC’s budget.  It is intended to provide for future needs in this growing area of work. Current plans include the utilisation of some of this reserve to finance one-off PCC grants and also to fund additional serious violence duty costs.

Pensions & Redundancy Reserve

This reserve provides for any pensions and redundancy costs which may be incurred.  Warwickshire police has a requirement to identify £3m of savings over the medium term. Whilst it is hoped that this will not require any redundancies,  the retention of such a reserve constitutes sound financial planning.

The full impact of the Mcloud remedy one-off pension cost is unclear and this reserve will provide for one-off costs associated with this risk.

Income reserve

This reserve has been established to meet any shortfalls in non-commercial income, for example mutual aid, where the cost cannot be mitigated or met from within existing budgets.

Insurance and legal reserve

This earmarked reserve is held to mitigate against the risk of short-term excessive increases in insurance or legal costs falling in any specific year, which would have a detrimental impact on the in-year budget.  These costs are often unforeseen, values cannot be anticipated with much certainty, but could be significant, for example those costs arising from a public enquiry.

Operational reserve

The operational reserve has been set up to provide the Chief Constable with some flexibility for one-off initiatives to target improved performance, perhaps through deployment of officers on overtime rates or deliver one-off discrete items of equipment.

Capital Reserves and Balances

In addition to the revenue reserves there is also a Capital Receipts Reserve. This holds receipts from the sale of police land and buildings which are no longer needed for operational policing as more efficient use is made of partners’ and the policing estate. The annual budget includes the funding requirement and the receipts expected from asset sales over the MTFP.

The PCC holds Section 106 (Town & Country Act 1990) money.  S.106 is a condition of granting planning permission and essentially provides local authorities including policing, with money for providing infrastructure and services. Once conditions are satisfied this money is applied to revenue or capital, however this may be over one year and hence the need to carry balances forward.

5. Procedure for use of reserves:

The use of reserves requires approval by the Commissioner and supported by his Chief Finance Officer.

All requests to use reserves should be supported by recommendations in the Money Matters report, which is scrutinised by the PCC and provides the information to enable future approval or otherwise of reserves via a decision notice by the PCC.

On occasion where an urgent request is being made this should be discussed as soon as possible between the Chief Constable’s Chief Finance Officer and the Chief Finance Officer to the Commissioner.

6. Monitoring:

The level of reserves is kept under continuous review. The Commissioner receives a regular financial report (Money Matters) containing recommended use of reserves and  levels of reserves together with an annual review of the reserves strategy in January/February as part of the budget setting process and the out-turn position in the summer of each year.

The current level of forecast reserves is relatively healthy, with transfers to reserves forecast in 2022/23.  A draw down from reserves has been approved in the 2023/24 budget, to meet some revenue and capital costs.  This is part of planned usage to help manage reserve levels within levels that are deemed acceptable and are neither too high or too low, to enable time to develop future savings options without having an adverse impact on policing services, and to reduce the level of borrowing required to fund capital works, and thus reduce the future revenue cost.  This represents a good and prudent approach to financial planning ensuring levels are retained to manage risks, but are not excessive.

7. Risk Analysis:

The adequacy of reserve statement includes details on the risk analysis that has been undertaken.  Any recommendations during the course of the year that change the planned use of reserves reported within the Annual Budget and precept setting report, will take account of the needs of operational policing balanced against the need to retain prudent levels of reserves. Such changes will need to be approved by the PCC.

In summary and in support of the risks identified as part of the adequacy of reserves review the significant risks that have been considered, and which are kept under review are:

• The effect of high pay and non-pay inflation costs, and the impact on the budget.
• The rising cost of living and the effects this may have on crime rates.
• The impact on funding of the uplift grant which now incorporates the pay grant and for which grant conditions and penalties remain unclear.
• Not being able to deliver or achieve efficiencies and savings required over the MTFP.
• That income levels may not be achieved or over reliance on some specific income streams creates an over exposure to risk.
• The need to finance transformation, including automation of some processes which will facilitate improved efficiency and productivity identified through the Empower review as part of a renewed digital strategy.
• The current financial climate is increasingly uncertain, and supply chain issues are significant in some service areas.
• The risk that collaborations don’t perform well, that costs become excessive or that they break down and alternative service models have to be identified.
• The recruitment and retention of suitably qualified staff is a challenge in a  relatively full employment market.  This is particularly evident in some specialist roles.
• Details regarding the outcomes from the funding formula review are not yet known.  It is unclear whether Warwickshire will be a net beneficiary or not of the revised arrangements.  It is likely that transitional arrangement swill be put in place to enact any changes, but no further details are currently known.
• Demand pressures and risks associated with spill-out demand from other agencies, affecting police performance.

Should the Commissioner and Force be faced with several of the above issues at the same time there would be a more significant and pronounced effect on reserves and their potential use.

Once utilised, reserves have limited scope for replenishment. This is usually achieved through a budget underspend, or increased income and will be reviewed as part of the work at the end of a financial year. This will include the review of the level of earmarked reserves held, which could appear insufficient and may need reassessing.  Reserve levels are reassessed at year end, and also as part of the annual budget setting process, although they are kept under review during the course of the year in line with risks, as part of the budgetary control and reporting process.

8. Compliance with Home Office Guidance:

On 31^st March 2018 the Minister for Policing and the Fire Service published new guidance and the information that each PCC must publish in terms of police reserves. One of the key requirements is that the information on each reserve should make clear how much of the funding falls into each of the following three categories:

• Funding for planned expenditure on projects and programmes over the period of the current Medium Term Financial Plan
• Funding for specific projects and programmes beyond the current planning period

• As a general contingency to meet other expenditure needs held in accordance with sound principles of good financial management

This information is provided in Appendix C.

9. Conclusion:

There has been a comprehensive review of all reserves held by the Police and Crime Commissioner in preparing this 2023/24 reserves strategy. This report sets out clearly and transparently the reserves held, the purpose for which they are held, the plans for their use and the risks and assumptions underpinning them.  This strategy will be reviewed annually and the PCC’s approval sought.  During the year changes may however occur in the MTFP, which affect this strategy. Such changes will be monitored by the Chief Finance Officer and reported to the Commissioner for approval.

Based on current planning assumptions, the level of general reserves in Warwickshire should stay above the recommended minimum level of £6m through to 2026/27, Adequate provision has been made in earmarked reserves to fund expected one-off pressures and to manage known risks. The reserves strategy acknowledges the need to identify a sustainable source of capital funding, and an infrastructure reserve has been created to address this.  Consideration will be given to further contributing to this if there is further underspending in revenue in 2022/23 or during 2023/24.

Reserve levels are reliant on the accuracy of assumptions made across the MTFP, however the current economic outlook is uncertain and it is therefore important that reserves are held at adequate levels to mitigate these additional risks too.  The financial strategy of a good and balanced budget remains, in line with the police and crime plan priorities, reserves are being used in a strategic way to manage the need for savings through transformation and driving greater efficiency from recent investments in technology.   Careful budget monitoring and tight budgetary control are necessary throughout 2023/24 and the MTFP to identify any issues as they arise and enable timely decisions to be made to address any resulting financial implications.  These will generally have to be dealt with within existing budget, but reserves will also help to manage the position.