Budget reductions and unallocated reserves - further correspondence

UNISON received a response on Friday to our representations to Labour Councillors concerning the Council’s budget from Councillor Paul McGlone, Executive member for Finance. This is UNISON’s further response, incorporating the full text of the Labour Group reply to which UNISON is responding;

Dear Paul,

Budget reductions and unallocated reserves

Thanks very much for your prompt response on Friday to UNISON’s correspondence with the Group concerning unallocated reserves. I appreciate your taking this matter seriously and will respond to what you have had to say paragraph by paragraph. In general you make a persuasive case for the need to hold unallocated reserves but, as you may be prepared to agree, do not make a compelling case for any particular level of unallocated reserves.

You say “Firstly, Labour councillors are as angry about the Tory led Coalition Government’s attack on local government as Unison is, and as I am sure all Lambeth employees are. None of us came into politics to cut services or withdraw from helping the vulnerable in our community. But we can’t ignore the reality of our funding being cut by a third amounting to £79 million over three years. As a responsible administration elected in May with a strong mandate from Lambeth residents, we have a duty to them to deliver a balanced and legal budget to enable the council to continue to serve the most vulnerable and deliver basis services. As Labour politicians we will of course also do everything in our power to fight back against the government cuts agenda (as you say, to make them adopt an alternative economic strategy) or cause a General Election.”

We have a disagreement about the absolute necessity of balancing the budget, particularly if doing so actually prevents you from serving the most vulnerable and delivering basic services (School Crossing Patrols, for example, are a pretty basic service which many of us remember from our own childhood and which clearly serve the vulnerable).

However, from a pragmatic point of view, given the decision of the Labour Group on this point, it is more important for now that we discuss what should be done within the context of your decision to balance the budget.

You go on to deal with “the issue of reserves.” You say that; “The argument you are putting to us is the same as Coalition Government ministers have been making. They are implying it is a ‘choice’ council’s have, namely, the Government has drastically cut funding to councils by a third so we should use reserves to fill the gap created by them. This is rank hypocrisy on their part given they are creating the most risky financial environment for public services since the creation of the welfare state. In this environment financial reserves are needed more than ever.”

The fact that an argument is made (hypocritically) by Tory Government Ministers (including Tories in both the Conservative and Liberal Democrat parties of course) does not necessarily mean that it is automatically wrong. Councils do not have a choice about whether or not to hold reserves, but you do have a choice about the level of the reserves which you hold, and that choice needs to be made on the basis of balancing the risk of holding too low a level of reserves against the consequences of holding too high a level.

You go on to point out that “Lambeth’s ‘General Fund Reserves’ as at 31st March 2010 were as you state £28.1m. You don’t need to be an accountant to understand that the purpose of a ‘general reserve’ is to give some measure of financial cushion to absorb unexpected disasters or funding emergencies. The general professional ‘rule of thumb’ has been a general reserve of +/- 10% of our net budget, which for Lambeth currently means about £30m. Last financial year alone Lambeth has two service areas, Temporary Accommodation and Parking that overspent £10 million – it was only with good overall financial management that other service areas under spent to cover this, needing a £3 million call on reserves. Given Lambeth provides approximately 600 services, you can see how financial risks can arise unexpectedly, and had it not been for our ability to absorb the shock, we might have had to close a service down completely.”

Again you make a persuasive case for the principle of holding reserves, but not necessarily a compelling case for any particular level of reserves.

The 2009/10 statement of accounts states that; “the financial results for the year leave the General Fund (excluding schools) with a balance in excess of £28m, at the upper end of the recommended range (£15m to £30m).” (I have added the emphasis to the last few words).

In the same way the 2007/08 statement of accounts stated that “the financial results for the year leave the General Fund (excluding schools) with a balance in excess of £16.7m. This is at the lower end of the recommended range of £15m – £30m.” (Again, I have added the emphasis).

The officer report to last Thursday’s Finance Scrutiny SubCommittee repeated the following advice from last year’s budget report; “the minimum level of balances that the council needs to maintain to ensure financial stability, and so provide a strong environment within which services can be continuously improved, is £15m and that the council should plan to hold £30m in balances, which is approximately 10% of net revenue expenditure.” (I’ve added the emphasis again).

None of this is quite the same as a “general professional ‘rule of thumb’ (of) a general reserve of +/- 10% of our net budget, which for Lambeth currently means about £30m”. What the officer advice is actually saying is that you must be sure to hold reserves of at least £15 Million (approximately 5%) and that you should aim for £30 Million. As UNISON has already pointed out, it is only over the last couple of years that reserves have reached anywhere near this level.

Additionally, of course, if the Council’s net revenue expenditure is to be reduced by £37 Million then the amount required to be held in order to hold 10% of that figure will be reduced by £3.7 Million, from approximately £30 Million to approximately £26.3 Million (and the amount required to be held to meet the figure of 5%, described by the Chief Finance Officer as the “minimum level of balances that the council needs to maintain to ensure financial stability, and so provide a strong environment within which services can be continuously improved”, will be reduced by £1.85 Million, from approximately £15 Million to approximately £13.15 Million).

The officer advice which you have received, and acted upon over recent years suggests that there is a range for unallocated reserves from a minimum of about 5% of net revenue expenditure up to a desirable figure of about 10%. Within that range it is your responsibility as Councillors to budget for an appropriate figure, taking account of risks to financial management, but also of the consequences of service delivery of the impact on planned expenditure reductions of your decision in relation to the level of unallocated reserves. An initial level of unallocated reserves of £13.15 Million would, for example, comply with the officer advice, as well as exceeding the median level held by London Boroughs as at 31 March last year.

You continue by dealing, rightly, as follows with the “financial risks the council is carrying. The risk assessment around delivering £37 million Government cuts package is estimated at about 20%, which may need a call on reserves; we may be forced to lose over 1,000 jobs with the consequent redundancy costs, which the Government is not paying for; there still could be unexpected disasters or emergencies; there is a risk that the Council may overspend this year by some £4m (although I have been tough with managers that they need to manage within their budgets); and there is also a low probability of any under spends that could be added to reserves. The overall conclusion is we need some ‘reserves’ to enable us to absorb financial shocks and help deliver transformation in the future.”

The 20% “headroom” figure, suggested by the external auditor as identified in paragraph 1.20 of the report to Finance Scrutiny may be little more than informed guesswork, but, accepting it for the moment, it suggests that you should add a figure of around £7.4 Million to a planned level of unallocated reserves.

As far as the costs of redundancy payments are concerned, paragraph 2.4 of the Finance Scrutiny report notes that you decided not to seek approval to capitalise redundancy costs because, given your level of balances you knew you would not receive such approval. You do not indicate that you have in mind a particular sum which you feel should be added to unallocated reserves to take account of redundancy costs – if you have an estimate I would be interested to know what it is.

Furthermore, in relation to possible overspends, I note that projected overspends have been dramatically reduced towards the end of each recent financial year. The £4.2 Million projected overspend as at the end of November, to which you refer, represented a £9.2 Million improvement on the position at the end of October (as noted in another report to Finance Scrutiny last Thursday). A rigorous approach to financial management (which is to the credit of Members and senior officers) can be expected to reduce this overspend much further, if not eliminate it altogether.

You go on to point out correctly that the Council’s “accounts & reserves are subject to rigorous challenge by the District Auditor, External Auditor and we receive professional advice from the Council’s Section 151 officer (Chief Financial Officer) in regard to the level of reserves. The council will now be carrying a significant level of new financial risk and for that reason we need to structurally reduce what we spend to match our funding from government. All using reserves does is buy you a little time, not replace or resolve the structural funding problem.”

Both these points are valid of course, but the first point – that you are subject to scrutiny as to the level of your reserves – applies equally to every other borough and therefore does not explain why you hold the particular level of reserves you choose to hold (higher than many other boroughs).

Secondly, it is self-evident that drawing upon reserves serves only to delay cuts without resolving structural underfunding. However, since the Council has – quite rightly – been particularly critical of the Government’s “front loading” of cuts it is plainly inconsistent not to consider such delay if it is possible.

I particularly appreciate your final, cautionary note, in which you advise me to; “be careful how you interpret the figures you quote – I am told that Wandsworth Council only a few years ago was told off by the District Auditor for having £600 million (yes, £600,000,000 – 200% of their net budget in ‘unallocated reserves’!) and boroughs like K&C had 100’s of millions, both due to their ‘Thatcher endowment’ in the late 1980’s, which has rigged the local government funding formula in their favour for decades. We can only guess how this money has been ‘reclassified’ or spent!”

I completely agree that these questions need to be explored further – but I don’t accept that “we can only guess” about these matters.

There are Labour opposition Members on both those authorities who could provide the Regional Party with answers to the question as to where those sums of money have gone. Since we know that the Tory Coalition Government will, hypocritically, seek to pin the blame exclusively upon Labour Councils for the consequences of spending reductions largely driven by their own irresponsible fiscal policies, it would surely make sense for the Labour Party to do some work on the questions which you raise so that we can go beyond guesswork.

In conclusion, as I said at the outset, your response to UNISON provides a helpful and persuasive case for the principle of holding an adequate level of unallocated reserves. However, you do not make a compelling case for a particular “adequate” level of reserves. Reading your response alongside officer advice and comments set out in recent Statements of Accounts and reports to last week’s Finance Scrutiny, it would be possible to justify a level of unallocated reserves in the range between £15 and £30 Million.

Bearing in mind the Council’s statutory duty, under s188 of the Trade Union and Labour Relations (Consolidation) Act 1992 to consult “with a view to reaching agreement” about how to avoid or reduce redundancies, I will therefore repeat the request which I have already made to the Executive Director of Finance that, before the 2011/12 budget has been set, we should have further dialogue about the actual level of unallocated reserves. UNISON has also asked for further dialogue about the amount of the Council’s contribution, as an employer, to the pension fund in the coming financial year, in the same context.

Many thanks for your serious and considered response on the question of unallocated reserves, and I look forward to hearing further about this request.