Archived decisions

Appendix 9

Level of specific reserves and general balance 2009/10

1 Introduction

1.1 The Local Government Act 2003 requires that the Treasurer assess the financial risks faced by the Authority and makes recommendations based on this as to the appropriate levels of resources required to be held against these risks.

1.2 In considering financial risks, a distinction must be made between:

· A provision, which is made for a known and quantified outstanding liabilities. It is usual, for example, to hold some provision in the Authority's accounts in respect of specific known claims against the Authority, which are not covered by insurance.

· On the other hand, reserves are set up against the possibilities of future costs that are either not yet liable or capable of being quantified, e.g. the likelihood that there will be more uninsured claims in future.

2 Level of reserves required

2.1 The approach taken in this paper is to assess the risks of increased expenditure that the Authority faces during any given year. Some adjustment is then appropriate given that:

· there is a much smaller chance that all identified risks will occur in the same year; and,

· the use of reserves is not the only means of meeting such pressures. Savings/transfers from underspent budgets are preferable (and the Authority has a good recent record in achieving these), together with other assistance available through the flexible use of capital funding.

2.2 The main factors used to evaluate the primary financial risks facing the Authority, together with the suggested amounts required to cover them, are summarised in the following sections.

3 Pensions fluctuations

3.1 The new financial framework for pensions, which came into force on 1 April 2006, transferred most of the risks in association with pensions expenditure from Fire Authorities to the Government. There are still some risks associated with pensions relating in the main to the number of ill-health retirements but given that they are paid over a three year period a sum of £50,000 is considered sufficient.

4 Inflation risk: Pay

4.1 There may be a need during the year to meet the costs of a pay award not known at the time of setting the budget. The firefighters' pay award takes effect from July and it is not yet known. Non-uniformed staff pay is more likely to be known when setting the budget given an effective date of award of 1 April - although the pay award for 2008 has not yet been agreed, let alone 2009.

4.2 In 2007/08 a reserve equivalent to an additional 1.0% of firefighters' and support staff pay was made. Given that the base budget includes a provision for 2.5% for 2009 pay awards and the Government is likely to press down on awards in the context of the credit crunch, a figure of £100,000 is considered reasonable for 2009/10.

5 Uninsured risks

5.1 Although the Authority has insurance in place, there remain risks. There was a period when the Authority effectively became uninsured from April 1997 to June 2001 due to its primary insurer going into liquidation. There are also some uninsured risks, e.g. for employment practice issues; and, if there are higher than budgeted levels of insurance claims, then there will be higher excess costs to pay. This is one of the harder areas to assess, but it was increased to £800,000 to reflect uncertainties around the legal status of mutual insurance arrangements. Now that alternative arrangements have been made, a return to the figure of £600,000 is proposed, based on the historic number of uninsured risks tending to come forward and the continuing trend towards more litigation.

6 Extremes of weather

6.1 Unusually hot dry summers, wet winters and storms can all lead to additional operational costs, primarily associated with increased activity by retained firefighters and vehicle running expenses including fuel. This is recognised under current arrangements through a protocol which builds in a budget variation for increases in the number of incidents. Historically, the highest variation was 16.5% in 2001/02, but this was exceptional. A lower provision of £250,000 would seem appropriate and no change is proposed to this figure.

7 Other inflation

7.1 There is some risk attached to non-pay inflation levels: for example, energy and fuel costs. To allow for a possible 10% increase in these heads over and above the budgeted level of inflation would require £80,000.

8 Regionalisation

8.1 No recognition of regionalisation is thought necessary in calculating the level of general balance for 2009/10. This will, however, be an area to keep under review.

9 Capital Programme issues

9.1 The Authority has a significant capital programme under way. The timing of payments and capital and to a certain extent overall project costs are difficult to estimate. It would make sense in taking the capital programme into account when considering the level of general balance to hold. It is difficult to rationalise a formula-based approach to this, but a sum of £800,000 would not appear unreasonable: the increase from 2008/09 reflects the additional uncertainty around capital receipts (for which more allowance might have been needed had the position re the sale of Carpenters Down not been clarified already, or had receipts from the sale of Copnor been factored into the capital programme ) .

10 Uncertainties in 2009/10 and beyond

10.1 The Authority continues to face some uncertainties, such as the transition to regional control arrangements and the introduction of Firelink. But other recent change agendas are now either integrated into normal working (eg IRMP, take up of pension by retained firefighters), are provided for specifically (equal pay) or have receded in likelihood (possible merger with the Isle of Wight). Again it is difficult to rationalise a formula-based approach to these, but compared with £800,000 in 2007/08 and £400,000 in 2008/09 a sum of £200,000 would not appear unreasonable for the 2009/10 calculation.

11 Conclusion: level of reserves

11.1 Bringing all these factors together leads to a `maximum exposure' of £2,070,000 as set out in Table 1. However, as mentioned above, other funding sources may be available, and it is not likely that all these problems will occur in the same year. That is illustrated historically by the fact that the Authority's outturn position has very rarely resulted in an overspend, and recent years have produced underspends. In theory it would probably be reasonable to discount the level of reserves required by 50% for the improbability of simultaneous recurrence of problems. However, it is considered sensible to take a more cautious position so a reduction of only 25% is proposed: this can be revisited if the Authority's budget performance continues to be healthy. This would suggest that an appropriate level of reserve is £1,560,000. Given the imprecise nature of the assessment, it is reasonable to round this to £1.6m. Naturally, the level will be kept under review in light of both experience and variations in factors such as uninsurable risks and inflation rates.

11.2 This results in reserves at just over 2.3% of annual spend, which appears to be a somewhat lower proportion than for most other fire and rescue authorities.

11.3 This is a relevant background factor, though not a determinant of good practice as it may be for example that less strict control of budgets is in place in such authorities, and Hampshire should also gain through the `economy of scale' in spreading risks across a larger spending base than most. In addition this does not take account of how much risk is being carried in the revenue budget. Hampshire's budget is built on a realistic basis with prudent provision for future inflation being provided for.

Table 1: Summary of Factors

Factor	Assessed impact 2007/08 £000	Assessed impact 2008/09 £000	Assessed impact 2009/10 £000
Pensions: payments	50	50	50
Inflation: pay	370	0	100
Uninsured risks	600	800	600
Extremes of weather	250	250	250
Inflation: other	40	70	80
Capital factors	500	500	800
Future years' uncertainties	800	400	200
	2,610	2,070	2,080
x 75%	1,958	1,550	1,560
Rounded £100,000	2,000	1,500	1,600

11.4 Accordingly, it is proposed the budget for 2009/10 should be built on the basis of providing for a £1.6m level of reserves.