005/2014: Review of Reserves and Provisions Policy – 30 May 2014

Executive Summary and recommendation: 

The requirement for financial reserves is acknowledged in statute, as is the Commissioners 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:  Policy approved

Signature:

Date: 30 May 2014

Title: Police and Crime Commissioner

Part 1 – Unrestricted facts and advice to the PCC

1. Introduction and background

1.1        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.

1.2        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

1.3        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.

1.4        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

1.5       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

1.6       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

1.8        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.

1.9        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

1.10      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

1.11      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.

2.  Matters for consideration

2.1        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

2.2        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.

2.3        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 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.

2.4        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.

2.5        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.

2.6        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 2013/14.

3.  Other options considered, if any

3.1  Not applicable

4.  Contribution to Police and Crime Plan outcomes

4.1        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.

5.  Consultations carried out

5.1  Not applicable

6.  Financial Implications/Value for money

As set out in the body of the report.

7.  Legal Implications

As set out in the body of the report.

8.  Equality Implications

There are no equality implications of this report.

Appendices:

Appendix 1   Reserves schedule as at  2014/15 budget setting  005 Appendix 1 Budget – Reserves version 43

Appendix 2  Policy on Financial Provision and Reserves  005 Appendix 2

Appendix 3   Details of purpose and usage of individual reserves  005 Appendix 3

Public Access to information

The Police and Crime Commissioner wishes to be as open and transparent as possible about the decisions he/she takes or are taken in his/her name. All decisions taken by the Commissioner will be subject to the Freedom of Information Act 2000 (FOIA).

As a general principle, the Commissioner expects to be able to publish all decisions taken and all matters taken into account and all advice received when reaching the decision. Part 1 of this Notice will detail all information which the Commissioner will disclose into the public domain. The decision and information in Part 1 will be made available on the NYPCC web site within 2 working days of approval.

Only where material is properly classified as restricted under the GPMS or if that material falls within the description at 2(2) of The Elected Local Policing Bodies (Specified Information) Order 2011 will the Commissioner not disclose decisions and/or information provided to enable that decision to be made. In these instances, Part 2 of the Form will be used to detail those matters considered to be restricted.  Information in Part 2 will not be published.

Is there a Part 2 to this Notice – NO

Originating Officer Declaration:  Author name:           Jane Palmer, Chief Constables Chief Finance Officer and Chief Accountant, Collar number:  004364

Head of Department has reviewed the request and is satisfied that it is correct and consistent with the NYPCC’s plans and priorities.
Gary Macdonald, 5299,  09/05/2014

Legal Advice – Legal 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.
Jane Wintermeyer, 3840,  19/05/14

The CC CFO 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.

Jane Palmer, 004364,  30/04/2014

Equalities Advice – Either there is considered to be minimal impact or the impact is outlined in Part1 or Part2 of this Notice.
Jane Palmer, 004364,  30/04/2014

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 decision

Signature      Jane Palmer  , 004364

Date  30/04/2014