Sunday, January 30, 2011

Council budgets and unallocated reserves in London

"Dear Jon
I am responding on behalf of the council administration. I appreciate your appeal is sent in the spirit of a constructive suggestion, and I will respond in the same vane.

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.

Secondly, on the issue of reserves. 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.

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.

Thirdly, as regard 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.

Fourth, our 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.

Finally, 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!

Hope this helps you understand were we are coming from on this issue.

Best regards,

Paul McGlone
Cabinet Member for Finance & Resources"

(Guest post by Citizen Smith)
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