Effective financial management is essential for councils of any size, and one of the most discussed aspects is managing reserves. In a recent Scribe webinar, our finance expert, Hannah, led a thorough conversation on reserves—answering questions on how to set, justify, and manage them, even during uncertain financial years.

What are Reserves, and Why are They Important?

Reserves are the funds councils set aside for unforeseen costs, future projects, or specific earmarked items. Councils are advised to maintain general reserves equivalent to three to twelve months’ net expenditure to cover contingencies and cash flow issues. Larger councils might keep closer to three months’ worth, while smaller councils, which have less flexibility, may hold closer to twelve months.

General Reserves vs. Earmarked Reserves

Hannah clarified that general reserves serve as a financial safety net for unexpected events, while earmarked reserves are allocated for specific future expenses like planned projects or asset replacements. Councils often earmark funds for upcoming election costs, equipment upgrades, or community improvement projects. Allocating reserves correctly is key to transparency and allows councils to respond effectively to financial inquiries, especially from auditors.

Creating and Justifying Earmarked Reserves

Many councils face the challenge of deciding when and how much to allocate as earmarked reserves. Hannah offered a few guiding principles:

• Identify Future Needs: Councils should identify foreseeable projects, like road improvements, building renovations, or technology upgrades, and begin earmarking reserves over time to avoid budget spikes.
• Adjust as Needed: Reserves should reflect the current scope of council responsibilities. Councils can revisit earmarked funds annually, adjusting based on actual or anticipated changes.
• Documentation: Properly documented earmarked reserves clarify for councils and the public how funds will be used, minimising potential objections to larger-than-expected reserve balances.

Maintaining and Building Reserves Post-Overspend

If reserves have been depleted due to unexpected costs, councils can replenish them gradually or, in urgent cases, increase the precept temporarily. Hannah advised councils to maintain consistency in reserve levels to avoid drastic financial fluctuations. The process of re-evaluating budgets annually ensures that any previous overspends are accounted for without burdening residents unexpectedly.

Practical Approaches to Setting and Monitoring Reserves

1. Regular Monitoring: Councils should track budget versus actual expenses monthly, keeping reserves aligned with expenditure patterns.
2. Use of Tools: Software solutions like Scribe offer tools to automate budgeting and forecasting, making it easier to adjust reserves in real time.
3. Transparency with the Precept: Breaking down the precept per Band D household can help councils communicate the real impact of changes, especially if reserves need to be replenished or increased.

FAQ for Town and Parish Council Budgeting and Reserves

1. What are General Reserves, and how much should councils typically hold in them?

Answer: General reserves are funds held by councils to cover unforeseen expenses or cash flow issues. According to the JPAG Practitioners Guide, councils should maintain a general reserve between 3 to 12 months of their net revenue expenditure, depending on the size and nature of the council. Smaller councils may hold a higher proportion due to less predictable expenses, while larger councils may hold less relative to their total budget, as they may have steadier revenue and expenditures.

2. What are Earmarked Reserves, and how should they be used?

Answer: Earmarked reserves are funds set aside for specific projects or anticipated future expenses (e.g., replacing playground equipment, traffic calming measures, or election costs). Unlike general reserves, earmarked reserves have no upper limit and are not intended for general, unpredictable expenses. However, councils should periodically review earmarked reserves to ensure they remain relevant and sufficient for their designated purpose.

3. Can Earmarked Reserves be carried over to the next financial year if the project is delayed?

Answer: Yes, earmarked reserves can and should be carried over if a project has not been completed within the financial year. Councils should continue holding these funds as an earmarked reserve until the project is finished. This avoids inflating the budget with unspent allocations year-to-year, maintaining transparency and continuity.

4. How do I calculate the impact of the precept on individual properties using Band D properties as a benchmark?

Answer: The precept per Band D property can be calculated by dividing the total precept by the number of Band D equivalent properties (a weighted figure provided by the billing authority). For example, if your total precept is £80,000 and your council area has 1,000 Band D properties, then the cost per Band D property would be £80.

The calculation per property:

• Total Precept ÷ Band D Equivalent Properties = Precept per Band D Property

5. How do councils build up earmarked reserves gradually?

Answer: To build up earmarked reserves for projects like playground upgrades or vehicle replacements, councils can allocate a portion of their budget each year. For example, if a playground upgrade is anticipated to cost £10,000 in five years, the council could earmark £2,000 each year. This gradual accumulation helps avoid large fluctuations in the budget and spreads the cost over multiple fiscal years.

6. If the council overspends and reserves are low, what actions should we take?

Answer: If reserves fall below the recommended level due to overspending, the council should consider:

• Budget Adjustments: Re-evaluate and reduce the upcoming year’s expenditures where possible.
• Precept Increase: Increase the precept to replenish reserves gradually, avoiding significant shortfalls in future budgets.
• Controlled Spending: Delay or defer non-essential projects until reserves reach an acceptable level.

7. How should councils handle unexpected grant income in the budget?

Answer: If the council receives unexpected grant income:

• Separate Tracking: Track the income and related expenditures separately from the regular budget. This can be done through earmarked reserves or a dedicated project budget line.
• Reserves Adjustment: If the grant is for a project extending into future years, move any unspent funds into earmarked reserves at year-end, ensuring funds remain allocated to the project until completion.

8. Is it recommended to hold councillor allowances in an earmarked reserve?

Answer: Generally, councillor allowances are part of the regular annual budget since they are predictable, recurring expenses. However, if allowances may increase significantly following an election, councils could consider setting aside a portion of election reserves to cover potential allowance increases, especially if a higher number of councillors claim them.

9. Is it necessary to have a separate bank account for reserves?

Answer: No, councils do not need to open a separate bank account for reserves. However, councils should clearly categorise and record reserves in their financial documentation to differentiate between general reserves and earmarked reserves.

10. If the council’s billing authority requires the precept submission by December, does this comply with regulations?

Answer: While most billing authorities require the precept by January, councils are ultimately subject to the deadlines set by their billing authority. However, if a December deadline is significantly earlier than usual, councils may wish to consult their county association to request a more lenient deadline that allows for proper budget review.

11. What should councils do if they have accumulated surplus funds beyond the recommended reserve levels?

Answer: Councils with surplus funds should consider:

• Earmarking: Designate funds for future projects, capital purchases, or asset replacements.
• Reducing the Precept: Temporarily reduce the precept if reserves are excessively high, especially if there is no clear planned expenditure.

12. How should one-off grants or uncertain income be treated in the budget?

Answer: If one-off grants are uncertain:

• Do Not Budget Until Confirmed: Avoid including them in the main budget until funding is guaranteed.
• Earmarked Reserves for Match Funding: If the grant requires match funding, place only the council’s portion in earmarked reserves, releasing it if the grant is awarded.

13. Can we create a reserve fund specifically for building maintenance on old structures?

Answer: Yes, councils can set up earmarked reserves for anticipated repairs on aging buildings. This fund helps cover periodic major repairs, while general, minor repairs could remain within the annual maintenance budget.

14. What options are available if the council must reduce costs due to high inflation?

Answer: Cost-reduction strategies could include:

• Energy-Saving Measures: Implement energy-saving initiatives in council buildings.
• Supplier Reviews: Re-evaluate supplier contracts and seek fixed-price arrangements.
• Delay Non-Essential Projects: Postpone projects that are not immediately necessary until financial conditions improve.

15. How should councils prepare for potential fluctuations in future precept requirements?

Answer: Councils should aim for a steady, incremental precept increase each year, reflecting inflation and planned projects. Large, sudden increases are harder to justify and manage, so councils should aim to adjust precepts gradually to keep pace with expected expenditures.

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