PRECEPT SETTING CALCULATIONS

Question

Readers please discuss.  What is the correct way to set the precept?   Our RFO simply reviews the year round budget and whatever the result is calls that the precept .  Last year I found substantial savings in that several EMR pots had no legal basis. I felt some of this money should be returned to the electorate through a reduced precept.  The RFO’s view was that Reserves were not to be included in the calculations and that any savings would be vired to and parked in general reserves (but within the 3/12 months limits)  Then during the ensuing year all reserves would be examined in detail and if changes were warranted well, they would be simply vired between the EMRs and General Reserves total. At the formal precept meeting Cllrs forced a transfer from General Reserves  to reduce the precept (£35K) but none of them knew that a £24K underspend (a common event)  was due to happen on the current year’s budget which would be then transferred to General reserves at the year end .  This whole process allowed the clerk the ability to adjust reserves as she saw fit  ie savings were passed on to the electorate  if she  so chose rather than "as of right"/automatically.

My view is that Reserves are budgets just like the year round budget and should be set and fixed at budget/precept setting time .  Our clerk's, Chairman F and GP s view is that Reserves are completely separate and are set in any way the PC chooses outwith of precept calculations. My personal feeling is that the flexibility in General reserves encourages this approach and that they like everything else should be set at a fixed amount in the precept setting process.

IMHO there should be fixed way of calculating of the precept .  As I say please discuss

Answer 1

The tail is wagging the dog.

Answer 2

Each council is different so it's difficult to identify a "right" way to do things but a general reserves policy, irrespective of the numbers, can be helpful.  For most parish/town councils, the JPAG guide suggests that between the equivalent of 3 - 12 months planned expenditure is considered appropriate to hold as general reserves plus amounts held for identified projects being earmarked separately.  So, not sure what you mean by "EMR pots had no legal basis".
For my council, the budget is drafted by the RFO based upon a combination of previous year experiences, inflationary amounts etc. for routine expenditure items plus funds for potential projects or one off expenditure items which are usually identified but not necessarily agreed yet.   So, for example, our current draft budget for next year includes a notional amount for VE Day celebrations albeit no specific projects/events have yet been identified.  Once we have a total expenditure figure, that figure is further adjusted to show where expenditure might come from an EMR amount (in our case, we've been putting money aside for a major capital project) or from general reserves leaving a figure for expenditure to be funded from that year's precept.  Clearly this is a bit of a balancing act and not just applying a formula.  The final precept figure also takes into account our stated reserves policy which has been agreed separately and reflects the JPAG guidelines.
It is not an exact science to be honest and as you've experienced, an underspend against any project this year can emerge when you get closer to the year end, in which case the funds are transferred to general reserves, possibly to an EMR if they relate to an underspend for a specific project where timings haven't worked out as planned.  If appropriate, this may be reflected in a later year's precept calculation if a project doesn't materialise at all.

Comments

Thank you DW.   You have clearly stated that "The final precept figure also takes into account our stated reserves policy which has been agreed separately and reflects the JPAG guidelines".  That indicates to me that the total expenditure is the sum of the year round budget, plus the agreed EMR and General reserves totals less income . Once set I don't  have a problem with money being vired between the various budgets.  In my case (because reserves were never interrogated ) I found money (£100k) allocated to 2 EMRs for which the PC had no powers.  In the short term these "savings" were vired to General reserves where they stayed until a home could be found for them.  I argue that the GR should be a set amount not within a range .   I further argue that the precept should set by taking the sum of all budgets reduced by the forecasted cash in hand at the year end  but of course my PC whilst it may monitor its year round spend it does not produce a year end forecast .   My opinion is that the current flexibility in the way the precept is set works against the best interests of the electorate.  Once you build in options you build in abuse

---

We may have to agree to disagree here.    As I said, all councils are different with differing levels of responsibility and of course ambitions.  The general reserve "range" indicated by the JPAG guide recognises this.  I believe flexibility is a key element to ensuring parish and town councils are able to serve the needs of their residents.  Personally I think a year end forecast is essential as not all expenditure is incurred in equal proportions but setting the budget when we have to does mean that unplanned items (income as well as expenditure) can turn that forecast into a nonsense by the year end so it does need to be taken in context.

---

I note you say  "flexibility is a key element to ensuring parish and town councils are able to serve the needs of their residents"  but given the precept is designed to ensure you have sufficient funds to cover your NRE  why do you need flexibility when you can overspend and never run out of money.   Equally if it was  huge amount well you could borrow money .   I think the whole reserves "flexibility doctrine" has led to a great deal of unwarranted money being held in reserves and the lack of a defined system for calculating the precept simply enables this to continue.

---

"when you can overspend and never run out of money"?  Not sure where that came from but I am fairly certain a parish near me would wish that to be true!  And you know borrowing by a parish council is only possible with the Secretary of State's approval/permission, right?
External auditors can, do and will comment on what they believe to be excessive reserves in their report where those reserves are held to be in excess of the recommended amount.
The flexibility I refer to is the flexibility for a parish to determine what is appropriate in their own circumstances rather than set the precept according to a "formula".   It is for the council to determine what is appropriate rather than a civil servant.

---

Right DW lets get down to the nitty gritty.    Year starts off with line 8 on AGAR at £600k .  This equates to EOY total of reserves so £540k in EMR and £60K in General reserves (GR).    Year round budget is circa £300k .  So at start of year precept set at £300k to cover year round budget and reserves left as is ie not reviewed.   So at this stage advice is GR amount  should be about 3 months NRE so  fine its circa 20%  just below 3 months .  During year it is established that a £100k EMR pot is invalid so money vired temporarily to GR which is now £160k (53%) just over 6 months .  Come precept setting time I ask that GR be reduced to nearer the recommended 3 months and that this money be used to reduce precept.  Clerk say “no we don’t include reserves in any calculations so reserves stays as is” .   They say that the required review of EMR reserves will be carried out during in the following year and any changes will be vired to or from GR.   This means that if no review of reserves  is ever carried out, the grand total allocated to all reserves cannot be increased or decreased and that cannot be right .  The thing that makes this possible is the flexibility allowed in GR .  To me it says if your NRE is circa £300K then your GR should be about 3 months 25% .   The problem is the clerk quotes “no, no ,no it can be between 25% and 100% if we say so” .   Then I as a resident say, “OK justify the 53% as you are accountable to me”.  The PC then responds, “we cant and we don’t need to”. The current advise is contradictory
The upshot of all this is that the flexibility built into the 3-12 months guidelines is too wide and commonly misinterpreted as a reason why PCs can retain up to 12 months without any justifiable reason.
I argue that the only way “accountability can be assured” is by having a formula which fixes GR at an agreed level.  The converse argument is of course that EMRs can be set at whatever level you decide.  Personally I think reserves are out of control

---

Interesting reading and have a few comments:

Our local unitary council is basically bankrupt and just about keeping going  - that's probably the case for many. At some point they will need to stop providing some services, reduce them and/or devolve them further to parishes. Discussions have already been taking place on and off about this. Should parishes prepare for that highly likely (in our case definitely coming) situation by keeping substantial reserves? Or would you rather they put precepts up if/when needed by a very large percentage?

Also like it or not councils are basically businesses with employees, liabilities and legal responsibilities. Would you run or expect a business to only have enough resources to survive for a few months if things went bad? And while auditors do comment on large reserves they have no understanding of the situation a parish is in and I (and my council) would happily defend our choices of keeping substantial reserves if challenged.
Further to that, I also agree with DW that a set formula cannot possibly allow for the nuances of the hundreds of different councils, the financial state of their unitary council, local challenges and future costs like land purchases or legal fees that might come their way.

---

Clerk 375 .  Firstly why would any PC as an independent legal entity accept any additional power/responsibility being delegated to it without the money coming with it?  And secondly if it did accept any such  offer where would the extra money come from to pay for it other than by increasing the precept.  Yes you could in the short term raid the General reserves but then you would want to replace that money would you not.   I cannot see why reserves are not treated as  apart of the budget and funded as such .  The problem is that reserves are not subject to any real control and used as a dumping ground based on a principle that you can never gave too much money .  A further problem is that no-one has any real data on PCs to even guess at the amounts of reserves that are actually held .   Somebody IMHO needs to produce a paper based on "the relationship between the precept and the level of a PCs reserves . In the meantime I believe reserves like all budgets should set at the start of year and adjusted /justified as required

---

If only it were the case that principal authorities delegate cash for services that it choses to remove or reduce.    Never known it to happen.  Frankly, if things like public open space grass cutting more frequently than twice a year or maybe running public toilets are important to your parish then why shouldn't you take that service on if your principal authority decides to remove or reduce that service?
I've had experience of a small parish, some years ago, that had used its reserves over several years to fund, in effect, a zero increase in precept for its residents.  Then there was a funding opportunity from the principal authority to refurbish an aging play area.  The grant was awarded but the council were required to make payment for the agreed work first and then claim it back from the grant awarding body, less that element which the parish had to co-fund.  The work couldn't go ahead as the parish didn't have sufficient reserves to fund that project up front.   As I said, each parish is as individual as the members that make it up and have differing needs.  A 3 month general reserve as a formula wouldn't have been enough whereas a 60% general reserve would have been.  It sounds as if your council is meeting the recommendation as far as level of reserves is concerned.

---

If an OPTIONAL  new cost service arrives part way through a year sure you can vire money from general reserves or indeed any other budget  to pay for it and then for the next year you simply build it into the year round budget .   Then you would have to recover the GR spend through a precept increase .  I agree the level of reserves needs much more detailed guidance than presently given  but they should always considered as part of the precept calculation . The problem is that many PCs treat them as being totally separate and as such they  not critically examined as part of the budget setting  process.

Answer 3

As Delboy's Wife has highlighted, the breadth and complexity of the sector requires flexibility to allow individual councils to determine a way that works for them. The majority of local councils are at the lower end of the financial spectrum, where significant reserves are rarely an issue. Far from being hoarders of public money, many find themselves unable to realise their ambitions due to a lack of funding. In the current financial year, 6,048 councils set a precept of less than £20,000.

Comments

I hear the argument re smaller Councils but I am only concerned with mine.   I agree there is a need for a separate governance guidelines  for smaller medium and larger Councils  and we all know these are missing.   I would add that I have found a PIR about this issued to one PC . Meanwhile I  have raised it with our EA.  Interesting debate as I am always happy to listen to informed opinion about the bigger picture .  Thanks

Answer 4

While I agree with comments saying each parish is different, so it's difficult to generalise about the "right" level of reserves, the OP has a valid point. The budget setting process should take account of the level of reserves. 

How the budget requirement is calculated is set of in legislation (section 49a Local Government Finance Act 1992).

https://www.legislation.gov.uk/ukpga/1992/14/part/I/chapter/IV/crossheading/calculations-by-local-precepting-authorities