In anticipation of a potential multi-year settlement for policing and discussions between the government and police sector, the issue of reserves has surfaced once again.
Reserves are not just spare cash that can be used for any spending need or plugging gaps in funding settlements. Earmarked reserves often have very clear objectives and can be contractually needed for commitments such as PFI payments for police buildings. The level of usable reserves is also a clear indicator of the financial health of an organisation.
The Home Office recently published PCCs reserves for 2019 and 2020, which showed a slight reduction from March 2018 to March 2019, followed by an increase from March 2019 to March 2020. Such reserves have been of great interest to ministers over recent years, but when negotiating a settlement for police, we must remember the reasons why reserves are held in the first place.
There are also solid accounting reasons for items being placed into reserves, which can impact on their overall level in the short term. For example, anyone looking at the level of police reserves as of 31 March 2021 should take into account the COVID-19 related funding issued to PCCs in March. Last-minute payments within the financial year can effectively skew reserve levels at the year end.
Grant income must be accounted for on receipt, unless subject to potential repayment conditions, so if monies were paid across to police bodies in March but related to the following financial year, that income would be included in the 'old year,' boosting the level of reserves. It is important to get behind the details of changes in reserve balances to fully understand the underlying financial position.
The Home Office requires a PCC to justify a general reserve of over 5% of overall budget. But there is value in asking different questions. When considering financial sustainability, for example, asking if reserves continue to be used at the current rate, how long will they last?, can reveal a stark picture for some PCCs. Further questions could then be asked about which reserves are being used, why, and if higher levels of reserves are required.
Whether reserves are built up or run down over the short to medium term is the responsibility of the PCC and their CFO, based on their police and crime plans, medium-term financial plan, capital strategy and existing commitments. PCCs must have a robust approach to reserves and a clear reserves strategy, which links to the medium-term financial plan, capital plan, strategic plans, transformation programmes, and any financial resilience assessment undertaken to comply with CIPFA's Financial Management Code.
Reserves are an integral part of sound financial management and should be seen as such by all of those involved in police funding over the coming years.
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