Manchester City Council

Capital and Reserves - an Explanation

Last Friday was Budget Council. It was a lively meeting with a fair few people exercising their right to protest but not I'm pleased to say in a way that interfered with the democratic process. There was a lot of debate at the end of which the Executive Budget proposals were approved with a number of amendments. The main amendment, that from the opposition was not passed, not least because senior officers advice to Council was that various parts of it were " unrealistic " and " unachievable ". In the meeting itself it was revealed that the proposed cut in spend on consultants was bigger than the spend on consultants - that doesn't quite add up.

However the main reason for this post isn't that but all the noise in the Twittersphere about various somes of money the Council could allegedly use to support its revenue i.e. service budget.

Let me first talk about the capital budget. The capital budget is essentially what we spend on fixed assets. That includes new buildings and major refurbishment of buildings, the acquisition of land or buildings, the acquisition of major plant, and investment in shares or bonds. The capital budget can be funded from the revenue budget, through borrowing ( within strict parameters set by government ), or from capital receipts. The Council can only borrow to support the capital budget i.e. it cannot borrow to pay for everyday services. Capital receipts i.e, the sale of assets can only be used to either repay debt or to support the Capital Budget.

So if for example we were to sell some or all of Manchester Airport Group, the money received would be a capital receipt and could only be used to redeem debt or for the capital budget. It could not be used to fund parks or libraries or other services. However, if we did sell all or part of the airport, that would reduce our annual dividend from the Airport, money we do use to support parks, libraries and other services. Redeeming debt might sound an attractive option except of course interest rates are now at an all time low and we have to pay significant penalties for paying off debt early.

Let me move on to reserves. Under the accounting rules the Council is required to operate under, any revenue monies not spent in the current year have to be accounted for as a reserve. So although it might appear that the Council has lots of reserves that isn't actually the case. I'm not going to go through all the reserves but hopefully enough to give a flavour.

It is often cheaper for the City Council to insure its own risks rather than take out insurance but it has to maintain a reserve to cover the risks it is self-insuring, the Insurance Fund. this is kept under regular review but in simple terms, the alternative to the insurance reserve would be much bigger annual insurance premiums. The HRA reserve can only be spent on local authority housing. The Capital Fund covers already committed capital projects, for example the three new swimming pools, where expenditure will fall in the next couple of years. The parking and bus lane reserve can only be spent the year after they have been accummulated and then only on transport, highways and related environmental items. The LMS reserve is the total of all the schools delegated budgets carried over to next year and can only be spent by the relevant schools.

I hope that's enough examples to give the picture. The only money that is not already committed in one way or another is the General Fund Reserve. That is there for crises and emergencies and our auditors require us to keep it at least around the current level i.e it isn't available to spend either. Just one other thing, reserves can only be spent once. So even if we could spend all these funds on current services, which we can't, it wouldn't prevent cuts, it would just delay them and for not very long.

If there are questions on this, will do my best to answer them.

There are 7 responses to “Capital and Reserves - an Explanation”

  1. thanks Says:

    thanks for clarifying, information aids arguments after all. On a separate matter - any plans to somehow spend a little more on cleanign up the city centre - it seems to be getting so filthy. Surely this is so important, conerts and art cannot be ignored and money spent on that isn't necessarily wasted as you often claim, but surely if the centre is full of rubbish then the backdrop to a cultural city is a bit tarnished. thanks for your posts.

  2. Simon Kensdale Says:

    Some questions – more for my general understanding than for any point scoring agenda.

    1. The General Reserve Fund .Who are these auditors who have control over a democratically elected body? Normally, an organisation pays auditors to provide a service. Auditors give advice, based on their specialist understanding and experience, but they do not give instructions. The Audit Commission was disbanded partly because it had too much influence over local government. It hasn’t been replaced by some secret society has it? (Here what concerns me is the transparency of the decision-making process. I think the Council should stand up for its own decisions and not claim that they are imposed by some outside agency, other than central government).
    2. What constitutes a crisis or an emergency? Wouldn’t you say that we were now, by local government standards, in a crisis and that therefore reserves built up in the past can and should be used? After all, other than earning a pittance in the way of interest, these reserves are not being deployed for the betterment of the community, and the community paid for them through their taxes. (I appreciate that delaying the evil hour in which cuts have to be made is not much of an achievement, but the current government and its policies will not last for ever and the economy will not flat line indefinitely. If the authority can weather today’s ideological attack it will be better placed to recover in a few years’ time. What concerns me is that if the correct defence is not found then there may be precious little left to revive in the future.)
    Simon Kensdale

  3. Larry Murphy Says:

    It is a pity that the opposition do not understand the financing of local government and make such absurd proposals. But perhaps they DO understand but would rather make cheap political points and take attention from the harm that their MP's are doing in supporting a reactionary Tory government that is decimating the public sector and plunging many poor people into even deeper poverty.

  4. thanks Says:

    Grant Thornton audits the council doesn't it?

  5. Richard Leese Says:

    @ Simon Kensdale Auditors don't decide but do advise and, if we are acting imprudently, can qualify our accounts. The General Fund reserve is really for events that could not have been predicted and budgeted for in advance. The current budgetary situation is certainly very serious, but as we are demonstrating not unmanageable. Utilising the General Fund Reserve to offset cuts would give us an extra three months and our financial position won't have changed much in that time but the Reserve does do better than earn a pittance in interest. We use it to cash flow the capital programme which saves us from paying a significant amount of interest each year.

  6. franky Says:

    Perhaps you can explain what these new swimmimng pools are. e.g. are they competition pools. The one proposed for Chorlton & withington means that kids have to go by car or some other transport, while currently they mostly walk there

  7. Richard Leese Says:

    The proposed new pools/leisure centres would be community facilities. They would be located where there is good public transport and they will still be walkable for their catchment area. Evidence from elsewhere suggests that modern facilities increase usage significantly.

 

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The blog of the leader of Manchester City Council, Councillor Richard Leese.

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