A number of councils have complained after the BBC last week named them as at risk of running out of reserves.
In December, the Chartered Institute of Public Finance and Accountancy published a briefing on its emerging financial resilience index which claimed that 12 councils could run out of reserves within four years at current rates.
Last week, the BBC published a list of 11 councils it claimed its own analysis revealed would be on the list.
However, a number of councils this week described the figures as “misleading”.
Dubbing the BBC report as “spurious”, Rob Gledhill, leader of Thurrock Council, said: “This report appears to be based on incorrect assumptions and faulty maths.
“The idea that Thurrock Council could be in danger of running out of reserves is ludicrous.”
He complained that the BBC have included earmarked reserves as part of its calculations, “when they have no bearing on financial resilience”.
He said: “Earmarked reserves are set aside to be used to deliver specific improvements to the borough whereas general reserves provide a true measure of resilience.
“Our general reserves increased by almost 40% from £8m to £11m in 2017/18, which is a true indicator of how well our finances truly are.”
Christine Grice, cabinet member for finance and resources at London Borough of Greenwich, which also appeared on the list, said: “We are a well-run council and our financial policies and procedures were endorsed in last year’s independent audit, which stated that we ‘continue to maintain a robust reserves position that is stronger than the majority of other London boroughs.’”
She said that most of the decrease in reserves was due to investing in regeneration projects.
This week, Somerset County Council, another council on the list, reported that it had turned a projected overspend of £12.1m for the last financial year into an underspend of £5.9m.
A spokesperson from Somerset said: “We’re not at any risk of running out of money, our latest outturn report shows us putting considerable sums into reserves.
“In our case, the reported figures are also skewed by earmarked reserves set aside for – and then spent on- major flood prevention schemes funded by central government.
The spokesperson said the flooding cash – totalling around £30m – was not spent on the running costs of council services.
Another riposte from an authority on the BBC list came from Knowsley Council, which said a significant reduction in its reserves was down to a one-off payment of £16.6m in 2018 to cover three years’ worth of pension contributions.
It said that taking this money from reserves meant it had been able to fund the pension costs upfront and transfer money back from the permanent budget on an annual basis.
This, it said, means the end result will be no decrease in its reserves position.
Jane Aston, Knowsley’s cabinet member for resources, said: “The reporting of these figures creates a very misleading picture of life here in Knowsley.
“Our position has been misinterpreted, which is very frustrating.
“This is actually an example of how we are managing our budget pressures well and using our finances innovatively to maintain essential services and support at a time of significant cuts.”
Asked to respond to the criticisms, a BBC spokesperson said: “This data was rigorously checked and we used a standard methodology to come up with our figures.
“Responses from the local authorities mentioned were included in the article.”
The BBC said its decision to include earmarked reserves alongside unallocated reserves was in line with the methodology used by CIPFA in its resilience index.
The index was originally touted as giving councils a traffic light score to provide a better early warning system for councils that might be heading for financial trouble.
However, the episode demonstrates the complexities of interpreting individual councils’ financial risks, and the sensitivities surrounding naming individual authorities.
Joanne Pitt, local government policy manager at CIPFA, said: “With many councils under significant fiscal strain, the resilience index is a diagnostic tool for recognising potential signs of financial risk.
“The index is not a predictive model but is expected to help chief finance officers to assess financial sustainability.
“We continue to work closely with key stakeholders to develop this tool ahead of its release to ensure it meets the needs of the sector.”
Room151 understands that in discussions with stakeholders over the formulation of the index, CIPFA discovered differences in how councils allocate spending to earmarked and unallocated reserves.
It therefore concluded that the best comparative indicator of the strength of reserves is the total figure.
However, it acknowledges that the use of earmarked reserves may indicate strong financial management rather than financial risk.
