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Acceptable levels of reserves
Explanation of significant variances in AGAR

Acceptable levels of reserves

A Smaller Authority must be able to justify the level of reserves it is budgeting for in line 7 of Part 2 or Part 3 of the AGAR. 
These reserves may be held for one or more of the following purposes:
  1. Working capital – i.e. enough to keep the Authority’s finances afloat to allow for normal day to day / month to month fluctuations in the available cash.
  2. Earmarked projects – where an Authority has approved a future project, e.g. playing field improvements, it will want to save up for this over a number of years before commissioning the improvements. Such savings may have come from donations, events or fees charged but they have no restrictions on what they can be used for other than the Council has designated/declared that they are being held for X purpose.
    NB: A Council needs to formally designate and minute decisions to earmark funds. And similarly, if the Council require to use these 'designated' general funds for a purpose for which they have not been designated, the Council needs to take a decision to un-designate/re-designate the funds and minute their decision. This is part of the budget review to ensure the Council are holding appropriate levels of funding and using it as the Council intended to when the Council put their annual budget together.
  3. Ring-fenced items – reserves which may have been raised or donated to the Council for a specific or restricted purpose which cannot be used for anything else. For example, S106 would be ringfenced as there are limitations on what it can be used for.
  4. Known expenditure – where the receipts and payments basis is used, you need to have enough cash to pay your creditors.
  5. Risk mitigation – all Authorities face risks.  As part of your review of the risks, you should be considering how to mitigate each risk to acceptable levels.  Some of this will be by insurance, but some may be ‘self-insured’. You should consider this in connection with your assessment of risk (see line 5 of the Annual Governance Statement).
If, after preparing your budget, you are projecting a higher level of reserves than you can justify, you may want to consider reducing your precept.