The council is sometimes asked why it has financial reserves when there are budget gaps to be filled. The first point to make is that the majority of the reserves held by the Council are held for specific purposes and they don’t represent spare cash that can be used to fill budget gaps.
There are a number of reasons why the Council holds reserves and these include:
Funding received from Scottish and UK Government and other sources directed towards a specific purpose or project that is received late in a financial year and cannot be spent in year, or funding that can be used over a longer period of time for a specific purpose or project. As this funding is directed (quite often by Government) towards a specific purpose or project it cannot be spent on anything else. Examples include Crown Estate funding and Place Based Investment funding that has been received late in the financial year and will be spent across financial years.
To fund one-off costs and provide funding for investments, for example, transformation programmes, capital investment contributions, redundancy costs. These can span several years and support the long term sustainability of the area. A reserve may be built up to fund projects over time. A recent example includes a reserve built up to contribute to the development of a new school on Mull. Another example is a proportion of Council Tax income earmarked each year to be spent on the delivery of affordable social housing, where the income and expenditure will not match in-year and the reserve is created to allow flexibility on when the spending occurs. In 2024-25 and 2025-26 there was a temporary reduction to the employer’s pension contribution rate and the Council took a prudent decision to hold the saving in reserves to be used for transformation and to smooth the budget savings over a 4 year period.
It is best practice to hold a contingency fund which provides a working balance to help cushion the impact of uneven cash flows and cushion the impact of unexpected events, for example, the severe weather events that the Council has experienced over the last few years which led to significant costs to repair and restore infrastructure and roads. It is up to authorities to make their own judgement on the level of reserves taking local circumstances into account, however, a reasonable benchmark is 2% of the Council’s net budget, which is currently circa £6.5m.
The funds held in reserves are regularly reviewed as part of the routine budget monitoring that is reported to the Policy and Resources Committee throughout the year and if it is deemed that a reserve is no longer required, the funding will be returned to the General Fund (and marked as unallocated). As part the of budget planning process each year, consideration is given to all reserves and whether they still remain relevant to the current priorities and demands of the Council. On occasion, the Council may choose to use some reserves to assist in balancing the budget, but this is a one-off measure and this needs to be carefully considered as this simply delays the need to make a longer-term saving and the reliance on reserves to balance the budget could indicate financial sustainability issues. Reserves should be used in a planned way.
