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Redundancies ‘being paid out of reserves’

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The government’s refusal to raise the limit on the use of capital receipts and borrowing is forcing councils to raid reserves to pay redundancy bills.

Local authorities have been told to fund more than half of the costs themselves after Department for Communities & Local Government figures showed councils had been granted permission to capitalise only £83m out of £216m applied for in 2010-11 to fund redundancy programmes.

Communities secretary Eric Pickles also revealed that any increase in next year’s £200m allocation would only be possible if it were matched by grant reductions. He told select committee MPs: “I am quite happy to take £600m out of the grant application to allow that to happen.”

Mr Pickles said that when he made the offer to the political leaders of the Local Government Association “they didn’t seem so keen to press the point”.

The government’s refusal to consider increasing the allocation has angered local government treasurers who believe councils are being forced to choose between rational transformation and prudent accounting.

Last month’s figures showed 58 councils had been allowed to capitalise just 38% of the redundancy costs they estimated, with three refused permission outright.

The trio includes Essex CC, which was told that its reserves, which total £188m of non-schools cash, were too large to warrant the use of £4.2m of capital funds.

Margaret Lee, Essex CC’s interim finance director, said the council was disappointed by the decision and added that it had previously talked to Mr Pickles who had agreed its approach to financial management was “appropriate”.

Essex’s unallocated non-school reserves total about £33m, which the authority said met best practice of 5% of expenditure and was “essential” for cushioning services against any in-year shortfalls and delays to savings programmes.

Its remaining £155m reserve is allocated for costs such as private finance initiatives, insurance and increasing waste charges, but some will now be used to fund redundancy costs. Ms Lee said: “[The reserves] are not for transformation programmes; they are following proper accounting practices.”

Despite this year’s refusal, Essex intends to apply for permission to use capital funding next year when the amount allocated is likely be slightly larger, as will be the number of redundancies.

Ministers have stated that the capitalisation directives will total £200m in 2011-12, compared with £155m in 2010-11, but DCLG has not yet indicated whether the allocation will also cover pension costs and “exceptional” requests, as about half of this year’s allocation did.

An Association of North East Councils spokesman said the limits to capitalisation directives were driven by a Treasury insistence on a “pound to pound adjustment to the grant” - despite the directives relating to councils’ own assets and “not a single penny” going from Treasury to local government.

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