A third of councils have said they have increased reserve levels because of uncertainty about future funding, according to a survey of finance directors.
The figures come from LGA research which was carried out in response to ministerial criticisms of the increasing level of reserves at a time when the government is deciding what level of cuts councils should face in 2015-16.
A third of councils said they had added to their reserves in 2012-13 because of uncertainties about their funding position once the business rate retention system is introduced in April 2013.
Under the new retention funding system a fall in business rates income can cause councils to see a fall in funding of up to 7.5% of their baseline funding level.
Carolyn Downs, LGA chief executive, cited the research when she appeared before the public accounts committee on Monday and told MPs that increases in reserve levels were “quite the reverse of poor financial management, but [were] very prudent financial management”.
Professor Tony Travers, director of the Greater London Group at the London School of Economics, said increased reserves were “a what a rational financial planner would do” given the prospect of further cuts as the government failed to meet deficit targets. Prof Travers also told MPs that reduced reserve levels would contribute negatively to the public sector deficit.
The LGA’s survey, which urged members to respond because of an “an urgent need to set the record straight on local authority reserves and their capacity to be used to plug future funding gaps”, also found councils were adding to reserves because of uncertainties about welfare reform.
According to a report to the LGA’s finance panel last month, 28% of councils had added to reserves in 2012-13 because of worries about the localisation of council tax support, under which authorities will take responsibility for the benefit from April 2013 but with a 10% cut in funding from local government.
Just under a quarter - 23% of councils - had added to reserves because of concerns about other areas of welfare reform such as universal credit and the social size criteria or ‘bedroom tax’ changes.
Ms Downs told MPs this week: “There is a huge amount of uncertainty…about council finances.” Every council was expecting further reductions in the ongoing spending review for 2015-16 funding and they were “saving for a rainy day”.
She also told the select committee that 40% of councils had added to reserves this year because they had delivered savings faster than expected and 16% had reserves which they intended to use for growth and infrastructure projects, a key focus for the government.
She was responding to criticism of the fact that unallocated reserves reached £3.6bn in March 2012, but she said this was only sufficient to keep local government running for two months.
Ms Downs also told MPs that government caps on the use of capital funds for one off revenue costs such as redundancies could also lead to increased reserves. “We need greater flexibility,” she said.
The government has traditionally allocated a limited amount each year, which councils must individually apply to use, although it has made no allowance in 2012-13 so far. The LGA has called for the government to change the rules and allow councils to decide for themselves how much capital funds to spend on large one off costs. “If we can’t do that people will build up reserves to pay off all those one off costs,” Ms Downs said.