Council chiefs have pushed back as the Treasury eyes up the sector's reserves in the run up to this year's Spending Review, The MJ understands.
Mandarins at the Ministry of Housing, Communities and Government (MHCLG) have previously told councils they expect them to dip into their reserves to cover pandemic costs.
And now it is believed the Treasury has been looking at the sector's already-earmarked funds, which have reportedly increased by 10%.
It is expected that senior MHCLG officials will ask councils that have added a lot to their reserves to explain their decisions.
Section 151 officers have pointed out that due to a technical quirk to do with the timing of business rates returns and the receipt of extra government funding to help with the pandemic many councils were expected to report a temporary boost to reserves this year.
In addition, research published last week found UK local authorities planned to use more than £500m worth of reserves to balance their books in 2021-22.
Managing director of chief executives' organisation Solace, Graeme McDonald, said it should not be a surprise that some councils have increased their reserves over the last 12 months ‘given the huge uncertainty, late policy shifts and lag in service demand in important areas'.
He continued: ‘I get no sense councils are building up their reserves unnecessarily, but [rather] making prudent choices about future demand and investments.
‘Let us hope Westminster doesn't focus entirely on amalgamated figures and headlines, but spends time understanding the variations and appreciates the level of future demand.
'It would be laughable to suggest the sector has got a nest egg hidden away.
‘We know the next spending round will be tight for all of us and it is hard to believe the Treasury will attempt to [use] this as the fig leaf to cover further council cuts.'
Local government policy manager at the Chartered Institute of Public Finance and Accountancy, Joanne Pitt, added: ‘Over-optimism about the financial resilience of local government is concerning, especially as we enter this post-COVID period.
‘The true position of a council's reserves may have been obscured by the payment of COVID-19 support grants and it is important that this is fully understood.'
One senior local government officer with knowledge of the conversations between Whitehall and the sector suggested the Treasury was ‘scraping the barrel for excuses not to give councils a real-terms increase in funding'.
Sector representatives have warned that most councils will not be able to manage solely using reserves and will also need to make service cuts this financial year.
But Whitehall officials have still told council officers they believe 75% of local authorities have been over-funded for COVID costs.
Reserves figures vary widely across the sector.
Stoke-on-Trent City Council has transferred more than £11.5m into its reserves after recording a surplus at the end of the last financial year.
However, auditors said the financial impact of COVID-19 on Leeds City Council had highlighted the ‘inadequacy of the council's general fund reserves and balances to cushion the impact of major events'.
Finance spokesperson for the County Councils' Network, Cllr Carl Les, said local authorities recognised that it was ‘prudent to keep enough unallocated reserves to be financially sustainable and for crises that are happening more frequently, such as the pandemic and climate events, and for which our residents expect us to deploy resources immediately'.
He added: ‘Using reserves to fund future increases in demand for services is not sustainable and simply stores up problems for the future as they can only be spent once.'
Chief executive of think-tank Localis, Jonathan Werran, said: ‘I hope the Treasury has now got a more nuanced understanding of local government finance than all the talk of piggy banks years ago.
'Council reserves are not a piggy bank.
'Reserves are there for good reasons.'
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