“Borrowing and treasury management in councils”
Agenda item 2 is a briefing on the Accounts Commission report entitled “Borrowing and treasury management in councils”. I welcome from the Accounts Commission Graham Sharp and Pauline Weetman; and from Audit Scotland Fraser McKinlay, director and controller of audit, and Gemma Diamond, senior manager. Graham Sharp, from the Accounts Commission, would like to make a brief opening statement.
Thank you, convener. The report that we are here to discuss today on behalf of the Accounts Commission looks at borrowing and treasury management in councils.
Borrowing is a major source of funding for councils to invest in infrastructure projects, such as schools and roads, that are essential for the provision of key public services. At the same time, in today’s environment councils have on-going challenges in relation to reducing public spending.
The report looks at how councils are demonstrating affordability in making decisions to borrow, and at the different positions that councils are in as a result of historical borrowing and policy decisions. The report focuses on long-term borrowing. We did not evaluate day-to-day cash, investment and borrowing transactions or look at other forms of debt, such as public-private partnerships.
The report is aimed at councillors as the key audience. It considers the clarity and purpose of treasury management reports that are presented to them, which are often very technical in nature. It also considers the skills and expertise that councillors need in order to perform their key scrutiny role.
During 2014, we looked at treasury management reports relating to 12 councils to get an indication of the clarity, content and variation of financial policy among councils. We interviewed officers and councillors from six of the 12 councils to get a more detailed insight. The report provides a summary of the main themes and conclusions arising from that work and identifies what more needs to be done. The messages and recommendations in the report apply to all councils, and our expectation is that financial officers, along with councillors, will review the report, assess themselves against it and implement the relevant recommendations.
I now turn to what we found. Borrowing by Scottish councils is £12.1 billion, or around 82 per cent of councils’ total debt. Councils take on debt to invest in capital assets such as schools and roads. As I noted, our focus for this audit was on the borrowing element. We looked at councils’ borrowing since the introduction of the prudential code 10 years ago. The prudential code is a framework to support councils and help them show effective control over levels of, and decisions relating to, capital investment activity, including borrowing. We found that just over half of councils have higher levels of borrowing now than they had 10 years ago.
Councils are following relevant codes and regulations, and they are clearly demonstrating short-term affordability of borrowing and other debt. However, we have found it difficult to identify how officers analyse long-term affordability and communicate that to councillors through strategies and reports for councils. For example, councils have information on capital investment requirements for up to 10 years and on the timing and cost of repaying borrowing, and they also have forecasts of future interest rates, but there was no analysis bringing those together with budget scenarios to assess affordability in the longer term.
Treasury management is a professionally run function in councils. There are signs of more joint working and of integration of activity with the capital investment function, which is a positive step. We see potential issues in the future around the transfer and succession of skills and experience in that area and suggest that councils might wish to plan for that together.
Councils have a range of governance and scrutiny arrangements, which is fine. The detailed arrangements are not for us to prescribe, but they need to be consistent across each council to enable councillors to build up knowledge and experience in this technical area. Councillors need to ask, and to be equipped to ask, more questions of officers about the affordability of borrowing and other financing options, particularly in the longer term, and about performance based on prudential and other indicators as reflected in year-end reports. Reports for councillors could be improved. They can be very technical documents and they should be written with councillors and the general public in mind.
I will quickly summarise our recommendations. The report makes recommendations that are aimed at: helping councils develop treasury management strategies to present a wider, more integrated strategic view of borrowing and treasury management; encouraging councils to be more open about, and to report on, longer-term affordability; and helping councillors to scrutinise treasury management activity.
The first main recommendation is that councils should prepare the treasury management strategy with councillors as the key audience, and that they should present a wider, strategic view of borrowing and treasury management. That should also cover how the borrowing strategy is informed by corporate priorities and capital investment needs.
Secondly, councils need to create more detailed and longer-term borrowing and treasury management analysis that is informed by their financial strategies. It should include scenario planning, the analysis of capital financing options and the use of prudential indicators over a longer period than the minimum three-year requirement in the prudential code. Year-end reports should provide an overall assessment of performance and treasury activity.
Finally, councillors and officers should review governance arrangements to ensure that they provide councillors with a wider strategic view of borrowing and treasury management and that councillors have access to all relevant treasury management reports. They should also ensure that training for councillors provides the appropriate level and balance of treasury management knowledge and scrutiny skills. We have provided a short guide and scrutiny questions for councillors to assist that process, published separately from the report.
My colleagues and I are happy to answer any questions that the committee has on the report.
Thank you, Mr Sharp.
I refer the witnesses to page 31 of the report, which states:
“Council governance structures are in place but not all meet code requirements”.
Will you elaborate on that?
We found that councils were all generally following the principles of the code but, sometimes, the requirement for everything to be approved by the full council was not being followed. The full council might approve the minutes of another meeting where the treasury management strategy was approved, so the strategy was not going to full council to be approved.
How many councils did you find in that position?
Two of the six that we looked at.
So only six councils were looked at in this assessment.
That is right. We looked at six councils in detail.
In percentage terms, therefore, the figure could be even higher.
We do not have any evidence for other councils, so I am not able to comment on that.
Should that part of the code not be pursued to ensure that the requirements are met?
The councils all consider that they are meeting the general spirit of the code’s requirements, because the full council would have the opportunity to see the strategy and would approve the minutes of the committee at which the strategy had been approved. Certainly the strategy is available to all members, but that approach does not follow the exact requirement in the code that the full council approve the treasury management strategy.
As Gemma Diamond said, we took a sample, which is what we often do in our work. However, if it would help the committee, we could see whether we could find out that specific information for all 32 local authorities.
Correct me if I am wrong but I believe that in your opening remarks, Mr Sharp, you said that councils were meeting those requirements—I am sure that you referred to the code of practice. Does that comment apply to everything except the point that is made in the paragraph from which I just quoted?
In my opening remarks, I said that, in material terms, councils are meeting the code. The more significant point that I think we are trying to get across in that paragraph is that we believe that the code does not go far enough in a number of respects, particularly with regard to maturity of borrowing and looking far enough into the future.
On page 5, the report says:
“Overall borrowing has remained at around £12 billion for the last three years, with total assets of £39 billion.”
In fact, that point is made quite often throughout the report. Does that mean that you are quite content with borrowing sitting at around a third of the level of assets? At what point should we as committee members be concerned about the level of borrowing in relation to assets?
There are a couple of levels to that question that need to be dealt with. First of all, we are talking about total figures, and I would be neither content nor discontent on the basis of aggregated figures. What matters are specific councils’ financial plans and strategies and how they justify the borrowing and other debt that they have taken on in terms of sustainability, and that sort of thing is not captured in aggregated figures.
Secondly, we have included the asset figure to give a feeling of scale. Because borrowings are serviced and repaid from future revenues, we really need to look at future projections. The situation is not quite the same as that in companies, where you can have asset cover for properties that are realisable in the market, for example. Clearly, the assets that councils have are largely infrastructure ones that provide services instead of generating an economic rent, so we have to look at individual councils and their plans.
I am an economist, not an accountant, but I note that you constantly mention £12 billion of borrowing against £39 billion of assets. The way I read that comment, it seems to be providing a bit of comfort; it is as if you are saying, “We’ve only got £12.8 in borrowing, so we don’t need to worry.” If the figure for borrowing was £30 billion or even £38 billion against £39 billion in assets, would that be a cause for concern? Would you still be looking only at individual councils and what they are doing?
As I said, I would assess that on the basis of individual councils’ specific plans and borrowings, not on the aggregated figures.
I do not suppose that using those numbers is designed to give comfort or otherwise; rather, it is designed to give a sense of scale. Similarly, with reference to some of the conversations that we have had with the committee in the past about levels of reserves, it is not right for us or the Accounts Commission to come up with a magic number for what is good or bad, or worrying or not worrying. As Graham Sharp explained, we make the point so strongly in the report because it is important that the levels of borrowing are understood in the context of a council’s long-term financial plans. That is the bit that we think could be strengthened.
09:45
On the financial plans for individual councils, the histogram in exhibit 4 on page 13 shows that East Lothian and West Lothian have probably more than doubled their borrowing in the past 10 years. We also see significant increases in Edinburgh and South Lanarkshire. In the rest of the councils, there has been very little decrease, as Mr Sharp said. Is there any particular reason why those four councils have seen a fairly dramatic increase in borrowing?
I will kick off; if we do not have the detail, I will be happy to come back to the committee because, as you say, the numbers are striking.
From other audit work that we have done in the City of Edinburgh, I know that one of the specific reasons for the increase in borrowing there was the trams. Gemma Diamond might be able to help with the reasons in East Lothian and West Lothian.
I do not have the detail on it all. It essentially depends on the council’s asset management plan and capital investment plan over the period. Exhibit 4 shows that the councils all had different plans over that time. For example, West Lothian has had significant investment in its assets and has used borrowing as a means of funding that investment.
Who is ultimately responsible for borrowing by councils?
I believe that the councils themselves are legally responsible for their borrowing.
The councils are responsible, not the Government.
Correct.
Councils are completely independent.
They are.
Thank you.
Paragraph 16 states that 17 of the 32 councils increased their borrowing, but paragraph 18 says:
“fewer councils are borrowing now than ten years ago”.
The level of debt seems to be bouncing along within the same sort of margin. However, we have just heard Mary Scanlon say that some councils have substantially increased their borrowing. Presumably, that means that some councils have decreased their borrowing.
Yes. You can see from the histogram that some councils have reduced their borrowing. There is a timescale issue between those two paragraphs. Gemma Diamond might be able to expand on that.
However, that is one of the reasons why you need to look at borrowing on a council-by-council basis. Each council is in a different position when they come to look at their future requirements for services and what that means for their infrastructure investment. They are also in a different position when it comes to the condition of their existing estate, their financial options and the revenues that they might look to in future. Some councils might have particular revenue sources that are specific to them.
All those things go together, in terms of cycle and the absolute position, to determine what is reasonable. That is why you see different patterns in different councils as well as different levels. I do not know whether Gemma Diamond wants to add anything.
No.
That takes us to paragraph 27 and the differences in debt position at the local level. The report says:
“These differences are likely to increase over time as councils’ choices reflect local priorities.”
Could you expand on that?
Since the prudential code was introduced, we have found a level of variability in what councils have chosen to do and how they have chosen to fund investment in their assets. We can see that that variation will continue.
Councils have very different strategies in terms of whether or not they are going to borrow and they are starting to use new debt models, such as tax incremental financing, growth accelerator models and city deals. Councils are starting to look into those as ways of investing in their assets, and we see that variation continuing over time.
The report is about the borrowing element. Non-borrowing options may be used more in the future, so differences in the borrowing levels will follow.
An important aspect is the quality of councils’ borrowing. There is an assumption that it is all Public Works Loan Board borrowing, but councils have Bermudan interest rate swaps and suchlike, which are rather more exotic and carry higher risks for councils. There is no mention of that in the report.
At the moment, councils are borrowing largely from the PWLB, as that offers the best interest rates. Historically, councils have used borrowing options but, at the moment, it is PWLB borrowing.
You say that short-term borrowing is increasing, which is a bit of a concern if it is not linked to longer-term planning.
In principle, I agree with that. If you look at the figures, you will see that one effect of the increase in short-term borrowing has been an evening out of the maturities, which is, in principle, a good thing. However, over the past few years, borrowing has been driven by the interest rates that have been available, particularly from the PWLB.
Are there indications that the borrowing is short term and that there is lending out on the market to make a return?
I am not aware that we have come across that.
No, we have not come across that.
I have heard that it has been happening.
I have two related questions on the role of councillors, which was a major focus of your report. In terms of the balance, are your concerns about all councillors or particularly about councillors who are involved in executive decision making or who scrutinise accounts? Is your concern about decision making over borrowing or about scrutiny of the accounts? I suspect that it is about both.
I will make a general comment and then ask others to come in. In general, compared with 10 or six years ago, finance cannot be put in a separate box so that we can get on with the business of the council while the financing issues are dealt with separately. Because of the economic conditions that everyone faces, particularly in the public sector, the assessment of borrowing sustainability, debt sustainability and financial decisions in general must be much more integrated with strategy in providing services—especially future services. To that extent, all councillors need to be much more aware than they were years ago of the financial position and the issues that it raises.
In our scrutiny guidance, we provided questions that we believe all councillors are capable of asking. We are trying to encourage councillors not to be afraid of the terminology and the jargon, and we have provided straightforward questions that they can ask in scrutinising what they are borrowing, whether they are getting the best deal, how long it will take to repay the borrowing and what the implications are for their future revenue streams if they commit those to interest payments and repayment of borrowing. Any councillor should have the confidence to understand those questions. We are telling them not to be afraid of asking those questions because they are legitimate questions for a councillor to ask in a scrutiny role—or in any role.
Are there any examples of best practice, where the information is communicated clearly and there is a culture of greater scrutiny of it? That takes me on to my next question. Later in the report you mention the use of external advisers on borrowing. Is there any issue around information being prepared externally for officials? Do councillors understand that they are receiving information from an external source or are reports prepared by council officials, who might have a better idea of how to communicate the information to their elected members?
We saw a lot of variation in the quality and content of borrowing and treasury management strategies. We found that the Scottish Borders Council strategy told a better story for members about why the council was borrowing and in explaining what that meant.
All 32 councils have external advisers for borrowing and treasury management advice. We found that all the officials in the borrowing and treasury management departments were appropriately qualified—they had financial qualifications or the treasury management qualification. Although they were taking advice, they were certainly writing their own reports to members.
That is quite reassuring. You mentioned that Capita is the contractor for 28 of the 32 local authorities. On one level, someone who is engaged in such a contract has a vested interest in local authorities’ borrowing, because that is the basis of their contract. Is the increase in the use of advisers a replacement of expertise that previously existed in local authorities or is it a reflection of a greater scrutiny and reporting burden being placed on councils? Have they taken external advice for that reason or is that just good practice?
All councils recognise the need for specialist advice in the area. That advice comes from the treasury management advisers in the market, who can give them the best advice about what is happening in the financial markets.
Councils in England and Wales take external advice. We see that practice as a means for councils to ensure that they have the best information that they can get on which to make their decisions.
The area is technical. One would expect councils to have their own expertise to understand their financial requirements and know the options to meet those requirements. However, councils would not necessarily be able to replicate external advisers’ knowledge of what is out there in the market. The important point is that councils represent, if you like, a smart client who is sufficiently knowledgeable to challenge external advisers’ advice if it does not seem suitable for their circumstances.
You have made recommendations for council officers and councillors to take forward. Do you have any comments on the Government’s role or recommendations for the Government, given the committee’s interest in public sector borrowing in general?
As we said, borrowing and other debt issues are individual councils’ responsibility and they must be held to account for that. That is done, council by council, primarily through the financial audit cycle and the risk reviews that are part of that, and through individual reports as required. There is not a specific role for the Government to intervene in that process.
I absolutely agree. There are—I guess that we might come on to this later—important principles of transparency and long-term planning and ensuring that the process is clearly reported and integrated into what councils are trying to do with the money. Let us remember that borrowing is not an end in itself. The commission has—correctly—focused the recommendations on councils, but there are principles that apply to other parts of the public sector.
I will follow straight on from what was just said. Exhibit 5 on page 15 tells me about maturity dates—as I think has been said, they are maybe becoming less skewed, which is in principle a good thing—but it does not tell me the one thing that I absolutely have to know, which is what the interest rates are. You have not told me that—it is not there. Who is auditing the results?
10:00
That is down to the individual council audits. To aggregate all the interest payments would not be a terribly useful statistic for this report, because one would need to look at the discretionary spend council by council that is available to cover that. We would get into a complex and—
I am entirely with you on that, but that was not my point. You are entitled to that interpretation but—forgive me—that was not where I was going. You have told us about making sure that councillors are in a position to ask the right questions, but I am slightly concerned about whether most councillors—I was one—are capable of understanding the answers. Nonetheless, getting the right questions is a good start.
We finish up with the councils being responsible for what they do, as you said. I am very concerned about who will make sure that councils have a strategy. Somewhere in the report you talk about five to 10 years as being long term, but I am afraid that I do not think that that is long term. I expect my local council to be running in 30 years’ time. The fact that it has debts that will be protected in 30 years’ time is something that somebody, somewhere really should be worrying about. People are well capable of fooling themselves, so I would be really concerned if the scrutiny was done just by the council internally. Most people will not fool themselves, of course. However, my concern is about who is worrying about the scrutiny overall if the Accounts Commission is not doing it.
One of the report’s main messages is that we are not satisfied that councils are looking far enough into the future. I think that the timescale of five to 10 years links with how councils look at things in the capital investment structure.
The points are extremely well made. The Accounts Commission asked us to do this piece of work because not an awful lot of light has been shone on it in the past, and certainly not since the code was brought in. However, councils have had a pretty decent track record up to this point of doing such work, so the issue is not on the critical list, if I can use that phrase. However, we say in the report that there are definitely things that councils can do better.
The role of audit is an interesting question, as ever. The local auditors’ role would be to get assurance that the council was doing things to understand what interest rates it was paying over what period and what that meant for the sustainability of finances and in particular the impact on future revenue budgets. I do not think that it is for audit to assess whether a council is getting a good deal or whether it has taken the right interest rate or loan. That is properly a decision for management and, ultimately, councils and councillors.
However, the Accounts Commission asked us to do this work because it requires some focus. It is probably right to say that the commission will continue to look at this area and perhaps begin to look at the other forms of debt that we mentioned but did not look at specifically. I would expect a bit of a stream of work that the commission will ask us to do over the next few years.
I endorse the view that you should be doing such work. If a business did what a local council does, the shareholders would be at risk. They could be left to worry about that, but this is about the public domain and public money—local people are in effect the shareholders and they cannot go bust.
I am conscious that it is eight years since I was a councillor and that, as Mr Sharp said, a lot has changed in that time. One of the changes is that very low interest rates have become the norm, which I suspect means that it is easy for councils to believe that they can borrow lots and not worry about it. I express again my concern that, among all the other issues that you look at, you should worry about that, because somebody should be looking at the result.
I can only follow Fraser McKinlay and say that the low interest rates and the ability to borrow are clearly concerns, although councils can borrow only for capital purposes and not to supplement revenue. Those concerns formed one of the reasons why we carried out the work that we did. As Fraser McKinlay said, we intend to look at the more complex areas of debt because, looking into the future, I think that there will be more of that than conventional borrowing.
You talk about borrowing for capital purposes, but I understand that payment of borrowing charges—in other words, the interest payments—comes from revenue expenditure, so borrowing impacts on that expenditure.
Absolutely. I was making the point that the fact that councils can legally borrow only for capital purposes constrains their ability to borrow—they need to have a capital reason to do it.
Borrowing charges are a constraint on spending.
Yes.
I want to explore paragraph 38 so that I understand it exactly. It states:
“none of the councils in our sample presented councillors with a longer-term view.”
Why not?
We found that none of the councils presented more than the minimum of three years required by the prudential code. The code requires councils to use prudential indicators to look ahead for three years, but no council went further than that. Many councils do not have a long-term financial plan in place that would inform the analysis that they would need to do on affordability.
When you refer to many councils, do you mean all of them or three? How many is it?
We found that the capital plan is for three to five years, but the revenue plan is for two to three years.
Is that for all local authorities or just those in the sample?
That is about the ones that we looked at. The local government overview report gives the number of councils that do not have a long-term financial plan, and I can certainly get that figure for you.
Thank you. Is that why paragraph 38 goes on to say that
“there was no analysis bringing this together with budget scenarios to assess affordability”?
That is right. We found that councils know when they need to make repayments on their borrowing, what the interest rates are—where they are fixed—and when those will fall. However, to work out whether that is affordable, they need the revenue line, and they do not have that over the longer term.
The revenue line is not available because there is three-year budgeting by the Scottish Government to local government. Is that right?
In the report, we explore the use of budget scenarios and forecasting using what-if scenarios to make assumptions about what revenue might be and to see what the risks are to the affordability of the borrowing.
Yes, but local authorities have a degree of certainty on budgeting over only three years—they know nothing beyond that, unless they make heroic assumptions about what central Government might give them.
We hear that a lot from councils, and we buy it to an extent, in that they do not have absolute certainty or clarity beyond that period, but we think that it is reasonable for them to make assumptions—not heroic ones, I hope—and to look ahead. The point has been made that, particularly in the context of the report, councils already make decisions that will have an impact well beyond the three-year period, so it is not unreasonable to expect them to make such assumptions, which of course need to be monitored and changed as they go along.
I take that point. What would a long-term financial plan be? To go back to what Nigel Don said, would it be for 10 years or for five years?
In past reports, we have talked about planning for up to 10 years. I absolutely take Nigel Don’s point, given the context of investing and taking out loans that have a 50-year period. However, we are trying to strike a balance between what is reasonable and practical and the constraints, so we tend to talk about five to 10 years as being the medium to long term.
It would help councils if central Government set out a longer-term strategy for how much even the totality of local government funding would be. There is an argument to be had about the bun fight between councils, but would information on the totality of funding for local government not help councils with that 10-year plan?
There is an interesting debate to be had on that, which might come up in later sessions with the Auditor General for Scotland today about the longevity of view that all tiers of government can take.
Quite. Is it fair to say that there is a recommendation for central Government about providing at least a degree of clarity, albeit that no central Government can bind a future one? Ministers always use the caveat, “We cannot bind the next lot.” However, it would not half help local government to have that clarity.
As I said, there is a debate to be had, and I am sure that it will come up later today.
That is very civil service language, if I may say so.
Another point that I hear a lot from local government is that the hubcos and the Scottish Futures Trust do not provide sufficient transparency and detail on borrowing to allow officials to give elected members certainty about what it means in the longer term. Is that a fair concern that elected members have?
The report is specifically about the borrowing element of debt and does not address other debt, which includes the various schemes to which you refer, so I do not have the evidence to comment on that. The other debt schemes are clearly more complex than conventional borrowing, so the requirement to provide good information that explains exactly what they mean is even more important.
That is fair.
My first question is a point of clarification on paragraph 62, where you highlight the fact that
“Scottish Borders Council appoints non-executive members to its Audit Committee”.
Are those non-executive members opposition councillors, or are they individuals who are not part of the local authority?
I would need to check the detail on that. I am sorry that I do not have it.
Gemma Diamond will kick me for saying this without checking, but I am pretty sure that it is the latter. I think that, when we refer to non-executive members, we mean people who are not councillors, but we will confirm that for you.
That was my interpretation of the paragraph. If unelected individuals provide advice and assistance—which is not necessarily a bad thing, I hasten to add—how is that fully democratically transparent?
That is a good question. Scottish Borders Council is not the only council that does that. A number of councils have non-councillor members from the local community sitting on their audit committees or have had them in the past.
There is a balance to be struck. It is really important that people are clear that the councillors are there to undertake the democratic scrutiny, but it can also be a good thing to have a different perspective and to bring in people from the local community with some expertise who can help. If that balance is managed carefully, it can be effective.
From a governance point of view, the decisions or recommendations of a council’s audit committee come from the whole committee, which will be dominated by councillors, and any non-executive members should have been selected to serve to inform the level of debate at the committee.
When you double-check the point and come back to the committee, will you also find out how the selection process occurs? Committees in the Parliament bring in external advisers regularly and a process takes place. External advisers provide additional assistance to our committees, and I expect that it will be the same in councils.
Sure. We are happy to do that.
Paragraph 71 highlights the situation regarding the online publication of treasury reports and the
“lack of clear and accessible information”.
What recommendation do you make to local authorities about how they present the information online? You suggest that they should make it a bit easier to find, but do you recommend that they should have a particular area of their websites that is easily accessible for members of the public?
I would encourage that. I tried searching for treasury reports online and, although I am a member of the Accounts Commission, I could not find them all. It is really difficult.
Company websites always have company investor sections. We know that we can type in “investors” or “investor relations” to find that section and that all the stuff that looks rather dry to some people will be available there. I would like all councils to have a separate section on their websites for governance information and reports.
That would be enormously helpful. Councils perhaps also need to present slightly different views for different people with different interests. There will be people who want to find out about the borrowing and treasury management issues, but someone might also want to know how their new school is being paid for.
Graham Sharp talked earlier about things being integrated. That point is about councils understanding and telling the story, as Gemma Diamond said, about what they are borrowing money for, where it comes from, how much it costs, what it is building and what the longer-term implication is. It is about making that information easier to find and about the story about borrowing being told in a less technical and jargony way than at the moment.
10:15
Okay—thank you. My final question relates to paragraph 73, which addresses the issue of training and support to improve councillors’ understanding and attendance. I would imagine that, when there is a new intake following an election, it is quite a challenging task for the officers to put together a training plan not only for the new intake but for all the councillors. People have other commitments—for a start, they might not have expected to be elected as a councillor—so a fair amount of juggling will have to take place in the short term. The situation will be the same for anyone who is elected in a by-election.
On the question of what councils could do, the financial reports could be simplified, and the training could be delivered in smaller chunks but more regularly. Would that be advantageous?
We make the point in the report that it might be helpful for councils to recognise that some councillors may find it difficult to attend a full-day course at a particular point in time. We recommend that solutions such as breaking up the training or providing online training materials be explored.
On the training side, there has been a recent development.
Yes. The commission and Audit Scotland are acutely aware of the pressures on councillors. Being a councillor is a big and increasingly complex job these days, and we recognise that people cannot do everything all the time.
The good news is that, just this week, the Chartered Institute of Public Finance and Accountancy Scotland announced that it has launched a new training programme specifically for councillors on borrowing and treasury management, partly—although not exclusively—in response to the commission’s report.
That programme will work in combination with what councils are doing themselves and the bit of work that we have published. Of course, councils can always ask their external auditors to help them with some of the work.
We hope that there is enough support for councillors. We need people to want to undertake that training, and we hope that, by opening up the area, which has previously been seen as a technical area that has been addressed by the director of finance, we will encourage more people to come forward.
Is there an expectation that councillors will become experts in public finance?
No, absolutely not. As Pauline Weetman said, someone does not need to be an expert to ask basic questions about borrowing maturity, how debt will be repaid and what it will be used for, and whether it is the best option or whether there are alternatives.
Thank you.
You have answered quite a lot of the questions that I had for you. Mr Sharp, you mentioned earlier that the report is written with elected members and the public in mind. Councillors who are making a decision will need some fairly technical information to follow a treasury plan, and they will therefore need a bit more than the generalised information that may appear.
We heard from Gemma Diamond that, although some of the reports that go through to full council refer to a report from the local audit committee or from an officer, councillors are not given reams of report material—there is simply a reference. If the councillors get their decision making wrong, the local press is likely to come back at them and say that the councillor did not do the necessary homework to come to a decision despite the information being there in black and white.
It seems that there is a bit of a double standard, given what is available in a general public report as against the information that somebody needs to make an informed decision. How do you reconcile that?
The full report is available to the councillors and they have it in all their minutes. I found the way in which things were explained in the Scottish Borders very helpful—the report included a good paragraph of explanation with each piece of financial information, so as well as having the three-year prudential indicators the councillors had a really clear explanation of how that affected the council. I contrasted that with another council’s report, which just presented the prudential indicators and said that the prudential code was satisfied—end of story.
Some councils seemed to provide a very closed description that did not encourage any questions, but I think that the Scottish Borders Council’s report was an example of how it is possible to combine detailed information with an understandable explanation.
We found that, when it came to members asking questions, because there was not a high level of narrative in the report they had to ask a lot of questions to get clarification of the content instead of asking scrutiny questions. If a report tells the story more and explains why the prudential indicators show the trend that they are showing and what that means for the council and its strategy, that gives members more opportunity to ask scrutiny questions about that information rather than having to spend the time clarifying exactly what is in the report.
We are asking officers to think about explaining in their reports in a clear fashion exactly what they are doing, why they are doing it and what that means for the council.
I think that we are looking at the issue from both ends in the report. We are recommending that education for councillors be improved, but we are also recommending that the information that is fed to councillors be clearer for the layman. For example, to say that all of a council’s borrowing meets the requirements of the prudential code conveys a rather different message from saying, “We’ve checked and all our borrowing is sustainable for the next three years.” That is the sort of thing that one needs to get behind.
In my experience as a councillor in Edinburgh, what was brought through in terms of treasury management information could be quite complicated. I assume that that was because of the size of the city’s budget and all the other things that come through.
If we are trying to simplify things for people who are not qualified in treasury management, we need to pitch the training at a particular level, such that the basic minimum standard of scrutiny can be adhered to. In the past, there have been examples of officials in various authorities wanting their view to be put through in a particular manner. If officers want a decision to be made by the councillors, the councillors must understand the wording that is put in the report to make sure that, through the public sector officer jargon, they understand what the decision is. How do we break through that?
As I said, part of officials’ responsibility is to make sure that they inform councillors in a clear and objective fashion, such that proper decisions can be made. That is part of the equation.
I think that that is the million dollar question. There is a cultural issue at the heart of the treasury management process—historically, it has been seen as something that has been done by the finance people, who do it well and run it professionally, as we say. Completely understandably, members put their trust in those people and rely on them.
We are not challenging that relationship, because it is important, but we are saying that it needs to be opened up a bit. The process needs to be less of a black box; more explanation needs to be provided in a way that councillors can understand so that they can properly challenge and ask questions about what they are being presented with.
As Pauline Weetman mentioned, reports can be written in a way that seeks to close down or minimise debate and discussion or in a way that openly seeks debate and questioning. The Accounts Commission is saying that we want councils to move in the direction of encouraging debate and questioning. It is a case of push and pull. Councillors ought to say that they want and need different information that is presented differently, and officers need to be in a position to provide that.
Page 6 of the report has a whole list of recommendations for council officers that addresses many of the issues that you have raised. The recommendations deal with the need for officers to provide a clearer explanation of affordability, the links to capital investment and the reasons for a proposal, instead of simply making a request to borrow.
Officers also need to write their reports in such a manner that they are understandable to the public.
Good morning. Do councillors really understand borrowing and treasury management in their scrutiny role? Exhibit 15 on page 37 of the report shows that the attendance of councillors at scrutiny committees is pretty low although that is a vital function within councils’ committee structure.
I have to say that, looking at exhibit 15, one cannot be other than disappointed at some of the attendance figures. However, I do not know the stories behind those figures. Earlier, we touched on the fact that councils could perhaps be a bit more thoughtful about how they present training in order to improve the take-up. As we said, financial sustainability cannot be put aside until the main council business has been dealt with, with financing being done as a separate exercise. These days, it is a major constraint on the ability to provide services and it has to be centre stage, integrated with the other council decisions.
Exhibit 5 on page 15 shows that, in 2012-13, 60 per cent of the borrowings were to be repaid within between 10 and 50 years. Given the fact that nobody can predict councils’ future budgets, is that not storing up a problem for the future?
Given that one cannot say where we will be in 50 years, I am not sure how best to answer that question. You need to look at the specifics of individual councils. If a council was struggling to meet its financial obligations and one saw that those financial obligations were going to continue and perhaps even increase for a very lengthy period, that would be of considerable concern. If, on the other hand, a council could cope reasonably well with its financial obligations looking, say, 10 years ahead, one might be a bit more sanguine about the assumption that that could continue for the following 40 years.
There is an intergenerational issue. One cannot and would not wish to supplement current funds at the cost of the future, but one must be measured about it. If we could push the three years out to 10 years, and if we were getting sensible results at that level, I think that we could be more relaxed about the following 40 years.
I do not know whether Fraser McKinlay has anything to add to that.
No, I have nothing to add.
On the issue of training for councillors, has consideration ever been given to making the training that councillors get on the financial elements of the decisions that they make compulsory? There are many other jobs and roles in which people are required to undertake training as part of their contractual obligations. I say that as a former councillor.
That is a very good question, convener. In our recommendation on page 7 of the report, we say that council officers and councillors should consider whether the training should be mandatory, although the commission did not feel that it was appropriate for us to go as far as to say that it should be mandatory.
On a couple of levels, for all councillors—as Graham Sharp mentioned at the start of our evidence—there is a need for financial literacy and understanding that probably did not exist 10 years ago. There is a need for that at a basic level, and there is also a case for people who have specific roles on a finance committee, a policy and resources committee or an audit committee having a deeper level of understanding. We would strongly encourage councils to provide that.
I think that there are compulsory courses in other parts of councils—for example, in dealing with licensing arrangements, which are quasi-judicial.
I think that that is right. That is a requirement for some of the statutory and regulatory functions, for sure. Although we are not talking about one of those functions, finance feels like such an important issue that, if you were considering making anything else mandatory, it would be pretty near the top of the list.
Yes.
We will have a brief final question from Drew Smith.
We have discussed how councillors can be encouraged to undertake training to improve their understanding of the reports that are given to them and the role of officers in improving and encouraging that. To whom are officers responsible? They have a number of different responsibilities. Do you believe that the balance is right in terms of their responsibility to the clerk, the chief executive and the administration of the council? Surely, in this aspect of their work, officers have a responsibility to the council as a whole and to the area that the council is responsible for.
There is a whole bunch of interesting stuff in there. For the purposes of this exercise, it is worth remembering that in every council there is a section 95 officer—a proper officer of finance—who is statutorily responsible for giving advice to the council. Regardless of the political make-up of the council or who the chief executive is, the section 95 officer role is absolutely key and, just like the chief executive as the head of paid services, they are accountable to the council and not to the administration of the day. For the purposes of this exercise, the section 95 officer is a key role.
On behalf of the committee, I thank the panel for their evidence. I recall that there are a number of commitments to follow up the evidence in correspondence, and I am sure that that will happen.
Sure. I will do that.
Thank you. We will have a brief suspension to allow a changeover of witnesses.
10:31 Meeting suspended.Next
Section 23 Report