Local Government and Communities Committee

Meeting date: Wednesday, February 23, 2011

Official Report 632KB pdf

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“An overview of local government in Scotland 2010”

Good morning and welcome to the sixth meeting in 2011 of the Local Government and Communities Committee. I remind members and members of the public to turn off all mobile phones and BlackBerrys.

Under agenda item 1, the committee will take evidence from the Accounts Commission and Audit Scotland on “An overview of local government in Scotland 2010”. I welcome the witnesses. John Baillie is chair of the Accounts Commission; Fraser McKinlay is controller of audit at Audit Scotland; and Gordon Smail is portfolio manager, local government, at Audit Scotland.

I understand that John Baillie wishes to make an opening statement before we ask questions. We happily agree to that.

Thank you, convener. My statement takes up just one page of A4, so I will not take long if I speak quickly.

That is fine. We are onside then.

The Accounts Commission welcomes the opportunity to give the committee a briefing on key issues in local government based on our recent overview report, which sets out the main matters that arose from the audit work in 2010.

The commission recognises the significant challenges that councils face in the coming years from both reducing budgets and growing demands for services. Councils and councillors face extremely difficult decisions in allocating funds and prioritising services. In itself, that is not unfamiliar territory for councils, but the range and scale of the financial pressures that they face are new. Councils will need to consider radical changes in services, including the potential for more joint working with partners.

The councils that have made most progress in embedding strong performance management and establishing clear and robust systems of governance, accountability and scrutiny are best placed to deal with the challenges ahead. Those are the principles that underpin best value and, more than ever, it is essential now that councils have them in place if they are to manage the pressures that they face. Councillors need the right information at the right time to take sound decisions, ensure value for money, scrutinise performance and understand the effects of their choices on the communities that they serve. Our report highlights the importance of the community leadership role of councillors. Such leadership is crucial if they are to retain the support of the public and continue to ensure the success and wellbeing of their areas.

In short, councils have taken serious steps to address the pressures that they face, and they need to build on the improvements that they have achieved in recent years. The Accounts Commission will continue to support improvement through our audit work in councils, our joint audit work with the Auditor General for Scotland, and our key role in co-ordinating scrutiny in local government.

We are happy to take any questions that the committee has.

I thank you for your opening remarks. Mary Mulligan will ask the first question on behalf of the committee.

Good morning, gentlemen.

My questions are about pensions. The report notes that there is a widening gap between the assets and liabilities of council pension funds. The briefing that we have from the Scottish Parliament information centre says that that gap has gone from £3.8 billion to £9 billion. What is the current level of assets and liabilities?

I will ask Gordon Smail to talk about the detail of that in a moment. The principal point that I want to make by way of introduction is that, as members know, the liabilities are calculated on the basis of the interest rates that prevail at the time. The lower the interest rates, the higher the present value of the liabilities, of course. That sounds as though it does not matter, but it does, of course, matter if interest rates stay as they are. The mechanism means that the liabilities will move quite significantly if interest rates move significantly.

I ask Gordon Smail to continue.

One of the key issues is how to value the liabilities, but the main issue relating to pensions that should always be noted is that the figures that we provide in such reports are a snapshot in time. We look at the position on a particular day—31 March 2010 in this case. The liabilities and how we go about discounting the amounts to a present-day value are one side of the equation. Mr Baillie has explained that. The other side of the equation is the value of the assets in the funds. That had gone up because the stock market had recovered quite a lot by that time, but not by as much as the impact of the interest rates on the liabilities. That was a much greater figure, and that is why the gap grew.

Pensions are a serious issue and there is particular interest in public sector pensions throughout the United Kingdom. Work is on-going. Our colleagues are currently giving evidence to the Public Audit Committee on the report that we recently published on pensions across the whole of the public sector in Scotland.

I am not sure that I got an answer to the question that I asked. If I explain why I asked the question, you will see what it was that I was seeking. The increase from £3.8 billion to £9 billion sounds to me like a lot of money. However, if the levels involved are £100 billion, the significance of the gap is different from what it would be if they were £500 billion, if you know what I mean. Is it a change of 0.5 per cent or 10 per cent of the total? That is the answer that I was seeking.

Is it the assets in the local government pension scheme that you are particularly interested in?

Yes.

The recently published pensions report to which Gordon Smail has referred says that the local government pension scheme has assets in management of more than £21 billion. That might be the number that you are looking for.

It is useful to know that, as it puts the gap in perspective.

I will continue with my questioning on this issue, although Mr Smail might have gone some way towards answering the point. We have been told that the market value of pension scheme assets increased; more significantly, there was a 53 per cent rise in the estimated cost of future liabilities. How is it that there was such a huge increase in the estimated cost of future liabilities over a 12-month period? It might come back to the question of interest rates, but is there anything else?

There are two main factors. The first is the discount rate to which Mr Baillie referred. With the sort of figures that we are discussing, small shifts can make a big difference. The other part of the equation relates to actuaries’ valuations and assessments of how long people are going to live. A number of things play into it. This is a complicated area.

As I am sure you know, the next triannual evaluation is due out next month, and that will bring everything up to date, including the cost of people living longer and so on—all the actuarial bits that go into the evaluation.

That is useful to know—the committee will be interested in that.

My final question, and probably the most difficult, as it is not factual, is on how we address the challenge that we face. What options are open to people in local government who deal with the matter directly? What about the involvement of the Scottish Parliament in the issue?

As you know, the report by Lord Hutton is due soon, and it will no doubt greatly inform any debate and subsequent actions that have to take place.

Two things occur to me immediately. First—you will be aware of this—is the consideration of how much employees should put into pension funds.

The other point is that there seems to be quite a disparity in contribution rates across the six pension funds or schemes in Scotland. One of the recommendations from our joint work on the pensions report that we have all been speaking about is that it is worth considering whether there are valid reasons for the disparities among the six pension schemes in Scotland. If not, some rationalisation might help to cut the costs.

It is a thorny issue, of course, as five of those six schemes are pay as you go. Only the local government scheme is fully funded, and the rest of them involve paying money out as contributions come in.

If the size of the workforce that is contributing decreases, that adds to the problem.

Yes, it does—that is exactly the case.

Alasdair, do you wish to ask a supplementary question on that area?

Yes. It is particularly on the funded scheme—the local authority scheme. You are right to say that a small change in the discount rate can make a huge difference in liabilities, and we could be talking about liabilities 40 years hence in some cases. Would it be putting words in your mouth to say that this particular sum would not necessarily give you cause for concern?

Any sum like that would always give me cause for concern. As with all risks, the important thing is to ensure that the risk is identified and properly managed. We should always bear in mind the extent to which the liabilities are dependent on interest rates. It is not an artificial figure, but it will change with every change in interest rates. If interest rates go up again, as seems likely, the aggregate liability will come down.

Indeed. The other point that I wanted to make has escaped me for the moment. I might come back to it.

That is fine.

I will continue on the pensions issue. You are right to say that Lord Hutton’s report on the UK position is due out soon, but a debate is taking place at Westminster about increasing pension contributions, particularly from low-paid workers. That might have a negative effect because those workers might decide no longer to contribute and to voluntarily withdraw from the pension schemes, which would create other problems in the long term. What is Audit Scotland’s view on that issue, particularly at a time when there will be increased demand on the local government pension schemes because of the voluntary redundancies that are taking place? There is also potential for a bigger hit on the pension funds when we get to a compulsory redundancy situation, if we reach that point.

It sounds a weak answer, although it is not meant to be, but all that Audit Scotland and the Accounts Commission can say in response to that point is that it is a matter of policy. All that we can do is flag up the issues and invite those who are in charge of policy to take a view on how best to deal with the matter. We can give advice on the consequences of particular policies, but policy itself is not something that we comment on.

You are right—it does sound a weak answer given the Accounts Commission and Audit Scotland’s role in advising local authorities, particularly on the future liabilities scenario. For every voluntary redundancy, an additional contribution has to be made by the local authority, but at the same time there has to be an additional withdrawal from the pension scheme, depending on how the pension is calculated. In the future programme of Audit Scotland and the Accounts Commission, work is to be done to try to get local authorities to address some of those issues. However, the question is not just how local authorities will address the financial issues but how they will do so without putting too much of a burden on the low-paid workers who are the major contributors to the pension schemes.

When the Hutton report is published, there will be a lot of debate and discussion to be had about the implications in Scotland. The report on pensions by the Accounts Commission and the Auditor General is designed to help that discussion and debate in Parliament because, although a lot of pensions policy is set at Westminster, as you know, the Scottish Government has a degree of influence over how these things are implemented north of the border. I am sure that the issues you describe will be an important part of that debate and that, whatever solutions the Parliament comes up with, it will want to avoid the perverse incentives or disincentives that you said might exist for low-paid workers elsewhere.

What we as the Accounts Commission and Audit Scotland can do, particularly in relation to the local government report, is to set out the facts of how the schemes operate, what the benefits are, and what some of the issues and risks are. The Improvement Service is already leading a lot of work through what is called the pension pathfinder project to consider how the local government pension scheme in Scotland could be administered more efficiently and effectively. As you know, 11 schemes currently make up the local government pension scheme. The project is looking hard at whether the scheme can be improved. Within a national UK framework of pensions policy, there is quite a lot of scope locally in Scotland to change the way in which pensions work and to make them more efficient and effective for people.

09:45

I want to continue on the issue of local authority liabilities. Page 15 of the overview report states that, in 2009-10, 10 local authorities were granted permission

“to borrow £62.3 million to meet the costs of equal pay”.

It also states:

“One further council was granted consent in December 2010.”

I am not sure whether you are at liberty to say which local authority that was, but will you say what the consented level of borrowing was? Also, do the current consents to borrow involve any of the larger local authorities? The liabilities for local authorities are proportionate to their size and number of employees, so larger authorities might have a greater liability in relation to their equal pay settlement. I am interested in whether, in the view of the Accounts Commission and Audit Scotland, further consents to borrow are likely to be granted, particularly given the financial circumstances that we face.

Are you aware of the 11 councils that have been given permission?

Your report says that there were 10 councils and a further one in December 2010.

I think that the further one was Highland Council. I ask Gordon Smail to deal with the second part of the question.

We do not have that information with us, but we can provide it to the committee.

Mr Wilson, are you interested in which councils we are talking about?

Yes.

The list is Aberdeen City Council, Clackmannanshire Council, East Dunbartonshire Council, the City of Edinburgh Council, Falkirk Council, Glasgow City Council, Midlothian Council, North Ayrshire Council, Scottish Borders Council and West Dunbartonshire Council. After we had produced the report, we learned that, as John Baillie said, Highland Council had also applied.

According to the local authorities, are the borrowing consents that have been granted sufficient to cover any liabilities that they may face under equal pay settlements?

That is certainly the aim. Of course, it is all done on the basis of prudential borrowing.

A supplementary point is that the more councils borrow to fund revenue expenditure, the more they lock themselves into future interest and capital repayments, thereby losing a degree of flexibility. There is a general point I want to make later about just how much local authorities are storing up for tomorrow.

That point is well made and it is one that I certainly recognise. The more councils borrow now, the higher the liability will be as the years go on.

My next question ties into the point about local authority decision making. Page 7 of the overview report states:

“The councillor role is key; their effectiveness will have a significant bearing on how well councils cope with tough budget decisions and on how well they perform in delivering vital public services to local communities.”

I agree that the role of the directly elected member in local authorities is vital. Are you satisfied that councillors are fully aware of the financial implications of the decisions that they are making and that they are being provided with the most accurate and understandable details on how local authority balance sheets operate and how the local authority finances work? I have commented previously in the committee that work remains to be done to get elected members—particularly those who are not in convenership or executive roles—to understand fully what they are being asked to decide on in making decisions about their local authority’s future financial liabilities.

That is quite a big question, but I will try to keep my answer short.

Around half of all our councillors were new to the role at the last election—everyone here is aware of that, but it is worth making the point again. There has been quite a need to bring them up to speed in terms of their knowledge and expertise. As you also know, the Convention of Scottish Local Authorities has been conducting a large education programme in that regard.

The answer to your question is that we have been saying for some time now that all councils need better data on service performance and costs of service, including unit costs, the better to inform councillors so that they are able to reach proper decisions. That plays into the need for proper options appraisal. It is not sufficient for councillors to simply take the view that is presented to them by, for example, their executive. It is important that the options that are presented are fully costed and that the councillor is able to demonstrate to the voting public that they have taken a proper decision based on a proper options appraisal. There is a way to go on that yet.

I accept the point. However, as someone who could be classified as being like one of the new councillors who were elected in 2007, the position that you outline—that half of the councillors who were elected that year did not fully understand the balance sheets and other elements of the running of a council—is a bit disingenuous, given that some of the people in the new intake had experience of either local government or financial matters, which they brought with them into local authorities. That enabled greater scrutiny of some of the expenditure and programmes that were being proposed.

If I led you to believe that I was concentrating simply on new members, that is my fault; I must have explained myself badly. I was talking about all councillors and was simply reflecting on the fact that half of them had no experience of council business before May 2007. I take your point entirely. We have been saying for some time that the issue involves all councillors. Indeed, at last year’s COSLA conference, I gave a presentation on the need for elected members to understand finance, to demand proper information and to understand that information when they get it. Understanding is not simply a matter of training; it is also a matter of councillors demanding the information that they want rather than being given all sorts of detailed information that takes too long to get through.

When I came to the committee for the round-table discussion in October, my sense was that councils had been preparing more thoroughly for the budget round that was approaching at that point. In a funny kind of way, the financial pressures that they are facing have made the process more transparent and thorough, and I think that there has been real improvement in the involvement of local elected members in the process and in their understanding of that process. Managing a reducing budget, as opposed to an increasing one, is new territory for many councils, which has made it even more important to concentrate on those matters. There has been progress, but the situation is still patchy. As the chairman said, there is still more to be done on issues such as options appraisal and being clear about the impact and implications of decisions that are being made.

We have spent a bit of time on equal pay and pensions. I suppose that it might be helpful to broaden out the discussion by asking what the Accounts Commission considers to be the most significant risks that face local authorities in the short term. Are you satisfied that local authorities are dealing appropriately with those risks, including the risks around pensions and equal pay?

The obvious risk is the one that we are all aware of, which arises from the funding problem—the risk of budgets not being met, having been agreed and set in the past couple of weeks.

Linked to that one, the next risk relates to whether local authorities can achieve full value for money. A culture of continuous improvement demands that councils try to achieve best value for money. That is something that we will never stop saying. I will not repeat what I said a moment ago, but proper data on service performance, and on the costs entailed, are required. I am going over ground that I have just covered, but councillors will have to scrutinise properly the information that is put before them. Their decisions will have to be based on proper information. They will also have to show leadership. Among other things, that will entail their working closely and well with other councillors as well as with the council executive.

There is a balance between having legitimate political differences and getting lost in a mire of point scoring. We have seen an improvement in that; many councils are beginning to consider the issue. The best-performing councils are the ones that have good professional working relationships among the councillors and between the councillor group and the executive group.

How prevalent is that good practice? You have spoken about everything that is necessary in order to meet budget requirements, but are you satisfied, in general, that councils across Scotland are meeting those requirements? Are you satisfied or dissatisfied?

As Fraser McKinlay said a moment ago, there has been improvement, but we are not satisfied yet. The better-performing councils are doing the right things, but others are lagging behind.

What proportion of councils are you satisfied with, and what proportion are you unhappy with?

It is very difficult to give a precise answer to that question. Different councils are good at different things, and auditors will never be completely satisfied with any council, because we are always looking for improvement. That is at the heart of best value.

In exhibit 12 on page 19 of the overview report, we have tried to summarise the risks that local authorities face, which are a combination of demand pressures and resource pressures—with the councils squeezed in between, if you like. As committee members know, we produce an overview report annually. There is no doubt that this one reflects a greater degree of satisfaction than previous ones. Real progress has been made on issues such as asset management and workforce management—the issues that underpin a council’s ability to take difficult decisions. The number of councils that we might categorise as high risk is, I think, decreasing. That is very welcome. Processes and structures are improving, and councils are focusing much more on outcomes and on working with partners. However, there is still a long way to go, and the situation is still very patchy.

As well as the work with individual councils, a lot of work is going on nationally. The Improvement Service and COSLA are working with their partners at a national level to consider issues such as how council resources can be shifted away from dealing with the negative effects of poor outcomes, when things are not working, and towards early intervention—preventing those things from happening in the first place. In the current economic situation, everyone acknowledges that big wins will occur if problems can be dealt with at source, rather than if the effects of negative outcomes are dealt with further down the line.

We have a picture of individual councils dealing with local situations, but a lot of work has also been done nationally in considering how local authorities, as a whole, can make progress.

I will ask the question in another way. Does the Accounts Commission consider that any local authorities are likely to experience significant financial difficulties? Will they require—now or in the near future—early intervention to prevent them from falling into serious situations?

10:00

The work in the report is based on the financial year that finished in March 2010, but one of the interesting things about the report is that we are reporting a pretty stable financial situation. Councils are in pretty good shape, as are reserves. We can never say never, but I do not think that Audit Scotland and the Accounts Commission have concerns that some councils out there are really going to struggle to make ends meet in the next year.

Having said that, I think that the issues are significant, particularly on the demand side. The falling amount of money is one issue but, in the medium term, councils will have difficulty with the increasing demand for services. As members will know better than I do, demand for services goes up when we are in a recession, and that will come on top of an ageing population and all the other issues that we are familiar with. Therefore, it is not only about managing money but about redesigning services, targeting resources differently, and prioritising things more acutely. That is why the issues to do with options appraisal and the decision-making process are so key. Councils are having to do that differently now from how they did it before.

Although I represent a Glasgow constituency, the committee’s remit is much wider than its members’ constituencies. I am intrigued by the fact that Shetland Islands Council seems to have an on-going difficulty with the certification of its accounts. Could you elaborate on the issues with those accounts that give you cause for concern?

Yes. We can fill in the other issues, but I will concentrate on one in particular. There is an accounting standard that requires the consolidation and inclusion of linked bodies in the group accounts. The standard provides criteria to define what a linked body is. For five years now, the principal issue with the accounts has been that, in the opinion of Audit Scotland and in the opinion of the previous firm of auditors, PricewaterhouseCoopers, the Shetland Islands Council’s group accounts have not included the Shetland Charitable Trust—a significant trust—and its assets and liabilities. The auditors have therefore said that the council’s accounts are not entirely true and fair. They are considered to be true and fair except for the inclusion of the Shetland Charitable Trust. That, in essence, is the issue.

When we had our public hearing with the council, the representatives tried to explain what enabled them to take the view that they did. The circumstances are unusual. The councillors of Shetland Islands Council are almost all trustees of the trust, although there might have been a slight change in that since the meeting. The councillors, meeting as the council, took the view that the trust should provide them with its accounts. The council then sat in session as the trust and decided that they could not allow themselves, as the council, to get the accounts. That is the essence of the situation.

We are watching the situation closely; we have not lost sight of it by any means. The council is working with a Queen’s counsel that it has appointed to look at the situation and see whether there is a way through it.

Our slight concern about the QC is that our problem with the situation is not a legal one but an accounting one. For some time, we have been trying to help our colleagues in Shetland to understand that we have a specific issue about a specific accounting problem to do with Shetland Charitable Trust, but there are strong local views that the trust is independent and that it would lose that independence if it were grouped as part of the council’s accounts.

I am struggling to see how independent it is of the council in the circumstances that you have described.

If I may say so, you have hit the nail on the head. At the public hearing, I asked the specific question about how councillors could negotiate with themselves as trustees when it came to issues such as the provision of services. I did not get an answer.

I am intrigued, as I do not know the situation in Shetland, to find out exactly what the Shetland Charitable Trust does.

I will start and others can fill in.

In essence, the trust provides some of what might be called the non-statutory services. There is a comprehensive provision for those services in any council, including Shetland Islands Council. Fraser McKinlay might want to elaborate on that.

The Shetland Charitable Trust had at the last count about £250 million in assets, which it uses for a wide variety of things. The council’s position is very strongly that the trust does not use that money to support core council services; it is additional.

We have some difficulty with that explanation, however, because the money is used to support care homes for the elderly and a very high level of provision of leisure facilities. While that is all great news for the people of Shetland, the provision of such services costs quite a lot of money. The money is coming from the Shetland Charitable Trust, but if the trust were to say tomorrow, “We’re not doing that any more,” the council would find it very difficult just to withdraw the services.

There are a couple of issues around the degree of control that the council has over the trust. One issue relates to the governance of the trust: as John Baillie said, the same people are on the council and the trust board. The other issue concerns the nature of the services that the trust provides.

The trust also invests in longer-term infrastructure projects that are very big and very controversial: for example, it is seeking to invest in the on-going Viking Energy project up in Shetland.

The new chief executive is very keen to resolve the qualification, as he really does not want to have his accounts qualified for the sixth year in a row. We hope that we will find a way this year to get to a place where we can remove the qualification on the accounts, but we shall wait and see.

I presume that the money came from oil revenues at an earlier stage.

Yes.

I wonder how the democratic accountability issues are resolved. We always talk about the fact that the one sanction that we have for elected people is that we can vote them out. Presumably, if someone is unhappy about the care home service or the leisure facilities, they have to complain to the trust. If they have an on-going issue with the trust, where do they take it?

Therein lies part of the complication. I am not sure that people would automatically think to complain to the trust: they would think that a care home is a council service.

The point about democratic accountability is interesting. The make-up of the trust is set down as comprising the members of the council, the headteacher of the high school and the lord lieutenant of Shetland. Because the charities regulator has some concerns about the governance of the trust as a charity, the trust is looking at that and considering whether the make-up can change significantly so that it can bring on board more independent members and that type of thing. The question whether councillors can easily fulfil their roles as councillors and as trustees of the Shetland Charitable Trust is a very hot topic locally.

Just to widen the discussion out a wee bit, we are concerned about that issue across councils. If we look at the arm’s-length external organisations, we see that accountability and governance are central. We are working on guidance for councils that will probably be published in late spring.

I am sure that that will be very interesting.

I do not want to labour this particular element of the issue, as there are other elements that we could easily discuss. However, it strikes me that although we sit here and deliberate on the remit and job of the Scottish Public Services Ombudsman, which would be the logical place for someone who was in dispute with a council to take a complaint that had been exhausted, someone who was in dispute with a trust would presumably begin and end their complaint with that trust.

There is the Office of the Scottish Charity Regulator, which is the regulating body for the Shetland Charitable Trust. In a sense, as Gordon Smail said, the situation with the trust is an extreme version of things that we see in a lot of places. It is interesting to note that lots of other councils have ALEOs. That is increasingly the case and they are made up in lots of different ways. Some are trusts, some are limited liability partnerships and some are companies limited by guarantee. There are some important principles of governance that we believe are essential in this area because, however they are made up, ALEOs use public money, and the ability to follow that public money is key.

For some time, we have been going on about following the public pound and insisting that the same standard of governance that prevails in a council should prevail for the public money that is invested in an ALEO, despite the conflict of interest if the same people are company directors of the ALEO.

I agree. I note that the Accounts Commission has expressed concerns about a list of things at Shetland Islands Council—leadership, vision and strategic direction, governance, financial management, and accountability. Are those concerns connected to the trust or are they about other things?

Those are general issues about the council, although they are linked to some extent with how the trust is operated, how the funding comes through, how they get on with each other or not, and how they manage or not. That is why we gave the new chief executive and the council a year and a half to look at how to turn things round, because the list of issues is a long one.

This is not really a question, convener, because I am conscious that I have had at least my fair share, but I wonder whether the committee might want to mention the issue in its legacy paper and suggest that any incoming committee that has a similar remit might want to take it on board. It sounds as if the issue is becoming intractable if the new chief executive is not able to make some headway on both of the elements.

We will wait and see how things develop later this year when we have another look at it.

Thank you.

I want to look at local authorities’ reserves. Your report notes a slight underspend by local authorities in 2009-10 and increasing levels of reserves. To what extent have local authorities used up much of their reserves in recent years, particularly with the costs of single status and equal pay, some of which may be on-going and therefore undesirable, and how are local authorities placed to deal with the use of those reserves in the future?

I will make a general comment about reserves and then go on immediately to make a point that I wanted to make today, if I may. We have always taken the view that it is for councils to set their reserve policies at whatever level they believe is appropriate in the circumstances. Our concern has always been that they explain that policy, and we have now seen quite a lot of success in that councils are indeed explaining their policies, the better to be transparent in reporting to people in their area. As we state in the report, reserves have grown a little over the year.

A moment or two ago, in response to a question from the convener, we talked about whether councils are in a good position and whether what they are doing is sustainable. We discussed those things in relation to the next year, which is of course important, but what I fear is what I sometimes refer to as the dangling debit for the medium to long term and for the next generation. We have a backlog of repairs to roads of £2.25 billion and rising, after the last winter; we have a property repairs backlog of just under £2 billion; we have borrowing to fund revenue expenditure on equal pay and single status, among other things; and we have the pensions issue that we have talked about. All those things aggregate to a sizeable sum of money that the next generation—and perhaps some of us, too—will have to face and pay for in some way, and I fear that councils will lose a lot of their flexibility because of the need to do something about those things.

Forgive me for taking the opportunity to make that general point. I now invite Gordon Smail to talk about reserves.

10:15

As you say, the reserves are holding up. Mr Baillie is right that not that long ago we did not know too much about council reserves. Through our work on the report and in local audits we have been able to get behind what the reserves represent and bring out just how much money is available and, importantly, what proportion of general funds is set aside for the future and what proportion is unallocated and kept for a rainy day. That is the type of thing that we have been able to trend over time. The trend shows that the unallocated amount is similar to last year. However, over the past five years, there has been an increase across all councils from 1 per cent of net cost of services to 1.8 per cent of net cost of services. That gives us the evidence to allow us to say that councils will be better placed to deal with budget pressures over the next few years.

You asked about what is earmarked. Part of the earmarked amount—£424 million—is for residual areas such as equal pay. The overall unallocated amount is about £218 million across all councils. It is very much for councils to determine against their overall financial policies what they should set aside. It is interesting to note in exhibit 9 the variation across councils in that regard. I know from speaking to councils that it is helpful for them in their own context to look at what other councils have set aside for a rainy day.

You made an interesting point about the levels of reserves. That was a partly helpful answer to my question and it shows that the issues of single status and equal pay are part of the burden that has been taken up by the reserves in recent years.

Looking back across several years, my recollection is that most local authorities’ reserves—speaking generally of the Scottish context—were quite high in the past, dipped significantly over the years and are now slowly beginning to build up. I am sure that your organisation will have a fixed idea of what is a reasonable amount of reserves for a local authority to hold in general terms; I understand that there is a need for flexibility. Given the increase in reserves that you noted from 1 to 1.8 per cent of the overall budget, are local authorities’ reserves low for what they need in order to cope with pressures along the line?

We are often asked that question, but we are not keen to be drawn on it, because as soon as the Accounts Commission or Audit Scotland says that the reserves figure should be, say, 1.5 or 2 per cent, that becomes set in stone. We are reluctant to do that because we strongly believe that it is for local councils to look at their local financial position and work out what is best for them. That said, as part of our assessments of individual councils’ overall financial position, we flag up risks. In cases such as those at the lower end of exhibit 9, where the amount of unallocated general fund is relatively low, local auditors will ask, for example, “Is this right for this council? Have you got plans to build back up to what you consider to be your policy?” One of the things that we have managed to achieve is that all councils have a policy for their reserves nowadays. Those are the types of question that we ask individual councils.

I am sorry if I am not answering your question directly and being drawn on what we consider to be the correct percentage for reserves, but I think that this is the right position to take on that particular topic.

Gordon Smail is right that there is no right answer, but we expressed concern about two councils last year—West Dunbartonshire Council and Midlothian Council—because they both reported having no unallocated reserves at all and we did not think that that was a particularly healthy position to be in. Both councils have increased their unallocated reserves this year, which makes us feel more comfortable. We do not think that there is a right answer to the question of reserves percentages, but we know that there is a wrong answer, which is when a council has nothing at all to deal with unexpected events. It was pleasing to see that some councils have taken action in the year to address that.

There certainly seems to be an improving picture on reserves across Scotland, and Mr Baillie made a good point about councils having policies in that regard and ensuring that they follow them through.

I want to return to a general issue that we discussed earlier and ask about a particular point. My question is about the efficiency of the provision of public services through local authorities. On page 24, the report states that, although some work has been done on shared services,

“Overall, progress in delivering projects has been slow, and significant savings in the short term are unlikely.”

In a time when sharing services should be such an obvious opportunity, why have local authorities been so slow to consider that?

I will start off and Fraser McKinlay will probably want to come in on the detail.

In the past, there has been reluctance to consider shared services as a real money saver. That is partly because of a belief in some quarters that shared services will not save a lot of money, although some of it is down to the need to cede control. A council that already has a good service might not want to mix it with something that it regards as inferior. That kind of reluctance has been in the background. By the time that a shared service is achieved, time will have gone by and there will have been consequent costs, such as those involved in reducing staff levels, so in the short term there is perhaps outflow rather than inflow. Shared services should come into their own in saving money in the medium to long term.

I support everything that Mr Baillie said. We still think that sharing services is a good thing to do, but people need to go into that with their eyes open to the complications and the fact that it will not save money next week. Inevitably, most such exercises involve investment up front, with a payback period over a longer term. Good shared services projects will save money and improve services, so it is important that people think about such exercises not just as a way of saving money, but as a way of redesigning a service for the good of the local community. There are many good examples of that. An obvious one is the Clyde valley partnership, which followed on from work that Sir John Arbuthnott did. However, it is worth reflecting on the fact that the partnership will save about £70 million. That is not an insignificant amount of money, but nor is it a huge amount. That scheme goes across a pretty wide range of services in eight councils.

Mr Baillie touched on barriers to sharing services. Those are about political will and leadership. There is a need to understand what services cost now—which does not always happen—so that a sensible business case can be pulled together to show whether a new model will work.

Some interesting recent developments on shared services have involved the front end of service delivery. For example, Stirling and Clackmannanshire councils are considering joining their education services. The approach is not just about the traditional or back-office functions such as finance, personnel and procurement, although more can always be done on that. Councils are beginning to consider how services are provided to citizens at the front end. It will be interesting to see how that pans out in the next couple of years.

The obvious geographical synergies that exist in some places in Scotland are blocked by the fact that there are lines in the sand—or lines in the land, so to speak—that people are unwilling to cross for all sorts of reasons. Do we have to deliver real financial opportunities and incentives for local authorities to make changes or do we just have to wait for the finances to get a bit tighter, and they will begin to move?

That partly goes into policy. The idea of financial incentives that are additional to any that come out of shared services is interesting. I had not considered that in quite the way that you put it, but it occurs to me that, if a shared service does not present a business case, that suggests that a financial incentive would be an artificial misallocation of resources. That would be the line that I would want to pursue.

To recap on equal pay, the figure that you give in the report for the cost of settling claims is about £180 million. We have heard in evidence over a long period that local authorities have what they describe as conceded claims—ones that they know that they will have to concede—and claims that they will rightly contest because they do not believe that there is a case to answer. Have you broken down that figure into the genuine liability in conceded claims and the amount for contested claims? If not, why have you not done so to get a true figure?

When we came to the committee last year to discuss last year’s overview report, the committee was clearly interested in the overall figures. We were able to bring those together in the report that we are discussing. We have figures for the amount that has been paid and the amount that is still in the system in the accounts. That is the point that I want to make.

The figures that we have are drawn from the audited accounts. Local auditors do the financial audits each year and they look at what councils have done relative to the financial reporting standards. There are rules about what would be included as expenditure and as provisions—that is, money that is set aside—and what would be a disclosure as a contingent liability. That approach has been taken consistently against generally accepted accounting practice across all councils. The auditors challenge councils. They say, “You’ve included these amounts in your accounts. How did you come to them?” They will rely on things such as their own legal assessment of whether money has to be paid or set aside.

I am trying to explain that there is an underlying technical position that leads us to the figures, which are big figures in local authorities’ balance sheets. Auditors look at the area each year when they do financial audits in councils.

I do not intend to spend a lot of time on the matter, but I would like to follow it up briefly. Have you examined the evidence that has been brought to the committee? It is clear that there is consistent recognition in all the evidence that there are conceded claims—in some cases, they have been described as conceded claims—and contested claims, but a technical application is applied that rolls all of them up into a figure that is bigger than it really should be, and that is the reason why we do not make progress.

We do consider the evidence. I am regularly in touch with colleagues in Unison in particular. Obviously, they have a lot to say on the matter; indeed, they have a lot to say about what Audit Scotland should and should not do around it. We are always happy to consider whether there is more that we can do.

Gordon Smail set out our audit position. It is difficult for us to second-guess the legal advice that councils have received so, at the moment, our job is to satisfy ourselves that that legal advice has been given, that it appears to be sound, that the council has followed a proper process, and that all of that figures in the accounts. We certainly keep a close eye on the matter and we will be interested to see what happens with equal pay claims over the next 12 months.

Do you have a figure for conceded claims and a figure for contested claims? Do you recognise that those are two different things?

We recognise that, but we do not have those figures. We have not done that breakdown.

You do not have the figures.

No.

So why are global figures being produced if we know that they are, at best, misleading?

I am not sure that they are misleading, convener. Gordon Smail explained our job as auditors working with accounting standards and guidelines. That is the extent of our role and remit and £180 million was the figure that we came up with.

I might be misunderstanding, but Inverclyde Council, for instance, can come along and tell me that there are 200 conceded claims and there is a value on them. Therefore, we have conceded claims, a number and the equal value, but the Accounts Commission does not.

We can clarify that, convener.

We can come back and clarify that. The principal issue is that there is liability for conceded claims and a legal requirement for the council to meet them, so they will be included in the balance sheet as provisions—that is, money set aside. Contested claims will involve the likelihood that they will come to fruition and they will be disclosed as contingent liabilities. We have the figures available, but we do not have them with us today. I have only the aggregate figures drawn from the information that we have received from auditors.

We can provide the figures to you.

The issue of common good fund assets comes up continually. Before the meeting, the committee was provided by somebody from Scottish Borders Council with arguments that indicate that common good fund assets could be anything up to £1 billion in value, although they contest that those assets are not being properly accounted for and recorded by local authorities in their annual audits. Do you wish to comment on that?

10:30

As you will know from our report, common good assets are about 0.7 per cent of the total assets that are under the control and ownership of councils. That does not answer the question, however. I think that your contact is saying that the assets are seriously understated. The council’s problem is that the records go back into history. Councils have taken a view to identify ownership at the point of any sale. That does not mean that they cannot identify existence and list it—they should be doing that already—but if councils were to pursue every possible common good asset in terms of ownership, it would take an awful lot of resources and the work might not make good use of the available time and the resources.

We know that this has been an area of interest to the committee for a while, following the receipt of petitions by the Public Petitions Committee. The matter has been of concern to us, and we in Audit Scotland have been made aware of a lot of interest from people, including members of the public, about this small but important part of the assets that councils manage.

As we note in our report, professional guidance is available on what is expected of councils. The common good issue has risen up councils’ agendas, and councils have taken reasonable steps and made reasonable progress—as the guidance requires—to ensure that their assets are recorded, in the first instance. They have been making good progress towards differentiating between assets under common good ownership and assets that form part of the general fund assets overall.

A pragmatic approach is being taken. Taking account of the current circumstances, some councils are doing the work at point of sale—they are spending the money and getting the legal advice that they require to determine whether land or buildings have come through the common good in history, or whether they are part of their general fund.

You mentioned guidance. Generally, councils have taken action to comply with guidance. Do you wish to comment on that further? Do you have any views on the variations that exist? You say that councils “generally” comply. Does that mean that some are not complying or are not following the guidelines as satisfactorily as you would wish?

We have not done detailed work to assess exactly how many councils are or are not doing so, but as Gordon Smail said, all external auditors will consider the issue locally. Our sense is absolutely that councils are making progress.

I would be very surprised if any councils are not following the guidance at all. Some councils will be making better progress than others, and that is what we mean when we say that they are “generally” taking action. As of today, we are pretty satisfied with the progress that is being made, while recognising the complexity of the matter, recognising the scale of the common good asset in relation to councils’ overall assets and recognising that the issue is important for the public.

Is there a small contradiction in that? The overview report said:

“Councils have generally taken action”.

When we ask for specifics on that, you say that you have not really done the detailed work. How do we get a general reassurance that councils are complying with the guidelines if we have not tested that or examined the issue? Have we?

Yes, we have. I am sorry, convener: I should have been clearer. The work in the overview report is based on the work of local auditors, and they will be generally satisfied. My point is that it is more difficult to say in an overview report exactly how well each individual council is meeting the guidelines. As I say, they are all taking account of the guidelines, and we are satisfied with progress on that.

Can you do more work on that?

We will ask auditors to continue to work on that. To give the committee some assurance, I can say from looking back at the individual reports that we do on all 32 councils that common good features in just about every single one. Although common good accounts for a relatively small amount of work in terms of its value relative to overall assets and so on, because of the public interest from a number of angles, it features in just about every report that auditors make to councils. It is certainly on the agenda, and things are happening.

There has been an increase in the Public Works Loan Board rate and, as Mr Baillie said earlier, it is likely that interest rates will start to increase. Do you have any comments on the increasing level of borrowing?

My only comment would be a refinement of what I said earlier about dangling debits in general. If you have increased borrowing and increased rates of interest, the repayments are the first call on expenditure in the future, before you consider how you are going to provide services. That reduces flexibility for councils. Anything like that makes me slightly anxious.

The report refers to wide variations in patterns among local authorities. Are there any in particular about which you might be concerned?

I do not think so.

I am not at the moment, but it is interesting that there are wide variations. Clearly, it is up to individual councils to set their own policies, but there would be merit in councils considering why that variation exists.

The other thing that is worth drawing attention to as part of this debate is the fact that, along with the increase in borrowing, the nature of the funding schemes is changing. In our report, we mentioned tax increment financing. At the time of writing that report there were one or two examples of that and a couple more have emerged since then. That is a tightly regulated scheme and it involves lots of hoops being jumped through. However, it is quite a different approach and is based on the council bearing the risk of bringing in non-domestic rates in the future. To some extent, that comes back to the point that Mr Wilson made about ensuring that elected members are absolutely clear about the liabilities that they are taking on through such arrangements, particularly as the PWLB becomes slightly less attractive as a source of borrowing.

In a period of financial stringency, the asset values that might otherwise be realisable as surplus assets cannot be realised, which also pushes up the need for borrowing.

That concludes this evidence-taking session. We appreciate your attendance and the evidence that you have given. We look forward to hearing your conclusions about the arm’s-length organisations, which I am sure will be interesting.

10:37 Meeting suspended.

10:41 On resuming—