Audit Committee,

Meeting date: Tuesday, May 16, 2006

Official Report 185KB pdf

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Accounts Commission

I welcome Alastair MacNish, who is a regular attendee at Audit Committee meetings. He is here to speak about the report "Overview of the local authority audits 2005". He is joined by Gordon Smail, who is senior manager of performance audit at Audit Scotland, and Bill Magee, who is secretary to the Audit Scotland board. David Pia and Caroline Gardner remain with us. Members have copies of the report. I invite Alastair MacNish to make an opening statement.

This is the fifth and penultimate overview report during my time as chair of the Accounts Commission and it is the third report that we have shared with the Audit Committee.

Although there are major challenges ahead for local government, this is the most encouraging overview report in the five-year period. I will set out the positive aspects. There has been continuing sound financial stewardship across councils. Council tax collection rates are showing their sixth year-on-year improvement—collection rates are up to 93 per cent within the year and, for the first time, every council in Scotland maintained or improved its collection rate this year. There has been significant improvement in municipal waste recycling rates, although the amount of biodegradable waste that is being sent to Scottish landfill sites continues to be more than the Scottish Executive's target for 2006. Councils are providing greater flexibility in home care service provision, particularly in out-of-hours and weekend provision. Finally, after last year's problems, councils are now managing their reserves more transparently.

Despite those positives, local authorities still face three major challenges: the Scottish Executive's drive for public sector reform and modernisation; the pending loss of experienced councillors and senior officers in the next 12 months; and, at a time when central Government funding is levelling off, increased financial pressures such as pension liabilities and equal pay and single status costs. As a result, the commission requires local authorities to redouble their efforts with partner organisations to improve the quality of service provision and to minimise unnecessary bureaucracy; to make a commitment to better medium and long-term financial planning and the use of improved performance management information; and to set clearer strategic objectives and to match resources to local and national priorities.

I publicly congratulate local government members and officers in Scotland on their engagement with and commitment to the best-value audit process and on the openness and honesty with which each council has conducted its self-assessment appraisal. The entire public sector needs to recognise that engagement.

Thank you very much.

You have painted a picture of improvement in many areas, which obviously we welcome. I point out that the committee's job is not to examine individual councils but to take an overview of local authorities in Scotland. In that respect, local authorities' ability to meet their pension commitments must remain a concern. How will they be able to respond to that challenge?

Over the past two or three years, there has been a significant increase in councils' employer contributions to meet future pension commitments. As page 13 of the report shows, the liability increased from £1.9 billion in 2003-04 to £4.5 billion in 2004-05, partly because of the change in accounting rules under financial reporting standard 17. Local authorities have to tackle this issue. We have almost reached the end of the actuarial review of pension funds, and this summer Audit Scotland will produce an update of the situation.

The one plus is that each council is very much aware of the problem and has been making strides in dealing with it, particularly with regard to funded pension liabilities. However, police and fire services pension schemes, which are unfunded, pose a more difficult problem, because they have an immediate effect on local authorities' ability to increase spend in other areas.

Paragraph 63 of the report says:

"A full valuation of each of the funds is expected to be reported in March 2006."

Can you shed any further light on the result of that valuation?

We hope to publish a full report on all the valuations by July at the latest.

Your report states:

"Councils have some way to go to develop and implement systematic performance management of their services."

The report also states:

"Performance management is underdeveloped in most councils."

Given that performance measures were implemented some time ago, what is the extent of the problem? Why are councils not carrying out such management?

The reason is partly historical, and it centres on the statutory performance indicators, which were never as good as they should have been in managing and commenting on performance. Instead of relying on SPIs, councils need to develop their own indicators that are based on the targets that they want to set and the outcomes that they want to achieve. Through the best-value audit process and, indeed, through the new modernised audit that has been introduced we are working closely with them to improve the situation.

The picture is mixed throughout Scotland. Nevertheless, you are right to suggest that performance management information is vital to local service delivery. That information needs to be improved; we have commented on that for some time. The individual best-value reports are helping dramatically, because each council has an implementation timescale to help the whole process.

You mentioned the potential loss of experienced councillors at the next election. Is an equal danger the loss of experienced staff? In many ways, officials are the bedrock of the system. Is the turnover of council officials a problem?

I referred to elected members and officials. We have a serious problem, because we know that a considerable number of chief executives will stand down before 2007. Recruiting experienced people is an issue, particularly in a time of change because of the introduction of proportional representation, but it is a concern only because dramatic change will take place over 12 to 18 months. Councils are aware of that, but only time will tell. That is why it is important that councillors have proper training—the report highlights again the need for training on their scrutiny and other roles.

The same question applies to officers: where will the next breed come from? I thought that we could immediately replace all the old chief executives and town clerks. Some tried and failed to do that and some succeeded. Recruitment has always been an issue, and it is more difficult now because change is happening so quickly. We are concerned about the effect of that in 2007 to 2009.

Whence will come the solution—correct performance indicators that apply throughout the system—to the problems? What about the training of new officials and new councillors?

We are working closely with the Society of Local Authority Chief Executives and Senior Managers and COSLA to develop such measures. Those organisations have been aware of the need for them for some time and we have input into their development. The problem has not been solved yet; it needs to be tackled, and the organisations are very much aware of it. We will report further on that.

The committee recently spent time considering leadership in the public sector and reflecting on some of the opportunities that the Executive might have missed since devolution. What is being done in local government to develop leadership? I heard your response to Andrew Welsh, but the issue is bigger and more long term than simply plugging the gaps for a few chief executives. We are talking about building leadership capacity in local government to deal with the challenges that you have set out. Will you also be a wee bit more specific about the succession planning in local authorities and throughout the sector generally?

I ask Caroline Gardner to answer your first question; I will attempt to talk about succession planning.

We examined leadership development in local government as part of our report on leadership development in the Scottish public sector overall and we found encouraging developments. SOLACE is running courses for aspiring chief executives and aspiring service heads that seem successful in attracting the right group of people and giving them not only one-off input from the courses but continuing support from a network of peers and mentors who will help them to develop into those roles better. That is encouraging.

We found a good example in South Lanarkshire Council, which started with a best-value vision of what it wanted to achieve and rolled that all the way through development plans for members of staff and groups of staff with the right support. The plans focus not just on their role in the council but on their need to work in partnership with colleagues in the health board, in other parts of the public sector and in the voluntary sector. We identified that as good practice from which other councils could learn.

A gap probably still exists in having a structured process to give potential leaders throughout the public sector the opportunity to learn together early in their careers. We have a report on community planning that is due for publication relatively soon. Everything in it suggests that, in future, people will need much better experience of working with others from different professional and organisational backgrounds and of finding ways to solve local problems rather than sitting in their organisational bunkers. There is still a gap in developing such a structure to which all councils—along with the health service and the rest of the public sector—have access.

Leadership's vital role has been mentioned. It is evident already from the best-value audits that clear and strong leadership at council member and officer levels leads to successful councils and that, where there is weakness in leadership, there are problems.

Some councils have made great strides in succession planning. However, speaking about officers rather than members, many are still not in a position to be clear about succession planning for the huge change, because it is such a dramatic change. Some councils will need to do much more work. I hate to say it, but the situation throughout Scotland is also affected by a pecking order in the wide salary ranges in the smaller and larger authorities.

You identify in the report the need for greater support and training for elected members

"to enable them to challenge officers."

I guess that we could have an interesting conversation about the extent to which members need to challenge officers and the extent to which officers need to challenge members sometimes. However, to stick with the development of councillors—in particular, in their scrutiny role—will you comment on the shift that is taking place in several councils towards a cabinet-based system? That introduces another range of issues about elected members' scrutiny of their councillor colleagues within such a system. In some of the best-value reports I have read comments about that with reference to specific authorities, but where do you think the system is going in general?

As you are aware, from 1999 to 2001 I was the chair of the leadership advisory panel, which considered the political make-up of council organisation throughout Scotland. Then, there was a move towards cabinet-type administrations. The panel chose to leave the matter flexible and to allow councils to have a cabinet-type organisation or a committee structure. That has been remarkably successful, in that councils have been able to live with different, competing interests.

However, back-bench members' scrutiny of administrations—rather than officers, although they are a part of it—has caused us concern over the period. Those members need to be able to do exactly what the Parliament's committees do with the Scottish Executive and challenge administrations forcibly in their scrutiny role. Every council now has an audit committee—that might not be rocket science, but it is a statement of fact. More and more of those audit committees are becoming genuine scrutiny committees in which back-bench members can challenge the leaders, call them to account for policies that have been agreed and determine whether they are being implemented.

Progress is being made, but the report says that there is some way to go. We will encourage that progress. The points about the need for performance management information and scrutiny come out time and time again through the best-value audits. The new modernised audit might help scrutiny and councillors' ability to challenge administrations more readily. Time will tell whether that is successful.

What proportion of the 32 councils have moved to a cabinet system?

A third, I think.

It is around half.

Do half have a cabinet system? It has moved on since I dealt with it—the proportion was a third straight away—and I think that the change to proportional representation might move it further down that road.

I have a final question on a different theme. I sense that the move to best-value audits has helped authorities and people like us who are in the business of examining reports such as "Overview of the local authority audits 2005" and trying to get a sense of qualitative and quantitative performance to develop an understanding of how councils are performing. However, I am concerned that it is often still hard for the general public to get a sense of how local authorities are performing across the board and that councils' material often—as is to be expected—focuses on the positives. Doing so is legitimate up to a point, but how council tax payers and electors can get a balanced picture of performance is an issue. Do you have any plans to develop the best-value audit process so that better ways are found to convey independent assessments of councils' performances to local people?

I agree that the best-value audit process has been positive. Headlines that do not reflect the performance of every individual council can be taken from overview reports that comment broadly on the public sector and local government in particular. The great thing about best value is that one gets a warts-and-all report on a council and where people are doing good work. That takes us away from the approach in which a council is damned because of one bad area. Councils get credit for quality of provision.

You mentioned councils always focusing on the positives. We endeavour to ensure that a balance is struck and that the consumer's input and criticisms are reflected in what councils develop. Such an approach is part of the improvement that is required of councils through best-value audits. We come up with recommendations. Administrations will always want to say what they are doing well rather than talk about what they are not doing so well, but councils' self-assessment analyses have been unbelievably honest about where they are failing, because they have used them as a tool to get their act together, move forward and improve service quality. If councils and the whole public sector use such an approach so that there is joined-up working, it will be the greatest plus that could ever be achieved in Scottish local government.

I would like to follow up on what Susan Deacon asked about. You mentioned audit committees being created in every council. Do those committees scrutinise the work of the political leadership or the work of officials? I ask that question because this committee considers the work of accountable officers. We do not consider the work of ministers, so the political temperature is reduced, which contributes to a great deal of cross-party work being done to get to the bottom of difficulties. Do those audit committees work in the same way that the Scottish Parliament's Audit Committee works, or is there political scrutiny?

There is a mixture of scrutiny. Some committees scrutinise both officers' and members' work, but probably the majority scrutinise the work of officers. I think that committees should scrutinise the work of both officers and members if they are to be effective, and quite a few do so. We highlight that approach in best-value reports and try to promote it in the medium and long term.

In some councils, the audit committee will focus purely on the financial audit of the council and how resources are managed, and a separate scrutiny committee will deal with the political challenge. In other councils, the two functions are combined. We have not reached a view on whether one model is superior to the other—the issue so far seems to be much more about how the committees work in practice.

More work needs to be done on audit and scrutiny roles—that issue arises in almost every best-value audit. Nevertheless, councils are going down a road that I welcome—long may they continue to do so. There is definite progress, which must be continued.

There used to be annual publications on a range of issues such as the number of pupils in schools and refuse collections. I cannot remember what those publications were called, but they seem to have stopped. Does that reflect a change in the style of reporting?

Those statutory performance indicators, of which we have about 60 or 70, are still published. We no longer publish them in individual pamphlets because that skewed their impact to an extent. The SPIs are still reflected in the overview report and they are still used in the best-value report. We publish them on the web, where anyone can see them, but they are no longer published in small pamphlets.

We believe that the overview report is far more important, albeit that, as the committee may recall, roads maintenance and other such issues were highlighted via the various SPI reports. However, councils now use the SPIs to a far greater extent in their own questioning of their progress against the various targets that they are trying to achieve. The SPIs also still form a major part of the overview report that is prepared by the controller of audit.

The SPIs need to be improved, but I am delighted to say that the Scottish Executive is now taking on board that work. In fact, I will attend a meeting straight after this about developing more significant performance indicators that each council in Scotland can use. That is not as easy to do as it sounds because, although many of the issues are fairly simple, coming up with an output-driven indicator that can be used across the board is often difficult.

If the information is still available on the web, is there a news flash when it is refreshed each year?

Yes. My colleagues from the press in the public gallery behind us—at least, I think that they are still behind us—still take great interest in the information at times.

They are still behind you.

I am not sure whether other members have further questions but I have a few more, the first of which is on the issue of capital. Does the commission have any observations to make on the introduction of the prudential system? Paragraph 75 of the report states:

"A recurring feature in audit reports is slippage against capital programmes".

Are the two issues related, or is that slippage due to the difficulties that are mentioned, such as land deals taking longer than normal?

I say this slightly tongue in cheek, but in my 30 years I have not known a capital programme that did not slip.

I am sorry, but I am shameless when I am in the chair.

I will ask Gordon Smail to give a definitive answer.

Through the overview report, we are keen to draw together the common themes that have emerged from the individual local authority audits and to put those in the context of the changes that are happening in local government finance. From the trends that we have followed over the years, it is clear that capital expenditure is increasing and that councils are making use of the flexibility that is allowed under the new capital regime. Therefore, it is important that councils have indicators in place to ensure that their plans are affordable and that money will be available. That links closely with another point that we make in the report about the importance of long-term financial strategy. In other words, councils need to recognise the long-term effects of capital decisions that are made today.

To answer the question, although we do not have a detailed picture across the board, we have evidence about some of the interesting underlying questions. For example, by comparing capital budgets with actual capital spend for the year, we are able to see a picture of slippage in capital projects. We do not have the full information on those interesting underlying issues, but it is clear that there are questions over the capacity of both councils and the market. The report also highlights individual issues such as the time taken to complete land deals. In other words, capital projects that had been planned to go ahead have taken longer than was thought because of the legal requirements of selling and acquiring land.

On a related point, paragraph 102 of the report states:

"Later this year, Audit Scotland will be following-up the Commission's June 2002 report on private finance initiatives (PFI) in schools."

When can we expect Audit Scotland to deliver that report?

The issue of PFI is related to my concern about capital spending under the prudential system. As Gordon Smail has pointed out, local authorities in general seem to be entering into considerable long-term investments and commitments, yet the evidence shows that some of them are not fully funded. Despite knowing that they will have a mortgage commitment to meet about which future councillors will need to make decisions, councils seem to be entering underfunded commitments just now because windows that would give them access to support from the Executive's capital spend are closing. To me, that does not sound prudential. Do councils feel that they need to enter those commitments just now because they will otherwise miss those windows of opportunity?

We are carrying out a study on developments in PFI and public-private partnership projects in relation to school buildings, but the report of that work will not be published until about a year from now. At present, we are only just developing the project brief.

So that will be published in 2007.

Yes.

I return to Gordon Smail's point that it is vital that we have clear strategic objectives that tie up national and local priorities with capital and revenue spend. That is one issue that we keep pushing through the best-value and statutory audits. We tell councils to ensure that, even if there is a window of opportunity now, all their financial statements tie up with the council's long-term spending plans. If they do not do that, a black hole will appear. I am confident that councils are well aware of that. As I said, the financial stewardship of councils is sound—long may that continue.

On councils' capital spend, have you considered the added value that can be brought to councils and the populations that they serve through planning gain that can be achieved by working with private developers? How do we recognise the advantages of making the public pound go further through that mechanism?

Asset management is a vital issue in local government and the situation is improving year on year. The individual councils' best-value audits highlight the importance of asset management. Councils need to consider their assets and decide whether they are valuable or might be redirected in a partnership arrangement that would provide a gain to the council.

We are considering including that topic in our future programme of studies, on which we will consult during the summer. The committee will have the opportunity to contribute its views on the subjects that it thinks that we should pick up. Asset management is one issue that requires a closer look than we have so far given it.

To be clear, might that include considering whether local authorities, in granting planning permission, engage with developers to gain infrastructure improvements to support their developments? That is not paid for out of the public purse, but it obviously benefits local communities. Is that the sort of issue that you may consider?

In principle, yes. We may consider asset management planning, which is about how councils and other bodies approach the planning of the future use of assets. Obviously, that would incorporate the kind of issue that Mary Mulligan raises.

I want to move on to councils' reserves, which Mr MacNish mentioned in his opening statement. Paragraph 85 of the report refers to

"Improved disclosure in the accounts",

which we all welcome. Will you explain what has brought about that improved disclosure? You go on to mention that £208 million, which was about 46 per cent of the general reserves, was

"earmarked for specific future purposes".

Are those funds earmarked because commitments have not yet been fulfilled but are held back? For instance, some councils have flood schemes to which they are committed and for which they hold funds back because the schemes have not been completed. Alternatively, are the earmarked funds reallocated from projects on which money was not spent and which no longer require funds?

Over the years, we have consistently raised concerns about the reporting of reserves. It is important to say that we do not question councils' right to have reserves or raise issues about the amount that they should hold in reserve, as that is clearly a local issue. However, we are keen to encourage councils to be more transparent and up-front about why they hold reserves and what they intend to do with them. Over the years, substantial amounts have been held in reserve. Last year's overview report contained a profile of the situation. Councils reacted well to the commission's recommendations to make that information available, as reported in the present report. That has been one of the drivers. The questions that individual councils have been asked about why they are holding money have led them to include more information in their accounts about that and about what they are intending to do. That has helped to move on the situation quite substantially.

You also raised the issue of earmarking. From the additional information that has been provided about reserves, we have tried to give an indication of just how much is being held as a contingency. Councils are big business and it is right that they hold money back for unforeseen circumstances. With the improved information that we have, we have been able to differentiate between the amounts that are held in contingency and those that are intended for a future purpose. Earmarking can apply to a range of things, such as identifying where the money to fund equal pay settlements and the like will come from. It has been helpful for us to get that information and to be able to put it in this year's report.

I agree that there is greater transparency. It is far more useful for us to be able to see what reserves are available. I welcome that development.

You touched on the final issue that I wanted to raise—members may want to ask about other points. In your opening statement, you talked about challenges. I want to flag up the issues of free personal care, equal pay settlements—which you mentioned—and the future McCrone settlement challenges that will impact on costs for councils, such as increased uptake of chartered teacher status, which will put local authorities under greater funding pressure. The committee considered those issues earlier today. Are there patterns across local authorities of which we should take note at this point?

Councils are aware of the significant impact that the issues that you mention will have on their future planning for spending. There is no doubt that single status agreements and, in particular, equal pay settlements will have an impact, and all the councils are working very hard on those issues. Councils that had made a formal offer to staff were able to include funding for such issues on their balance sheet as a contingency, but if a formal offer had not been made, it could not be included on the balance sheet as a liability. Councils are at different stages, but they are all tackling the issues. As far as we are aware, they are doing so reasonably well.

The resourcing of such commitments is a big issue. When we put them all together, they amount to large sums of money. Councils continue to raise the issue of funding, but I am not aware of any council that is not striving hard at the moment to meet its commitments, which are not long term, but short term. Some have already agreed settlements, but others have some way to go on that. I am optimistic about the fact that they know what the problem is. Some are a considerable way down the road towards solving it. Councils are not unaware of the issues and are working on them. Whether they can accommodate all of those matters in their funding for 2007 is another issue, which each council will have to deal with on its merits.

A further question has occurred to me—if I am left in this seat too long, I think of more questions. You touched on the issue of collection of council tax. Over the past few years, councils have started to introduce a system of planning council tax rises over a three-year period, so that council tax payers have a better idea of what their commitments may be. Is there evidence so far of whether councils have been able to meet those projections? Are we able to say whether the approach has had an effect on collection rates because members of the public are able to predict more accurately what they are expected to pay in three years' time?

I do not know the answer to the first part of your question, but an immense amount of work has been put into increasing collection rates. Five years ago, collection rates were down at 80-odd per cent within the year. One could argue that councils get most of the remaining money in later years. We are now up to a collection rate of 93 per cent. You cannot imagine the input of local authority finance departments and other agencies that have striven to increase the collection rate percentage, year on year. They have increased it for the sixth year in a row. This year, every council in Scotland improved its collection rate, apart from Orkney Islands Council. However, that council has the highest rate of council tax collection in Scotland, and its rate fell only marginally this year. The councils should be given credit for working hard to improve on where they were.

Caroline Gardner might be able to help with your first question.

We do not have systematic evidence about councils' projections, but we are considering the matter. Alastair MacNish referred to the modernised audit that is being rolled out for all 32 councils—the commission is responsible for auditing all of them. That audit will consider the issue of long-term financial planning, but it is too soon for us to answer the convener's question about that.

I am encouraged that you are considering it.

I have a wee question about the reference in paragraph 133 of the overview report to the money that councils provide to other organisations, such as voluntary organisations. There is a suggestion in paragraph 134 that councils need better information about what they get for that money. Is the Accounts Commission saying that a voluntary organisation should not get any money without there being something in the nature of a service-level agreement? Are there different levels of agreement with voluntary organisations such that some organisations contract to provide services and others just get a bit of a handout because what they do is a good thing?

Obviously, there are different levels of contribution to the voluntary sector. Our concern about the matter was expressed in the recently published report "Following the Public Pound: A follow-up report". There was real concern about there being insufficient scrutiny of the fairly large amounts of money that councils hand out to third-party organisations. Councils require to manage and scrutinise such money properly. However, there are different levels of support. For example, local authorities have, rightly, always encouraged and given grants to small organisations throughout the voluntary sector. The councils get far more back compared with what they put in because the organisations' work is largely voluntary. We are not suggesting that that is not proper, but there is a real issue in following the public pound, given the large amounts of money that go to third-party organisations such as trusts. It is important that local authorities ensure that their money is being spent properly and effectively to deliver services within their communities.

Those are all our questions for today, Alastair. I thank you and your team for coming along and giving us the opportunity to put our questions. I am sure that the committee looks forward to your final appearance next year. If the rate of improvement that you reported continues, I am sure that we will have a pleasant meeting and that you will be able to leave on a high note.

Thank you very much.

That concludes item 7. We now move into private session for item 8.

Meeting suspended until 12:30 and thereafter continued in private until 12:38.