Local Government and Communities Committee

Meeting date: Wednesday, January 8, 2020

Official Report 729KB pdf

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Budget Scrutiny 2020-21

Item 3 is an evidence session on the Accounts Commission’s report “Local government in Scotland: Financial overview 2018-19”. This session forms part of our overall budget scrutiny in relation to the local government budget. I remind members that the theme of our scrutiny this year has been the long-term financial sustainability of Scottish local government.

I welcome Graham Sharp, chair of the Accounts Commission, who is accompanied by colleagues from Audit Scotland: Fraser McKinlay, controller of audit; Brian Howarth, audit director; Christopher Lewis, senior auditor; and Lisa Duthie, senior auditor.

I invite the chair to make a brief opening statement.

On behalf of the Accounts Commission, I welcome the opportunity to discuss our 2018-19 local government financial overview report with the committee. Our report this year highlights the continued financial challenges that are being experienced by Scotland’s councils and integration joint boards.

Since 2013-14, Scottish Government funding to councils has decreased by 7.6 per cent in real terms. However, in 2018-19, Scottish Government funding to councils was relatively stable, with a 1.1 per cent cash increase, which is equivalent to a 0.7 per cent reduction in real terms. This stability continued into 2019-20 with a 2.9 per cent cash increase.

Councils’ overall income in 2018-19, including £9.8 billion of Scottish Government funding, increased slightly to £17.7 billion, but that increase has not kept pace with the changing and increasing demands on services.

Councils planned to manage a funding gap of 3 per cent primarily through savings, but a shortfall in achieving those meant that more of the funding gap was met from reserves than had been planned. The net draw on reserves was £45 million. Two thirds of councils have reduced their general fund reserves over the past three years rather than maintaining or building them. Although I am pleased to report that no council is currently at risk of eliminating its reserves in the next three years, continued use of reserves to manage funding gaps is not sustainable in the longer term.

Councils have experienced several years of tightening budgets and have already made savings through restructuring and efficiencies. However, with further funding reductions forecast and the demands and pressures on services continuing to deepen, councils need to do more to redesign how they deliver and fund services so that they can continue to provide effectively for the needs of their communities.

The commission is particularly concerned about integration joint boards, which continue to face very significant challenges. In our report, we highlight that they need to do more to address their financial sustainability. Overall IJB budgets increased by 3 per cent to £8.6 billion. However, the majority of IJBs struggled to achieve break-even in 2018-19, with 23 of the 30 IJBs recording a deficit or relying on additional funding from partners.

Having clear, complete and detailed agreed budgets is a fundamental governance tool. We note in the report that 14 IJBs did not manage to agree a budget for the start of the 2018-19 financial year and just under half of IJBs had budgets that included some unidentified savings.

The pace of progress with integration is slow. We have yet to see evidence of a significant shift in spending and services from hospitals to community and social care.

We also note in the report the continued high level of turnover of senior staff in IJBs, with over a third changing during 2018-19. The instability that that brings inevitably impacts on leadership capacity and on the pace of progress.

The commission continues to emphasise the value of medium and long-term financial planning. In this overview report, we encourage IJBs as well as councils further to improve and develop their approaches to financial planning in order to support effective decision making and financial management.

My colleagues and I are happy to answer questions.

Mr Sharp, I welcome you and your colleagues, some of whom have not previously been before the committee. I also thank you for preparing a very thorough report, as you always do. Your reports contain recurring themes, which I am sure my fellow committee members will explore.

I want to ask you about a very current matter that affects Scotland’s councils. The United Kingdom Government has announced that its budget will be delivered on 11 March. Of course, that date is significant for Scottish councils because it is the last date on which they can legally set their own budgets. If the UK Government’s budget is to be set on that date, it is difficult to see how the Scottish Government will be able to set its budget before then, so our councils certainly would not be able to set theirs by then.

I am not asking you to comment on the political aspects of that situation, but perhaps you could give us a sense of the challenges that it might present for Scottish councils.

Clearly, the situation is problematic. I suppose that the good news is that everyone has identified that fact and is trying to work around it. However, as you say, the timing and the need for legislation on the setting of a rate, which should be based on a balanced budget, simply do not cohere with the delivery of a UK Government budget on 11 March. I know that everyone here will be working on the Scottish Government budget process. For our part, we would be very happy to participate in and contribute to that.

From a governance point of view, each council will need to take advice from its monitoring officer and section 95 officer on exactly what its position is, and what action it will need to take within the relevant timescales. I know that a number of options have been floated, but I do not know what will happen on those over the next few weeks.

I invite Fraser McKinlay to comment further.

As Graham Sharp has said, this is a problematic and unprecedented situation, as many of the committee’s members will know if they have sat around council tables in their previous roles. There are also issues for the Scottish Parliament, the Scottish Government and everyone else who is involved in the budget process here. As the chair has said, we would be very happy to contribute to discussions on how we might manage that over the next few weeks.

As ever, and as the chair has just described, our interests are in achieving good governance and ensuring that councillors are given the right information and advice, especially from their statutory officers. It is possible for councils to set their council tax rates without approving their overall budgets. Clearly, though, that is not ideal from the point of view of good financial management. However, given the evidence that, these days, councils’ medium-term and longer-term financial planning is in pretty good shape, I would say that they are probably better placed to do so now than they might have been, say, five years ago. The work that councils have already done on such planning will stand them in better stead if that should turn out to be their position.

As the chair has said, we will closely watch the discussions and the options that might be presented. However, as things stand, it is very difficult to see how councils might set fully considered and balanced budgets within the required timescales. As committee members will know, the date of 11 March has not been plucked out of the air. It will also have practical implications for getting council tax bills printed and sent out to council taxpayers so that they know what they will have to pay.

The final practical implication is that, in the past few years, the scope for councils to set their council tax rates has been part of the local government settlement. There is a bit in there that says that councils are allowed to increase their rates by 3 per cent plus inflation, which works out as being by 4.79 per cent or so. The local government settlement comes out as part of the Scottish Government’s budget process, so there would be a bit of an issue there even if some councils were to want to set their council tax rates before 11 March, in advance of setting their budgets.

Therefore there is a lot to work through. However, as the chair has said, there is a strong sense that everyone recognises that there is an issue here. As you have said, Mr Simpson, we will keep clear of the politics of the situation, but if we can do anything practical to contribute to those discussions, we will happily do so.

You mentioned that there are options. If the date of 11 March does not change, what options will councils have? I cannot envisage any council setting its council tax rate without knowing how much money it would be getting—that is just not going to happen. What other options might there be?

I was referring to the fact that I have seen options being mentioned in the press when people have reacted to the UK Government’s announcement. If we look at the options logically, the first one is anything that the Scottish Government can do with the information that is available to it, and the second is what councils can do if there is no Scottish Government budget. Under existing legislation, 11 March is the council tax date. There are practical reasons for that and it is not just a statutory requirement. As Fraser McKinlay has said, councils need to get bills out and the council tax should be linked to a balanced budget. However, in exceptional circumstances that might have to be looked at in another way and something might have to be done to work around it at a practical level.

The only circumstances in which a council might be willing to set the council tax would be where it had already decided to set the increase at the maximum level. Some councils have done that in the past and some councils will have set a three-year budget as well as a medium-term financial plan, so some of them will have factored into that an assumption that they would go for the full 4.7 per cent. If that is their plan anyway, they might feel able to do that in the absence of agreement on the whole budget. However, as I said, there needs to be clarity about what the settlement says about the parameters around council tax.

This year’s report does not say very much about timing issues and setting budgets, but we talked about those quite a bit last year. Exhibit 12 in the report puts matters in context, because it shows that council tax has been only part of the solution to closing budget gaps; a much bigger part of that has been savings plans. It is the time for that aspect that probably gets squeezed, because councillors need enough time to properly consider savings plans that are put before them in order to achieve a balanced budget.

A couple of matters probably mitigate the effect of the timing issue. As Graham Sharp and Fraser McKinlay mentioned, many councils have medium-term plans in place. Those will include a range of scenarios, so some preparation should already be in place in councils to consider a range of settlements. The council tax is therefore not the only solution, because the main way in which councils have closed the budget gap is through savings plans, which should be in train and should take into account a range of scenarios for the settlement. However, that would only mitigate the risk of a late settlement.

That is all very true, but councils still need to know how much money they will have. Councils will have a range of scenarios, but they will ultimately need to know which one they are facing. If they do not know that on 11 March—

It is the setting of the council tax that is the critical issue for that date. If a council’s rate is up at the cap and the council knows that the cap is remaining, which is another piece of information that it needs to know but does not have at the moment because the settlement has not been published, it might be able to use that to get over that issue. However, that does not solve the problem of the annual budget, which needs to be put in place as quickly as possible.

I have a final question on something that is important for the work that this committee does. If there is no change to this, is it possible for councils to do month-by-month budgets based on the money that they have had previously?

It depends on what exactly you mean by “no change”.

I mean no change to the date of the United Kingdom budget.

First, councils have to know what the cap is in order to be able to set a rate on 11 March, come what may; otherwise, I just do not see how they can do that. That is a very specific issue.

In relation to the Scottish budget, whether councils could rely on their medium-term planning for an interim period, having set a rate based on that and knowing what the cap is, and then set a budget later would need some thought and working through.

From our perspective, we are happy to be involved in the discussions, but it will be important for COSLA and the Scottish Government, with potential assistance from the commission and Audit Scotland, to provide some guidance. I stress, though, that it is ultimately for councils to decide how they want to deal with the situation, which is where I come back to the advice from the monitoring officer and the section 95 officer being critical.

The legislation—I think that it is the Local Government Finance Act 1992; I was reminding myself of that last night as I could not immediately bring it to mind—says very clearly that there is a requirement to set the council tax by 11 March. However, an interesting part at the end of the relevant subsection suggests that, even if the council tax is not set by then, it is not invalid. We are not lawyers, but I think that more work and careful consideration of what the requirement is are needed. As I have said, we are happy to be involved in that, and what we can bring is a sense of what we would expect good governance to look like and how it can be accounted for.

11:30  

I found the report incredibly useful. We are going to come back to IJBs, which were the last point that Fraser McKinlay mentioned in his introductory remarks. The convener is going to pick that up in detail, but I will give some context.

We have been looking at the long-term issues and challenges for local government funding and budgeting, such as demographic changes. One of the challenges is that, although the bulk of local authority spending is not ring fenced, in education and social care, which are the top two spending areas, there are a lot of Government requirements and commitments, which makes it very difficult to make savings in those areas. It would be interesting to hear about best practice and about where local authorities have been able to deliver the same level of service with less money.

The effect of that is that there is a focus on making savings in other services, which then do not get the same attention. I would be interested to hear some views on the savings that local authorities have made and on what those savings constitute on the ground—do the savings result in fewer services or fewer people providing the same service? What is best practice in those situations, when there are difficult decisions to be made?

The report is focused specifically on finance. The report that will be published in March or April this year will look at services.

The report that was published in March last year looked at services and it dealt directly with the issue that Sarah Boyack has raised of the gearing effect of squeeze on non-protected services. As local government funding comes under pressure and certain large areas of spending within their budgets are protected, either directly or indirectly, that means that much smaller areas of spending are bearing the brunt of the cuts and there are much bigger cuts to those areas.

Last year, in the performance and challenge report, we highlighted a number of cases where there had been cuts of 20 per cent or more in certain areas, such as planning. The areas that get cut tend to be less high profile, in that they are not in the public eye as much, such as regulatory services, but they are still very important. There may also be cuts to areas that do get attention, such as road maintenance. That means that they come under more pressure, and that is something that we have pointed out in the past.

Good practice is the responsibility of individual councils. Each council has a different set of operational challenges to meet, a different set of resources to use to meet those challenges, and its own priorities. There are examples of good practice as well as a general move forward; everyone has now signed up with the digital office and is focusing on that to reform and redesign services, which is a good thing. We share good practice directly when we can and we also share it through the Improvement Service, which takes our work and looks into what is done. My colleague can give some examples.

There were a couple of things in Sarah Boyack’s question that relate to the tools that are available. The local government benchmarking framework, which the committee has looked at in the past, is an important tool for councils. A lot of that framework involves cost indicators and how much it costs to provide a particular service. If some councils are delivering something more cost effectively, particularly within their family groupings, our expectation is that other councils would look at that. There is evidence that that is beginning to get a bit of traction. There are some quite active networks in particular service areas.

The Improvement Service is closely involved in that and, in the past 12 months, it has launched a new bit of work specifically on the sharing of experience on what it calls “transformation”. We try not to use that word too much, because our experience is that some of the transformation plans are not actually that transformational, but we know what is meant. It is about redesigning services.

On your question about the nature of the savings, I think that there is a real mix. There is no doubt that for many councils—for all councils, probably—there is a timing issue. Most councils need to deliver savings in the year quite quickly, and the way of doing that is quite often to reduce a service, cut a service or reduce the number of people who are providing it. That is the way in which councils manage to release cash savings quite quickly, but of course it can have unintended consequences.

The challenge is for councils to make bigger service design changes that are not only a bit longer term but, in many cases, require some investment in the first place. The challenge for councils is to make the shift from just cutting and reducing services to identifying areas that they need to invest in that should deliver efficiencies in time but are more about improving services and outcomes for communities.

As you know, I do best-value audits across all 32 councils on behalf of the commission. If the committee is interested in specific examples, you will find them in those reports. We tend to pick out specific examples where councils are doing some different or innovative things around efficiencies and savings and transformation.

That is really helpful. You talked about taking a longer-term perspective and making savings from the redesign of services, but another way for councils to balance their budgets is for them to increase income from fees. Are there any interesting trends in that regard? What is the variance in fee income across our local authorities? Are they looking at one another to identify different types of fees? Is any work being done on the impact of that on residents?

In general, local authorities are looking at introducing or increasing fees and charges as a way of supplementing income. As we point out in the report, fee income is in the order of 10 per cent of income, so it is never going to provide the solution; it will only ever contribute.

We have not carried out a specific piece of work on the subject, which would be required in order to look at it comprehensively. However, it is clear from what we know, which is based on the audit work, that there has historically been a wide range of charges by authorities. We note that in the report. When authorities are in that position, they are going to look at their peer group and at the private sector to see what others charge for and at what level, and they are going to look at where they can raise income without having too adverse an effect on behaviour.

As we pointed out in March last year, in the report “Local government in Scotland: Challenges and performance 2019”, when authorities look at fees and charges, they need to take account of the effect on citizens, particularly vulnerable citizens, and the local economy. In the case of retail, how will charges affect patterns of shopping? It is not a straightforward thing to do, but it is an area that all the authorities need to look at, because they need to diversify their sources of funding.

A couple of years ago, most of the councils took part in a benchmarking review of charges that was done by a consultancy firm, so most councils are aware of how they benchmark against others in terms of fees. There are a wide range of fees, and one of the practical difficulties for us is how we keep tabs on all the fees across the 32 councils. Basically, we look at a basket of fees and charges each year to try to get a flavour of the general direction, and we try to relate that to you.

There is scope for us to look at the subject more, but it is important to note that, as Graham Sharp pointed out and as we say in the report, fees and charges account for only 10 per cent of total income. A budget gap of 1 per cent overall would require a 10 per cent increase in fees and charges to balance it; they are only part of the solution and not the whole solution to closing financial gaps.

That is very useful. I suppose that local authorities have some agency in regard to fees and charges and can choose to increase income through increasing council tax or fees.

The wider pressure, however, is on Scottish Government funding, which accounts for the vast bulk of the money that comes to local authorities. Can you give a bit of background on your total figure for Scottish Government funding to councils? What is included and not included in that figure?

Are you referring to the 55 per cent of Scottish Government funding on non-domestic rates plus direct funding?

I am looking at the total figure.

Is it £9.8 billion?

Different organisations take different approaches to what they consider to be Scottish Government funding and how much it is. Some things are ring fenced and some money is general funding that comes straight to local authorities. Exhibit 4 shows quite interesting variations in the amount of Scottish Government funding that goes to different councils. I just want to go below the headline figures.

I will perhaps ask Chris Lewis to help with that. I am looking at exhibit 2 on page 10, and I want to check that we are talking about the same headline. Members who have been on the committee for a while will know that, every year, we have a conversation about whether the figure has, in effect, gone up or down. We hoped that we had got past that this year, but we have not, for completely understandable reasons.

In simple terms, we set out what is included in the 1.1 per cent cash increase, or the 0.7 per cent real-terms reduction, in paragraph 7 and exhibit 2. That is our focus on the money that comes from the Scottish Government directly to councils, as part of the settlement. Some of the numbers that the Scottish Government has cited subsequently have included capital, so the whole lot has been added together. However, when we come up with the headline numbers, what I have said is what we come up with.

Our source for the total in exhibit 2 is the finance circulars. We have split the total into revenue grants and NDR. Revenue grants can be split further into the general revenue grant, which makes up the bulk of the money, and the specific revenue grant, which is what the Scottish Government refers to as being ring fenced. For exhibit 2, we used indexing from the Office for National Statistics to get the real change. That is how we moved from the 2 per cent cash increase to the 0.2 per cent real increase.

Thank you for coming in. I have a few random questions. Thank you for your report, which provides a very useful insight into what is going on and includes a lot of rich information.

I want to look at the question of reserves. One of the key messages in part 2 is that

“Twenty-three councils have reduced their general fund reserves over the last three years. No council has a position where this rate of depletion would eliminate the total general fund within three years.”

In paragraph 32, it says that, at the current rate, Moray Council’s general fund will be depleted within five years. Back in 2017, the Accounts Commission said that three councils—Moray, Clackmannanshire and North Ayrshire councils—were at risk of depleting their general revenue reserves within three years, but it now reports that none is at risk of that. What lessons can we learn? What changed to result in the three councils that were at risk in 2017 now being in the clear?

The story is probably slightly different for each of them. I will ask Fraser McKinlay to go through them.

11:45  

I might not be able to give the story for all three of them. For example, to be fair to North Ayrshire Council, I remember that it was not delighted to be in the three, because its pattern of reserves use was for quite specific purposes. Its argument was that it was making investments, so that it was not necessarily accurate to say that it would continue to use reserves at that rate—although the description of reserves being used was correct, in that sense.

There were different reasons across the board. The councils have changed the patterns of use of the reserves, which has meant that they are not in that boat any more.

With regard to the committee’s interest in long-term sustainability, reserves are an important measure. The fact that all councils now have a reasonably good cushion seems to me to be an important measure from which we can take some comfort. However, as the commission’s chair said in his introduction, we will continue to bang the drum that the issue is not just how much of the reserves are used but what the reserves are used for. If they are continually dipped into just to top up and plug a gap every year, that is not sustainable. They can be used only once, which I think councils understand, and that is why we continue to bang the drum for medium-term financial planning. It is legitimate to use reserves for a year or two as long as it is part of a longer-term plan to get back into balance and to replenish the reserves.

The pictures are slightly different across the piece, but for me the issue is about ensuring that reserves policies are absolutely integrated with medium and longer-term financial planning. We have seen some good examples of that, such as a reserves policy that is risk-based, with the amount held based on a pretty thorough understanding of what is coming up, whereas some councils still just say, “It’s 2 per cent” and go with 2 or 3 per cent. The more sophisticated we can become, the more assurance we can give the commission and the committee about how reserves policies are being implemented.

In paragraph 32, you spoke about Moray Council identifying that

“a further £3.7 million draw on reserves will be required to balance the 2019/20 budget ... The council’s budget papers clearly recognise that this approach to financial management is not sustainable”

and it

“will need to be funded from savings, which have not yet been identified.”

Is it fair to say that Moray still faces some significant issues and problems?

The panellists are looking at me because one of my other responsibilities is as auditor to Moray Council. It would be fair to say that it faces some significant issues. I will come back to the technical issue about changes over the years, but we have recognised for a number of years that Moray needs to get to a point at which it takes some quite difficult budget decisions in order to set itself back on a track that would mean that it would not use reserves at its current rate.

There is a technical reason why the situation has changed from two years ago. The technical definition changed last year, when we reported that no councils were in the risk categories of running out of reserves in less than five years or less than three years. As you pointed out, paragraph 32 said that Moray Council planned to use £3.7 million. However, we were finding that what councils planned and what actually happened were often different stories, so we moved away from looking at councils’ plans for reserve use to looking at the more traditional audit area of historical use. The graphs now look at average use over the past three years, to get away from the difference between what councils plan to use and what they actually use.

That slight technical change, over two years, of how we measure reserve use does not get away from the fact that some councils use reserves up at significant rates, which is not sustainable in the long term. In some cases—Moray Council, for example—it is not sustainable over the medium term and some difficult decisions have to be made.

As we have dealt with Moray and North Ayrshire, I will finish the story. As you probably know, we had a best-value report on Clackmannanshire two years ago that said that it was not really addressing the issues. Our follow-up report a year later showed that that council had moved on significantly; it has addressed the issues and it has a plan. There is still a significant delivery challenge, but that is different from the position that it was in before, when it was not approving plans to deal with the issue. That is how things have moved on in Clackmannanshire, which explains the different perspective on reserves there.

Thank you.

In the report, you talk about commercial services and express concern that councils must be careful about getting into that area, in relation to staff, skills and risk. Are there specific examples of councils that have implemented successful commercial operations over the past 10, 20 or 30 years?

The experience in Scotland is limited, compared to England. In the south of England, there has been extensive commercialisation of different sorts, particularly in councils around the London area. There have been small-scale successful projects in councils, but I do not know whether we can point to anything significant.

I might be dancing on a pinhead, but there is a difference between a commercial service and commercialisation. As Graham Sharp said, we have seen that more significantly in the south. There is the famous story of a small district council buying a shopping centre 200 miles away for £400 million as an investment. They borrow cheaply through the Public Works Loan Board and buy the property purely to generate income. The good news is that Scotland never got into that business. There have been no examples of that at scale. The Chartered Institute of Public Finance and Accountancy in the UK is clear that that is not a good idea, so the guidance in the profession is clearer that that is not a good use of public money. It is highly risky. Scottish councils are interested in commercialisation, because they are interested in finding other sources of revenue, but probably not to that scale.

When it comes to commercial services that turn a profit that can be reinvested, we might look at arm’s-length organisations that councils have set up. We could argue that Lothian Buses is a commercial service that does a good turn for the City of Edinburgh Council every year. There are other successful examples. Tayside Contracts has been around for a long time as a shared service that is run on commercial terms. It can be done. If councils are going to do it, they need to be clear that they have the right people and the funding for it. For us, it is important that it does not divert attention away from other things. The risk/reward debate needs to be clearly understood. If councillors are signing up to those things, they must understand the inherent risks.

I have two more questions. One is on council tax and one is on non-domestic rates. In paragraph 17 of the report, you say:

“As identified in our report Challenges and performance 2019 all councils increased council tax rates by the maximum allowable three per cent”.

I question your use of the word “allowable”. Councils have a statutory power to set the council tax as they see fit. The “allowable” is the Scottish ministers saying, “If you don’t do this, we will cut your grant.” I wonder why you used the word “allowable”, because councils are allowed to increase or decrease it by as much as they wish.

That is fair.

That is correct.

Do you understand my point?

We will take that. We understand that. That is a loose bit of wording.

“Allowable” is a political word.

Understood.

The Non-Domestic Rates (Scotland) Bill is going through the Parliament. At stage 2, this committee agreed an amendment to the bill to repatriate the rate-setting powers to councils. Most European countries never got away from that; they still have local taxes that are set by local councils and municipalities. I am not sure that any of you were there at the time, but the Accounts Commission was established in 1975, so it was auditing—or looking at or whatever work it was doing—for 20 years before rates were centralised. I invite you to dig into your archives and draw to the attention of this committee any reports or work that the commission did on councils, their performance, setting the rates or issues that were raised and so on. Would you be able to do that?

I cannot tell you what is available, but we can have a look.

Thank you.

I thank Andy Wightman for being able to give the Accounts Commission into trouble for something. Very nice. [Laughter.]

Kenny, do you want to come in on that?

Yes, I also have a question on non-domestic rates. Since amendment 9 to the Non-Domestic Rates (Scotland) Bill was agreed to, the major concern that has been expressed to a number of us by organisations ranging from the Union of Shop, Distributive and Allied Workers, the Federation of Small Businesses, Scottish Chambers of Commerce and the Scottish Retail Consortium, is about the loss of rate reliefs worth more than £300 million. What are the financial implications for local authorities if that amendment is not either reversed or replaced by something else to allow local authorities to provide those reliefs?

Our position is that it is for policymakers to decide what they want to do in that area. Our interest is in how that regime works in terms of how it distributes funding across councils. As you know, Scottish Government funding currently reflects disparities in locally collected non-domestic rates, so in effect, we look at the two together, because they move together and it is an aggregate figure. If that continued, whatever the detailed changes were, from our point of view there would not be a great deal of difference in how we looked at the funding. However, if there were disparities in the user experience of non-domestic rates that affected behaviour, that could be a significant impact and would be something that would need to be taken into account by policymakers when changing the regime. That is a policy matter. Brian Howarth may want to add something on non-domestic rates distribution.

We have not done any work on the specific point on the loss of rates relief to be able to comment on it. Obviously, it affects the total available to the pool and therefore the total available that is distributed. As Graham Sharp pointed out, the ability for councils to have an element of their own rates and benefit from that is a policy issue.

What would be interesting is how that rolled out in practice and how councils benefited individually. There are some complications, in that some councils collect a lot more in non-domestic rates than others and may benefit more from that. There are also complications in that, as I understand it, South Lanarkshire Council is in the top three of rates collectors and collects utilities for the whole of Scotland. So there are some complexities in how a regime would roll out in practice that we would be interested in. The decision to take the steps that have been taken is a policy decision that we will look at in terms of its effect.

I am clearly not trying to ask you to say whether it is a good idea or not, which would be straying into the political realm—it is just about the practicalities. If the bill were implemented, what mechanisms are in place to allow local authorities to reinstate local reliefs in a short to medium-term timeframe? That is the kind of thing that local businesses will look at. If the small business bonus scheme disappears, for example, how soon in practical terms could it be replicated by a local scheme?

You would have to start with the intention of the legislation change and the policy behind that. For example, is the intention to have local authorities bear the benefits and disadvantages of the actual rates that they collect in their area? Are they responsible for setting those rates, which might be different from rates in another local authority? Is that the environment that policymakers wish to create? You would need to look at how that would work.

There would be some anomalies. Brian Howarth referred to the case of South Lanarkshire, which, because of Scottish Water, gets the benefit of non-domestic rates from the whole of Scotland. How do you deal with that? That does not seem equitable. Those are all policy decisions to start with, and then we would have to look at the mechanics of how that worked in practice. You need to start with what sort of environment you are trying to create at a policy level.

The only thing that I would add to what the chair of the commission has said is that I think that most people would agree that, because the non-domestic rates system is such an integral part of how the funding works, it needs to be looked at in the context of everything else that happens in local government funding. Mr Gibson’s questions are good examples of that.

That was exactly what I was going to ask you about next.

12:00  

It is important to take such an approach, and I am sure that, when stage 3 of the bill comes along, the Parliament will do that. To an extent, the debate about the implications of doing one thing or the other has started. However, we would certainly agree that, if there were to be significant changes to any part of the system, those changes would need to be looked at in the round and the effects on different parts of the system would need to be understood.

On your point about timing, one consideration would be the timeframe in which any changes would be made. I presume that, with such a significant change, the changes could be made over a period to ensure that there was time to put in place other mechanisms. For what it is worth, we would encourage you to ensure that you look at the issue in the round.

Are there any comparable international examples of where local control has either boosted competitiveness or led to additional or higher rates burdens? One reason why we have universal rates is that businesses were concerned that some areas were charging excessive rates. Are there any international examples of how devolution to local community or local authority level has worked positively, or not, as the case may be?

As Mr Wightman mentioned, there are lots of places where local business rates are devolved to councils and—

Indeed, but what is the impact?

The short answer is that I do not know, because we have not done work on that. However, we can certainly see what we can do. In England, a change was made some years ago so that local authorities now keep the rates that are raised in their areas. That has had a pretty varied effect, depending on geography and other matters. I have not studied the issue closely, but it seems to me that the English experience is an example that shows the need to look at the issue in the round. The system of local government funding in England was already fairly different from what we have in Scotland. We need to be sure that we are comparing apples with apples.

In Scotland, might we have to look fundamentally at the whole distribution formula for local government as part of the process?

As Mr Gibson will know, the commission has said in the past couple of years, even before the debate on non-domestic rates came up, that we think that the distribution formula is probably worth a look, given how the situation has evolved over the years. The commission said that in its previous two financial overview reports. We know that that would not be easy. As I said, if you are looking at non-domestic rates, you need to look at how that bit fits with everything else.

That is correct. On comparisons, I reiterate that, if you are looking at other countries, you need to understand how their whole taxation system works for businesses as well as public funding to see how it fits in that framework.

So we cannot really look at models from other countries specifically; we can only get allusions.

To move on, I have a question about debt. In paragraph 45 of your report, you touch on the Treasury announcement in October last year that interest rates on new Public Works Loan Board loans would rise from 1.81 per cent to 2.81 per cent. You said:

“This will make new ... borrowing or refinancing of debt for councils more expensive.”

What are the long-term implications of that change for our local authorities?

Clearly, that is a significant increase in the interest rate that is charged, albeit that Public Works Loan Board debt is relatively cheap. As we have said, to the extent that councils need to draw on that money, it will be more expensive. There is around a 50 per cent increase in the rate. We are not privy to the reasoning behind that, but I note that, whereas in Scotland the use of Public Works Loan Board debt has been relatively stable—I think that there was a 5 per cent increase in use last year—in England, the situation was quite different, with a 75 per cent increase. There was a significant increase in demand, and attempts to deal with that may have been a factor in the increase in pricing. I do not know whether demand will continue or abate but, as things stand, the cost of borrowing will increase significantly.

That requires councils to look at the affordability of existing loans and—this is almost more important—to look at their plans to assure themselves that, with the change in rate, PWLB debt remains sustainable. I know that councils are already doing that.

Is your instinct that the rate has been increased to reduce borrowing down south and that Scotland has just been collateral?

As I have said, we have no information on that. I am looking at the issue at a basic economic level. If the usage is increasing dramatically, perhaps the way to deal with that is to increase the price.

I refer to paragraph 37 of the report. It is worth noting that the vast majority of capital expenditure in Scotland is funded from Government grants. My understanding is that the position south of the border is different. If there has been an increase in PWLB borrowing, it may be related to the availability of Government grants down south. Although the PWLB is an important factor, it is not the main source of funding in Scotland.

I also understand that, although PWLB rates have increased for new loans, that brings the rate back to the rate that there was only a year or 18 months ago. It reached a low point and then increased to a point that is consistent with recent rates over the past couple of years. There has been an increase, but it is not a major one. In recent history, there have been similar rates and, as I said, the PWLB is not the main source of current borrowing.

My understanding is that, in 2017, the rate varied from about 0.7 per cent to 2.79 per cent and that the rate was set according to the risk of the capital investment that was being looked at.

Fraser McKinlay talked about commercial loans. You will know that, a couple of years ago, North Ayrshire Council had what was, in my view, a ludicrous plan to spend £72 million on a 47-year-old shopping centre. Thankfully, the plan was defeated in the council by 17 votes to 16. The council had been told that it would have to pay the maximum Public Works Loan Board rate.

I appreciate what Mr Howarth has said about grants and so on, but debt for local authorities increased by £300 million over the year, and any borrowing from the PWLB will be significant if the rate has increased. I just wondered what the impact will be.

Clearly, a significant increase in the rate will impact on behaviour to a degree. Public Works Loan Board funding has traditionally been a cheap form of funding. Fraser McKinlay referred to a council buying a shopping centre using PWLB money. That raised competition issues, because the authority used below-market rates to compete with commercial companies.

We are running a bit short of time and business in the chamber will start early today, so people should make their questions and answers concise, please.

The commission has focused very much on the benefits of medium-term financial planning—you have gone into all of that. You believe that that should be at the core at the strategic planning level in councils. Councils have taken that on board over the years and the majority—if not all—of them are now doing that quite successfully. However, there is a vast variation in approaches among councils, and that in itself can cause concern in relation to what they see as their priorities. It would be good to know what the key elements of medium-term planning are to ensure that financial planning and management improve. Why is there still that variation, as the commission has advised councils on best practice? That advice has still not been completely taken on board by all councils.

I will briefly give some context.

It is not that long ago—maybe three years—since councils said, “You can’t expect us to have medium-term planning when we get only a one-year settlement.” There has been a process, and we have now got to a position in which everyone is carrying out medium-term planning. In a public sector context, that is a good thing.

We are continuing to raise the bar by looking more closely at what councils are putting into their medium-term plans. They will be different, because councils are different. Councils have different challenges and priorities, so it is reasonable that the plans are different. Councils also have different ways of going about budgeting. The ways in which they allocate specific reserves, as opposed to unidentified reserves, are different, and the ways in which they look at risk are different. Therefore, the plans will not always be the same, but we are trying to raise the bar and to continue to spread good practice, and to do the same with longer-term scenario planning.

There are definite challenges for the longer-term planning scenarios, and they have been identified. Once again, you have been supportive with suggestions on how councils should manage them.

In some councils, it comes down to how confident the councillors are with the advice and support that they are given by the officials. I know that lots of training and support mechanisms have been put in place for the elected representatives, but there is still some way to go. It would be good to get your views on how we can ensure that they have that confidence. In the long term, that affects the good will in the process and the efficiency and running of the council.

We emphasise that councillors’ training and knowledge are essential. It is a two-way street, and it is not just for the council to provide that. There are councils that should do more to provide training, but individual councillors also have a responsibility to be satisfied that they have equipped themselves to do the job.

As the chair of the commission said, we now have a good baseline in that everyone has a medium-term financial plan of up to five years, and we will keep banging the drum about the longer-term stuff. That involves a more challenging conversation about a qualitative assessment of the process that is involved in those plans—for example, to what extent have communities been engaged in the discussion, or has the plan been drafted in the office of the director of finance and presented? It is also about the quality of the plan. Is there simply a worst-case scenario, an expected scenario and a best-case scenario and the numbers are crunched, or does the plan really take account of what the place and communities will be like in the next five to 10 years and what that means? That is the stage that we are at in the process. We will continue to play our part in that. We continue to engage with the directors of finance on the quality of the process, and we are always willing to help with the training and development of elected members in order to help them play their part.

As we discussed earlier, the Government’s initiatives, policies and priorities have an impact on what a council can achieve. We have looked at things such as IJBs, where councils have had significant difficulties. What councils set out as their plan and what they might have seen as their options have changed and become much more difficult to manage, because of the financial differences and the balances between what they want to achieve and what they can achieve. That has had a knock-on effect on reserves and everything else in the process. They have set out with a plan, but they have not been able to achieve it because of the circumstances that they have found themselves in as a result of population dynamics, for example. All that comes into the equation. That makes it even harder for councils to quantify and make the plan a reality.

I absolutely accept that it is not easy. Councils are big and complex organisations. Glasgow City Council’s budget is about £1.3 billion. It is reasonable for us to expect rigour in financial planning and strategy because public money is involved, and that delivers services for some of the most vulnerable people in our community. We have never said that that is easy, but we will continue to press the case for why it is important.

A third of IJBs were struggling to agree a budget for this year. What are the key barriers to that? What is causing them to have difficulty in doing that?

Fraser McKinlay has been meeting them recently.

12:15  

That is an excellent question, convener, and I am not sure that we have a simple answer to it. That issue will almost certainly form part of the work for the next year, because properly getting under the skin of what the barriers are is definitely an issue for us.

Anecdotally, the different budget cycles of the partner organisations have been cited as an issue. Councils and health boards budget on different cycles. IJBs try to set a budget in March, and NHS budgets are not finalised until June. That is one practical thing that people have cited.

However, there are more fundamental issues—Brian Howarth, as an auditor of some of those organisations, will want to come in on that. The integration schemes set out, among many other things, what happens when there is a variation in spend—either an underspend or an overspend—in an IJB. We increasingly see that as a point of contention in some places. As real life begins to kick in for the IJBs—overspends tend to be the more difficult issues—that can get in the way of agreeing how much money each partner will put in for the following year.

There are probably some common themes, but there will also be quite a lot of specific issues in individual places.

Before Brian Howarth comes in, I have a question. In putting the IJBs together, was there not a system in place to say how overspends will be divided?

Yes—all the IJBs have that.

So, what is the problem?

The problem is that when the overspend actually happens in real life, money has to change hands.

It worked well on paper [Laughter.]

That was a really simple way of putting it, Convener—I did not mean to be flippant.

All the integration schemes have a way of dealing with such circumstances. They vary—some just split the overspend 50:50 and some split it 70:30, or in line with overall funding. There are different ways of approaching it. However, in real life—this is a hypothetical example, but we hear of such things happening—a health board will say, “Wait a minute. That overspend is all on social care, so why are we picking up 70 or 80 per cent of the tab?” Or a council will see that an overspend has been on medicines and will say, “We know what the scheme says, but it doesn’t seem right.” When both partner organisations are under real pressure in their finances, that becomes quite a tricky conversation. We see that conversation happening across the land. Many of the schemes are up for review, so a lot of this stuff is already being looked at.

We know that timing is an issue, although we do not understand exactly the reasons why. That is something that we will pursue in the coming year.

We can say with some certainty that the problem is not systemic. We looked at one health board area: not every IJB in that area is late with its budget, so it is not a systemic issue.

The other thing to bear in mind—exhibit 14 in the report is a good example—is that even if an IJB’s budget is agreed, it might not be fully balanced. There might be a large element of unidentified savings. There is more work for us to do on that, to establish exactly the reasons why.

Going back to earlier questions, the announcement of the Westminster UK budget coming late this year might exacerbate the position. We want to get to the bottom of why budgets are not being agreed on time, and we want to know the nature of those budgets—whether they are truly battened down, or why there are large elements of unidentified savings.

Does that gel with what you said earlier, about finding that organisations had not done what they promised to do, so you looked at their accounts for three years back? Are they saying that they can make savings, but they are unidentified so you do not know where the money is coming from, or whether the savings are really going to happen?

That is a good general point, and the evidence is in the report. I am sorry for not giving exact figures, but I think that about eight IJBs recorded a deficit, two broke even and a much larger number—I think about 19—would have recorded deficits had they not been bailed out at the year-end by the two partner bodies. That is symptomatic of the fact that they did not think that they would have that position when they set out their budget at the start of the year. Nine or so would have thought that they would be able to break even, but they could not do that. There is a difficulty in terms of budget expectation and budget reality at the end of the year, which we see in microcosm in the number of IJBs that had to be given additional year-end funding from the partner bodies.

Okay—thank you for that. Another key issue is the significant turnover of senior staff in IJBs. Is there a common theme in that regard? Do you have any suggestions on the reasons for that?

Again, we do not have detailed information on that; what we have is more anecdotal. Colleagues might want to comment on this. When I was at the committee’s round-table discussion, I commented that turnover in leadership might not be only a cause of difficulty at a time when it is necessary to manage a lot of change, but could also be a symptom of a structure that individuals are finding it difficult to live with, and would rather not live with.

The situation will be different in different places, but there is no doubt that the job of the chief officer is a difficult one. They are accountable to the chief executive of the council, to the NHS board and to the IJB itself, so there is a pretty complicated accountability structure, and they are working in quite tricky circumstances. There is no doubt that there are places where churn and turnover have prevented quicker progress. It is hard to make big difficult decisions when there is not sufficient stability in the senior team.

It is difficult to say exactly what is happening in all cases, but something is definitely happening. We hope that, as we move into whatever year of the existence of IJBs we are now in—year 6 or 7—we will see a degree of flexibility. We hope that turnover will, after the amount of change last year, begin to tail off. We will continue to keep an eye on it.

If you do more work on IJBs, will you speak to senior officers to find out whether there are common threads in why they left?

There are a few points to make on that. First, as part of the annual audit work that we do on IJBs every year, there is routine engagement with chief officers and chief finance officers in particular, so we have a reasonably good sense of why changes have been made.

Secondly, we have a third national report on integration lined up for the next couple of years, in which we will begin to look at outcomes. We have done two reports for the commission and the Auditor General, and we will address in the third report what difference has been made to services and outcomes.

Thirdly, as a heads-up I can tell you that the commission has asked me to think about what best-value auditing would look like in IJBs. That will not kick off for 18 months or so, but we are beginning to develop an approach that will allow the commission to focus more sharply on the integration authorities’ best-value duty. Once we get into that work, we will be able to unpick more of the specifics of what is happening in each of the 31 integration authorities.

It seems that there are different approaches to managing shortfalls; I hear that some IJBs rely on funding injections during the year, for example. Are you concerned that that undermines the transparency of IJB funding?

As Brian Howarth said, the situation is a reflection of the difference between budget setting and what actually happens, and of how partners work together with an IJB’s management. Transparency comes down precisely to how that is managed. Perhaps Brian Howarth wants to comment.

It is hard to generalise. The partner bodies might take the attitude that the IJB should try to deliver a challenging budget in the year and will not fully fund budget gaps. However, if it turns out that, in reality, the IJB is unable to manage because of demand pressures or other things, that will inevitably mean that both partners have to fund it. In effect, they will be funding it anyway, because fund flows in IJBs are notional—the overspends occur in one of the partner bodies.

Although about 20 IJBs have underlying deficit issues, we have not seen systemic overspends in the partner bodies. That is probably because partner bodies are managing to offset overspends in the IJBs’ work against underspends in other areas of their budgets. National health service boards will do that against underspends in acute services and councils will do it against underspends in services such as education and corporate services. As long as that underlying deficit continues, we face the risk that host partners will end up being affected, and that they will increasingly return deficit positions, if the situation is not managed within the IJB services.

If extra money was being put in by the health service or the local authority, would you get information about where that money came from or would that normally be done just to cover a deficit in the IJB?

We try to collate information from local auditors across all 31 IJBs. We are particularly interested in how much additional funding has been received during the year and when. That gives us our figures on whether IJBs have been deficit funded at the year end. We are interested to know whether they have received further funding during the year. We might not always know the ultimate source of that additional funding—for example, if it has come from Scottish Government additional budgets for the NHS—but we are very interested in that and are reliant on the quality of the data that we are given by local auditors.

Good afternoon, gentlemen. It has been interesting to look at your report and the consequences that it identifies.

Paragraph 108 of your report says that, in 2018-19,

“over a third of IJBs ... experienced turnover in their chief officer or chief finance officer”.

That is quite remarkable. What happens in such circumstances? Do the individuals in question go back to local government, the NHS or the Scottish Government? Do they get a pay-off? Where does financial scrutiny of that come in? If that is the case across the public sector, it is an alarming statistic. Where is the scrutiny of that, given the amount of public money that is involved?

That is clearly a significant statistic, which is why we highlighted it. The high turnover has an impact on how IJBs can operate. There will be a variety of specific circumstances, because the ways in which staff are provided vary significantly among IJBs.

I will kick off, then Brian Howarth can talk about the detail. Scrutiny comes through the annual audit work that we do on every public body in the land; in this case, we are talking about IJBs. When a senior person leaves, it will always be part of the audit work for that year to look at the nature of that departure and at whether any payments were made.

I cannot promise that this is the case, but I think, off the top of my head, that the vast majority of such leavers have gone to different jobs, either in another IJB or elsewhere, in which case no payment would have been attached. Also, a good number have retired; we would expect normal processes to apply in those cases. Auditors look at and report on such cases in their annual audit reports. If there was anything untoward in IJB-land, I would report that to the Accounts Commission. That is how the scrutiny process works. Is that fair, Brian?

Yes. I am a local auditor for five IJBs, five councils, two NHS bodies and a pension fund. Across my five IJBs, three out of 10 chief officers and chief financial officers left during the year. When we can, we hold exit interviews with people who are willing to talk to us about their reasons for leaving—although whether they are fully candid with us is another matter. We also look at the terms under which they left. Of the three officers who left my IJBs, one retired, one moved to a different job and one got a redundancy package, which we looked at as part of our normal audit of the host body by which the individual had been employed. We carry out such local scrutiny routinely. In the remuneration report that we have just done, we look at the approval process and the business case for any senior officer leaving.

Are the positions that are vacated filled reasonably quickly? Are those senior positions unfilled in a number of IJBs?

12:30  

That is a good question. A good number of IJBs have ended up having in place interim staffing arrangements for quite a long time, so that is definitely an issue.

There is no doubt, if you look across the board, that there are a lot of important senior jobs to fill from a relatively small pool. Only yesterday, Brian Howarth and I were in a meeting with an IJB. There were six people from the IJB in the room, because there are three chief executives and three directors of finance for that one area. Backfilling such posts when someone leaves is quite challenging. The Auditor General has reported on the challenges of recruiting to senior posts in the NHS and we have reported in the past about the challenges of recruiting in some councils.

The interim arrangements can be an issue, which is why we raise that in the report. That is to do with turnover, but more important is what it means for the pace of progress. In some places where there has been churn in key roles, the issue is not that they have had to start from scratch, but that when someone new comes in a bit of reworking and resetting is inevitably required, which can get in the way of progress.

Turnover at senior level will not only affect an IJB’s ability to execute change. When we are talking about budgets not being agreed on time and savings not being identified, that will affect day-to-day business and be disruptive to the whole organisation.

Sure. I understand that Fife Council was in that position. I am sorry—I should have said, “Good afternoon, gentlemen and Ms Duthie”, when I greeted the panel. Please excuse me.

Fraser McKinlay mentioned that you would be moving to best-value auditing and explained what that would look like. I welcome that approach. However, IJBs have been in place for some time. Why are we moving so slowly in getting such processes in place? Should such auditing not already be in place? If it is not, we will not know what value we are getting from IJBs.

Auditors have been reporting on best value. The reports have tended to be short and have simply stated whether an IJB is meeting the best-value criteria. As IJBs have developed their role, there is increased opportunity to expand the audit, in a proportionate way, to examine best value. If an IJB is not doing much, resource will not be spent on putting in people to audit stuff that is not happening.

As Fraser McKinlay said, we want to expand what is looked at in the next set of audits. A lot of scrutiny goes on in IJBs. There is not just audit scrutiny—other inspectorates do a lot on work in scrutinising IJBs. Fraser McKinlay’s work for the Accounts Commission is to look across the board at all the scrutiny that is done, consider how we can utilise that and identify gaps. It is not the case that no scrutiny is being done. We look at IJBs’ work through the lens of best value, because that is a statutory requirement. Until now, as I said, there has not been a case for doing more scrutiny: going forward, we will do more.

Annabelle Ewing is absolutely right that IJBs should be carrying out best-value auditing. They have a duty to secure best value, which we check on now and will check on in the future.

To be fair, it is worth mentioning that the duty of best value and, therefore, the auditing of best value need to look quite different in IJBs, because, as organisations, they do not employ their own people or have their own buildings, as a council does. Therefore, the nature of their best-value duty is quite different and needs a bit of thinking. In effect, they are strategic commissioning bodies that get services from the council and the health board.

How IJBs are audited has required a bit of thought on their part. Our approach has been consistent with our approach to best value in the past. When the duty was first introduced, we started with councils and then went to the police and fire authorities that existed then. It was reasonable to let IJBs get their feet under the table: they have done that—or should be doing it now—so we are looking at the next phase of best value.

Brian Howarth mentioned one case—there are probably more across the country—in which a senior officer was made redundant, presumably with a hefty pay-off. What would be the circumstances under which someone would be made redundant in an IJB? That person should not have been replaced, but were they replaced in some way?

This does not apply just to IJBs: senior officers would normally be made redundant if there was a major restructuring of the senior management team. That might involve a change in services. In the case that I was involved in, there was a major change, in that children’s services were removed from the IJB and taken back into education services in the council. Therefore, the role changed drastically—there is still a chief officer of the IJB but it is a different role. That redundancy resulted in a payment. We examined the business case for that and the payback period.

Was the person a chief officer?

Yes.

But there is still a chief officer.

Chief officers of IJBs also have other roles within the council, which is a difficulty. They do not always have only their responsibilities as chief officer of the IJB, but can also have responsibilities within the council. The nature of the IJB changed in my example, because the integration scheme had changed. The nature of services in the integration joint board changed drastically because children’s services were taken away from it completely. Adult services remained.

We are short of time.

I know, but the debate has opened up a whole new can of worms.

We will have to do some work on IJBs, anyway.

We have just heard how difficult it is to replace chief financial officers and chief officers, but because one aspect of their job changes, they get redundancy payments and they move out, and boards are left with the disruption of having to find someone to replace them, and of dealing with the impact on front-line services. How can that be justified?

I will come in briefly on that. I do not mean to sound flippant, but it is not for us to justify that. The justification for the decision rests with the IJB and its employing authority. It is important to remember that one of the unique things about IJBs is that their chief officers are employed normally by the health board or the council. Therefore, reorganisation need not be just about the IJB—it can be in the council or the NHS.

As Brian Howarth described, our job is to look at the business case. There will be a payback period. Savings have to be made in order to justify any payment that results from restructuring, and it has to be ensured that it is regular and in line with policies.

Okay. The committee will probably look at that further.

I thank the chair and his colleagues from the Accounts Commission for attending. It has been useful.

12:37 Meeting suspended.  

12:40 On resuming—